-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3ad7t1+dQSmkQxygvOdNKl7hP0p3wYN1khl0HVftiK+yoyIqZjzcjx14Ahs2H6O 7srWJDyvwzdsaJo0IncVew== 0001012870-98-000922.txt : 19980409 0001012870-98-000922.hdr.sgml : 19980409 ACCESSION NUMBER: 0001012870-98-000922 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 19980408 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISE LABS INC CENTRAL INDEX KEY: 0001053997 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770470213 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-49685 FILM NUMBER: 98590000 BUSINESS ADDRESS: STREET 1: 2095 RINGWOOD AVENUE CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4089548378 MAIL ADDRESS: STREET 1: 2095 RINGWOOD AVENUE CITY: SAN JOSE STATE: CA ZIP: 95131 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- ISE LABS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) CALIFORNIA 3674 77-047-0213 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) (I.R.S. EMPLOYER (STATE OF IDENTIFICATION NO.) INCORPORATION) 2095 RINGWOOD AVENUE SAN JOSE, CALIFORNIA 95131 (408) 954-8378 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------- SAEED A. MALIK PRESIDENT AND CHIEF EXECUTIVE OFFICER ISE LABS, INC. 2095 RINGWOOD AVENUE SAN JOSE, CALIFORNIA 95131 (408) 954-8378 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------- COPIES TO: WARREN T. LAZAROW, ESQ. JEFFREY D. SAPER, ESQ. H. RICHARD HUKARI, ESQ. JEFFREY A. HERBST, ESQ. MICHAEL C. DORAN, ESQ. CAINE T. MOSS, ESQ. ALAN K. TSE, ESQ. STEPHANIE L. RUBY, ESQ. BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION 2200 GENG ROAD 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304 (650) 424-0160 (650) 493-9300 ---------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE - ------------------------------------------------------------------------------ Common Stock, $.001 par value................. 6,900,000 $14.00 $96,600,000 $28,497 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes 900,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 8, 1998 PROSPECTUS , 1998 6,000,000 SHARES ISE LABS, INC. COMMON STOCK Of the 6,000,000 shares of Common Stock offered hereby, 5,000,000 are being offered and sold by ISE Labs, Inc. (which, together with its subsidiaries, shall be referred to herein as "ISE" or the "Company") and 1,000,000 are being offered by the Selling Shareholders. See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. Prior to this offering, there has been no public market for the Common Stock of the Company. See "Underwriting" for information relating to the method of determining the initial public offering price. It is currently anticipated that the initial public offering price per share will be between $12.00 and $14.00. Application has been made to list the shares on the Nasdaq National Market under the symbol "ISET." AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6, FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS(1)(2) COMPANY(2)(3) SHAREHOLDERS - ----------------------------------------------------------------------------------- Per Share................... $ $ $ $ Total(4).................... $ $ $ $ - -----------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Does not include additional compensation to be received by Donaldson, Lufkin & Jenrette Securities Corporation in the form of a nonaccountable expense allowance. See "Underwriting." (3) Before deducting expenses payable by the Company, estimated at $1,000,000. (4) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to 900,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters, subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of share certificates will be made in New York, New York, on or about , 1998. DONALDSON, LUFKIN & JENRETTE BT ALEX. BROWN SECURITIES CORPORATION [INSIDE FRONT COVER GRAPHICS: SEE APPENDIX] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects a series of amendments to the Company's Articles of Incorporation to, among other things, increase the number of authorized shares of Common Stock to 50,000,000 and create a class of undesignated Preferred Stock of 3,000,000 shares. THE COMPANY ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent integrated circuit ("IC") testing and evaluation companies in the world. Unlike many of its competitors, the Company offers a broad range of IC testing, evaluation and other services throughout the entire semiconductor manufacturing process. These services include software development, electrical verification, reliability analysis, failure analysis, wafer sort, production monitoring and quickturn and prototype packaging. A significant portion of the Company's revenues from testing services is derived from testing complex, high- performance logic and mixed-signal products, which are typically the higher- margin, faster growing segments of the testing services market. The production of ICs is an extremely complex process that requires substantial investment in specialized equipment and facilities and sophisticated engineering and manufacturing expertise. As a result, many semiconductor companies have begun to rely on outsourcing various steps of the production process. Virtually every step of the semiconductor manufacturing process can now be effectively outsourced. By outsourcing their IC testing requirements, semiconductor companies can (i) focus on core business activities; (ii) access leading edge testing technologies; (iii) react more quickly to rapidly changing market conditions and reduce time to market for new products; and (iv) reduce capital expenditures, fixed costs and operating expenses. While a substantial majority of IC testing is still performed in-house by semiconductor companies, the Company believes that the overall growth of the market for ICs and the trend towards outsourcing services by both vertically integrated and fabless semiconductor companies are driving increasing demand for independent test services. Currently, wafer foundry services and IC packaging are the largest segments of the market for outsourced semiconductor manufacturing services. A leading industry research organization estimates that the number of ICs packaged by independent contractors will grow from 7.7 billion units in 1996 to 18.8 billion units in 2001, or nearly 20% per year. The Company believes that the market for independent test services has grown and will continue to grow at a faster rate than the market for independent semiconductor packaging services. The Company's strategy is to become the leading independent provider of IC testing and evaluation services in the world. The principal components of the Company's strategy are to (i) maintain its technological leadership; (ii) provide the broadest range of services; (iii) leverage strong relationships with its diversified customer base; (iv) expand capacity worldwide; and (v) focus on testing complex, high-performance logic ICs. In contrast to all of its major independent competitors, the Company's headquarters is located in the Silicon Valley. In addition to its significant United States presence, the Company has established substantial test capacity in Hong Kong and has more recently commenced testing operations in Singapore. The Company's proximity to a large number of the world's leading semiconductor companies, together with its broad service offerings, enables the Company to establish close working relationships with its customers' design engineers early in the IC development process. By establishing such early stage relationships with its customers, the Company believes it has a significant competitive advantage in competing for high volume future testing business. In order to address the increasing demand for independent testing services, the Company has made significant investments to increase its testing capacity. As of October 31, 1995, 1996 and 1997 and January 31, 1998, the number of testers operated by the Company was 38, 55, 91 and 96, respectively. 3 To expand its capacity and broaden its range of services, in September 1997, the Company purchased for approximately $31.2 million, including acquisition costs, certain assets of Alphatec USA, Inc. ("Alphatec") (the "Alphatec Acquisition"). These assets included 100% of the capital stock of Digital Testing Services, Inc. ("DTS") and selected assets of Alphatec relating to its Manteca, California operations (the "Manteca Operation"). DTS provides a broad range of IC testing and validation services throughout the semiconductor production process, with a primary focus on the initial development stage. The Manteca Operation provides semiconductor packaging services, including quickturn and prototype packaging. During the last twelve months, the Company has provided services to more than 250 customers worldwide. The Company's customers include a number of the world's leading vertically integrated and fabless semiconductor companies, distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and Xilinx. ISE Labs, Inc. was incorporated in the State of California in November 1983. The Company currently has locations in San Jose, Santa Clara and Manteca, California and in Hong Kong and Singapore. The Company's principal executive offices are located at 2095 Ringwood Avenue, San Jose, California 95131, and its telephone number at this location is (408) 954-TEST. THE OFFERING Common Stock offered by the Company................ 5,000,000 shares Common Stock offered by the Selling Shareholders... 1,000,000 shares Common Stock to be outstanding after the offering.. 22,500,000 shares(1) Use of proceeds.................................... Repayment of bank indebtedness, capital expenditures and for general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol...................... ISET
- -------------------- (1) Based on the number of shares of Common Stock outstanding at April 8, 1998. Excludes as of April 8, 1998: (i) 2,674,800 shares of Common Stock issuable upon exercise of options currently outstanding under the Company's 1998 Stock Incentive Plan (the "1998 Plan") at a weighted average exercise price of $8.01 per share; (ii) 1,825,200 shares of Common Stock issuable upon exercise of options reserved for future issuance under the 1998 Plan; and (iii) 600,000 shares of Common Stock reserved for future issuance under the Company's 1998 Employee Stock Purchase Plan. See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan." 4 SUMMARY CONSOLIDATED FINANCIAL DATA
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, --------------------------------------- -------------- 1993 1994 1995 1996 1997(1) 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues.............. $13,440 $15,548 $22,321 $25,354 $35,532 $6,198 $20,291 Gross profit.......... 6,883 8,788 13,368 13,260 17,582 2,768 10,808 Income from operations........... 3,441 4,335 8,477 8,217 9,256 1,616 5,146 Income before income taxes................ 3,340 4,359 8,597 8,191 9,319 1,551 4,244 Net income............ 1,986 2,468 4,930 4,848 5,740 955 2,631 Basic and diluted net income per share(2).. $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 Basic shares outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 17,500 Diluted shares outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 17,768
AS OF JANUARY 31, 1998 ------------------------- ACTUAL AS ADJUSTED (3) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 6,077 $ 41,095 Working capital (deficiency)....................... (12,282) 35,468 Total assets....................................... 81,749 116,767 Short-term debt, including current portion of long- term debt......................................... 15,015 2,283 Long-term debt, less current portion............... 18,483 7,533 Retained earnings.................................. 25,589 25,589 Total shareholders' equity......................... 26,153 84,853
- -------------------- (1) Statement of operations data for fiscal 1997 include the post acquisition results of operations of DTS and the Manteca Operation, which were acquired in September 1997 and accounted for under the purchase method of accounting. See Note 2 of Notes to Consolidated Financial Statements of the Company. (2) See Note 1 of Notes to Consolidated Financial Statements of the Company for an explanation of the method used to determine the number of shares used in computing net income per share. (3) Adjusted to give effect to the sale of 5,000,000 shares of Common Stock by the Company, at an assumed initial public offering price of $13.00 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS The discussion in this Prospectus may contain forward-looking statements. Future events anticipated in any such forward-looking statements contained in this Prospectus are uncertain. Actual events, and the Company's actual results, may differ materially from those that may be predicted, assumed or discussed in any such forward-looking statements. Factors that may cause or contribute to such differences include those discussed below, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," and elsewhere in this Prospectus. The cautionary statements made in this Prospectus should be read as being applicable to any related forward-looking statements, wherever they appear in this Prospectus. SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS A variety of factors have materially affected, and are expected to continue to materially affect, the Company's operating results. These factors include the cyclical nature of the semiconductor, personal computer ("PC") and related industries and the various markets that serve consumers of products incorporating semiconductors; absence of purchase contracts and the resulting lack of backlog from the Company's customers; price competition; timing and volume of orders received by the Company; reschedulings, delays, deferrals and cancellations of orders; evolutions in the life cycles of customers' products; erosion of semiconductor unit prices; changes in capacity utilization; allocation of testing capacity between the Company's facilities and those of its customers; availability, price and changes in advanced testing equipment; effectiveness in managing production processes; fluctuations in manufacturing yields; changes in product and service mix or devices tested or assembled; product obsolescence; availability of financing for expansion; the ability to develop and implement new technologies on a timely basis; the loss of key personnel or the shortage of available skilled workers; international political or economic events; and currency and interest rate fluctuations. Furthermore, the Company has historically experienced, and may continue to experience, seasonality in its revenues and operating results. This seasonality, combined with other factors including those described above, has resulted and is likely to continue to result in significant variability in quarterly and annual operating results. The Company's revenues increased significantly in the quarters ended October 31, 1997 and January 31, 1998, due primarily to revenues generated by DTS and the Manteca Operation, which were acquired in September 1997. The Company does not believe that recent growth rates are indicative of future operating results and there can be no assurance that profitability or significant revenue growth on a quarterly or annual basis will occur in the future. The Company anticipates that due to prevailing conditions in the semiconductor market, its quarterly revenues in the near future will remain relatively flat and may possibly decline from levels experienced in recent periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In connection with its efforts to increase testing capacity, the Company intends to continue to make substantial capital investments in equipment for testing advanced ICs, invest in additional manufacturing facilities and recruit and train additional personnel. Such expenditures are typically made in advance of anticipated increases in sales. Therefore, the Company anticipates that its gross margin and other operating results will be adversely affected from time-to-time due to poor or non-utilization of capacity associated with such additions of capital equipment, facilities or personnel. There can be no assurance that any anticipated increases in sales will result from such expenditures. Any failure of the Company to increase sales following such expenditures would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a large portion of the Company's operating expenses, including depreciation, rent and salaries, are significant, fixed and difficult to reduce or modify. If the Company's revenues do not meet its expectations, the material adverse effect of any revenue shortfall will be magnified by the significant and fixed nature of these operating expenses. The average selling prices for the Company's services, calculated on a hourly basis, historically have not fluctuated to a significant degree. There can be no assurance that said prices will not fluctuate in the future. However, the average selling price per device tested has varied and is expected to continue to vary due to a number of factors, including the level of device complexity and the time required to test each device. The Company expects that average selling prices for its services may decline in the future, principally due to intense 6 competitive conditions and other factors. A decline in average selling prices of the Company's services, if not offset by reductions in the cost of providing those services or by a shift to testing higher margin products, would decrease the Company's gross margin and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes there is a trend toward customers requesting turnkey testing and packaging services. In February 1998, the Company entered into an arrangement with one of its customers to provide such turnkey services. In providing such turnkey services, the Company intends to use the services of independent assembly contractors to perform the assembly functions. The Company currently anticipates that, for the foreseeable future, the incremental costs incurred by it in utilizing the services of such independent assembly contractors will substantially offset the incremental revenues derived by it for providing assembly services under these turnkey arrangements. Consequently, the Company believes, while these arrangements may favorably impact its revenues, they will have a negative impact on its margins. Based on the foregoing or other factors, it is possible that in some future periods the Company's reported or anticipated operating results will fail to meet or exceed the expectations of analysts or investors. In such event, the price of the Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SIGNIFICANT CUSTOMER CONCENTRATION; ABSENCE OF CUSTOMER CONTRACTS The Company has historically derived, and expects to continue to derive, a significant percentage of its revenues from a limited but often different group of customers. In fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998, 58.4%, 60.4% 54.2% and 45.2% of the Company's revenues, respectively, were derived from sales to the Company's top five customers, with 29.5%, 21.4%, 30.2% and 19.0% of the Company's revenues, respectively, derived from sales to the Company's largest customer in each respective period. The Company's future financial results are dependent in large part upon its ability to maintain relationships with such customers and attract new customers. Any failure to maintain its relationships with existing customers or to attract new customers would have a material adverse effect on the Company's business, financial condition and results of operations. Until recently, the Company's Manteca Operation had been almost entirely dependent on two customers. However, in January 1998, one of these customers notified the Company that by the end of the second quarter of fiscal 1998, it will no longer be a customer of the Company. Accordingly, the Company's Manteca Operation (which accounted for approximately 10% of the Company's revenues in the first quarter of fiscal 1998) is dependent upon one customer for substantially all of its revenues. In addition, the Company's Hong Kong subsidiary is dependent on Hana Technologies Limited, formerly Swire Technologies ("Hana Technologies"), the Company's largest customer, for substantially all of its revenues. Furthermore, a significant portion of the business that the Company derives from Hana Technologies relates to testing services for LSI Logic, which has historically been a significant customer of the Company's domestic test operations. There can be no assurance that any one or more of the Company's significant customers, including the major customers of the Company's Manteca Operation or Hong Kong subsidiary, will not reduce, cancel or delay orders or seek other suppliers, which could have a material adverse effect on the Company's business, financial condition and results of operations. None of the Company's customers, including its largest customer, Hana Technologies, is presently obligated pursuant to any contractual commitment or otherwise to purchase any amount of the Company's test or packaging services or to provide the Company with binding forecasts for any period. As a result, the Company has no significant backlog. The lack of backlog makes it difficult for the Company to forecast its revenues in any future period. The Company expects that in the future, revenues in any quarter will continue to be substantially dependent on sales made within that quarter. Moreover, customer orders can be cancelled and volume levels can be changed or delayed with no penalties. Furthermore, all of the Company's customers operate in the cyclical semiconductor industry and have varied and may continue to vary order levels significantly from period to period. Accordingly, there can be no assurance that any of the Company's customers will continue to place orders with the Company in the future at the same levels as in prior periods. 7 DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND PERSONAL COMPUTER INDUSTRIES The Company's business depends substantially upon revenue generated from semiconductor companies, which in turn depends upon market conditions in the semiconductor, PC and related industries. These industries are generally characterized by rapid technological change, rapid and significant erosion of selling prices, high cyclicality, intense competition, significant shifts in product standards and evolving industry demand. From time-to-time, these industries have also experienced significant production overcapacity. The effect of these conditions has resulted in, and may result in, significantly reduced demand for the Company's services. For example, a general slowdown in the semiconductor industry in late 1996 and early 1997 caused customers to reduce their orders with the Company. There can be no assurance that there will be no further downturns or slowdowns in any of the markets in which the Company's customers compete. More recently, the Asian financial markets have experienced significant turmoil. There can be no assurance that turmoil in financial markets will not negatively impact the growth of the semiconductor industry and the demand for the Company's services. Any significant or prolonged reduction in orders resulting from a downturn or slowdown in the semiconductor, PC or related industries would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Industry Background" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." EXPANSION OF TESTING CAPACITY; RESULTS OF OPERATIONS AFFECTED BY CAPACITY UTILIZATION RATES The Company believes that its competitive position depends substantially on its ability to expand its testing capacity in the United States and internationally. Accordingly, the Company is continuing to make significant investments to expand its capacity, particularly through the acquisition of capital equipment and additional facilities, and the training of new personnel. In order to more fully utilize such capacity, the Company intends to enter into turnkey relationships with wafer foundries and complementary semiconductor services subcontractors in Asia, similar to its existing relationship with Hana Technologies. There can be no assurance that the Company will be able to successfully enter into or maintain such turnkey relationships, adequately utilize its expanded capacity or continue to expand its testing capacity in a timely manner or at all. In addition, there can be no assurance that the cost of any capacity expansions will not exceed management's current estimates. In addition, the Company expects to continue to incur substantial additional depreciation and other expenses in connection with the acquisition of new equipment and facilities and, consequently, to increase its fixed costs. Any inability of the Company to generate the additional orders necessary to adequately utilize its expanded capacity would have a material adverse effect on the Company's business, financial condition and results of operations. As a result of the capital intensive nature of the Company's business, the Company's operations are characterized by high fixed costs. Consequently, decreases in capacity utilization rates and declines in average selling prices of the Company's services can have a material adverse effect on the Company's gross margin. Therefore, the Company's ability to maintain or increase its gross margin will continue to be dependent, in large part, upon its ability to maintain high capacity utilization rates and to offset decreases in average selling prices by improving production efficiency, or by a shift to testing higher margin products. Any inability of the Company to maintain or increase capacity utilization rates or to offset decreases in average selling prices by improving production efficiency or by a shift to testing higher margin products, which could have a material adverse affect on the Company's business, financial condition and results of operations. Capacity utilization rates may be affected by a number of factors and circumstances, including overall industry conditions, operating efficiencies, the level of customer orders, mechanical failure, disruption of operations due to expansion of operations or relocation of equipment, fire or other natural disasters, employee strikes or work stoppages or other circumstances. For example, in late 1996 and early 1997, the Company's capacity utilization rates were negatively affected by a downturn in the semiconductor industry. There can be no assurance that the Company's capacity utilization rates will not be materially adversely affected by future declines in the semiconductor, PC or related industries or for any other reason. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business-- Facilities" and "--Services." 8 RISKS OF INTERNATIONAL OPERATIONS In fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998, the Company derived 1.2%, 21.4%, 30.2% and 19.0% of its revenues from its international operations. Current international operations include the Company's IC testing facility in Hong Kong and its Singapore operations, which commenced operations in March 1998. The Company's current expansion plans include increasing testing capacity in its Hong Kong and Singapore operations, and opening additional facilities or joint ventures internationally. There can be no assurance that such expansion plans will materialize or that the Company's anticipated revenues from such expansion will materialize or cover the Company's increased costs relating to such expansion. The Company's business, financial condition and results of operations may be affected by economic and political conditions in each of the countries in which it operates or intends to operate and certain other risks of doing business abroad, including import duties, changes to import and export regulations (including quotas), restrictions on the transfer of funds, employee turnover, labor or civil unrest, potential risk of foreign currency fluctuations, long payment cycles, greater difficulty in collecting accounts receivable, and the burdens and cost of compliance with a variety of foreign laws. Moreover, changes in policies by the United States or foreign governments could result in increased duties, higher taxation, currency conversion limitations, hostility toward United States-owned operations, limitations on imports or exports, or the expropriation of private enterprises, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the Company's Hong Kong operations and assets are subject to significant political, economic, legal and other uncertainties in China. Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. The Company cannot provide any assurance that the Chinese government will continue to pursue such policies, that such policies will be successful if pursued, or that such policies will not be significantly altered from time-to-time. Moreover, despite progress in developing its legal system, China does not have a comprehensive and highly developed system of laws, particularly with respect to foreign investment activities and foreign trade. Enforcement of existing and future laws and contracts is uncertain, and implementation and interpretation thereof may be inconsistent. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the preemption of local regulations by national laws may adversely affect the Company's foreign operations in Hong Kong. This in turn could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, in recent months, capital markets in Hong Kong and other parts of Asia have been highly volatile, resulting in significant fluctuations in Asian currencies and other economic instabilities. These instabilities may continue or worsen, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, decreases in the value of Asian currencies relative to the U.S. dollar could make the Company's services more expensive in relation to its competitors, placing the Company at a disadvantage with respect to such competitors. HIGHLY COMPETITIVE INDUSTRY The Company operates in a highly competitive industry. The Company's competitors include large independent IC services providers, small independent IC testing and packaging companies offering niche services, and vertically integrated semiconductor manufacturers which have in-house testing and packaging capabilities. Large independent IC services providers with which the Company competes include Anam Industrial Co., Ltd., ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of Advanced Semiconductor Engineering, Inc., Siliconware Precision Industries Co., Ltd., ST Assembly Test Services Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd., many of which have significantly larger financial, marketing, distribution and other resources than the Company. Many of these companies have also established relationships with current or potential customers of the Company and have developed strategic relationships with third party providers of complementary semiconductor services to enlarge their businesses. The Company may be at a competitive disadvantage with such competitors that have fostered such relationships if the Company does not continue to develop such strategic relationships in the future. The small independent IC testing and 9 packaging companies with which the Company competes generally offer a limited range of services and typically compete on the basis of price. Vertically integrated semiconductor manufacturers that are customers of the Company continuously evaluate the Company's services against developing or using their own in-house capabilities, and most of these customers also obtain testing services from other sources. Vertically integrated customers may have more advanced testing technologies and typically have greater financial, marketing, distribution and other resources than the Company. The Company believes that its primary competitors in the test portion of its business are located in Asia, particularly in Korea, Taiwan, Malaysia, Singapore and Japan. Certain of such competitors may locate testing facilities in North America in the future. In addition, several companies have announced plans to commence independent testing operations in Asia, and several independent testing companies in Asia which currently offer only memory testing services could add logic testing and wafer sort. These operations would compete directly with the Company. Although in recent years semiconductor companies have increasingly outsourced portions of the IC production process, including testing, to independent companies to reduce costs and shorten production cycles, there can be no assurance that this outsourcing trend will continue. From time-to-time, the Company has lost business from customers who have chosen to perform their testing operations in-house. See "Business--Competition." A reversal of, or a slowdown in, this outsourcing trend would have a material adverse effect on the Company's business, financial condition and results of operations. HISTORY OF SIGNIFICANT LOSSES AT MANTECA OPERATIONS; NEW MANAGEMENT IN MANTECA OPERATIONS For a number of years prior to being acquired by the Company, the Manteca Operation had generated significant losses from operations, had disproportionately high operating expenses, had experienced delays in paying creditors and suppliers and had difficulties satisfying customer demand. In response to these conditions, prior to the Company's acquisition of the Manteca Operation, Alphatec reduced its workforce at the Manteca facility by approximately 75% and significantly reduced operating expenses to attempt to align more closely with revenue levels. The Company expects to invest the necessary resources in the Manteca Operation in order to offer its IC testing customers a wider range of services, and is currently in the process of strengthening relationships with key suppliers and customers. In addition, the Company has successfully renewed the ISO 9002 certification for the Manteca Operation, which had lapsed under Alphatec's ownership. If the revenues generated by the Manteca Operation are not maintained at a level necessary to offset operating expenses, if relationships with creditors, suppliers and customers do not improve or if the ISO 9002 certification is not obtained, the Company's overall business, financial condition and results of operations could be materially adversely affected. Prior to the acquisition of the Manteca Operation by the Company, the Company and its personnel had no experience in providing semiconductor packaging services. Moreover, in February 1998, the Company transferred one of its founders to oversee the Manteca Operation. This individual has no experience in operating a provider of semiconductor packaging services. Any prolonged inability to attract and retain qualified personnel to manage the Manteca Operation could cause the Company to divert significant management resources from its testing business, which has historically represented substantially all of the Company's revenue. Any such diversion could have a material adverse effect on the Company's business, financial condition and results of operations. NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS; MANAGEMENT OF RECENT GROWTH The Company has experienced and is continuing to experience growth in the number of its employees, the scope of its operations and the complexity of its business and operations. This growth, which has included the acquisitions of DTS and the Manteca Operation in September 1997 and the expansion of the Company's operations in Hong Kong and Singapore, is expected to continue to strain the Company's managerial, financial, manufacturing and other resources. The Company's ability to manage any future growth effectively will require it to attract, train, motivate and manage new employees successfully, to integrate new employees into its overall operations and to continue to implement and improve its financial and operational systems. In this regard, the Company hired its first full time Chief Financial Officer in late 1997. Neither the Company's Chief Financial 10 Officer, nor any of the employees in its finance department, has worked in a similar capacity for a public company. The Company may experience certain inefficiencies as it integrates new operations and manages geographically dispersed operations. In addition, certain customers have required and may continue to require rapid increases in services from the Company, which have placed and may continue to place a significant burden on the Company's resources. The Company will continue to be required to manage its assets and operations efficiently. There can be no assurance that the Company will be able to manage its expansion effectively. Any failure to increase and improve its operational, financial and management systems could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Employees." FUTURE ACQUISITIONS The Company's business strategy includes the expansion of its business capabilities, including potentially through acquisitions, joint ventures and other corporate alliances. Acquisitions involve numerous risks, including difficulties in assimilating the operations and financial condition, products, personnel and cultures of the acquired companies; difficulties in managing geographically disparate units effectively; diverting management attention from other day-to-day business concerns; difficulties entering markets or business in which the Company has limited or no direct experience; and the potential loss of key employees of the acquired companies. In addition, acquisitions may result in dilutive issuances of equity securities; the incurrence of additional debt; a reduction of existing cash balances; amortization expenses related to goodwill and other intangible assets; and other charges to operations that may have a material adverse effect on the Company's business, results of operations and financial condition. For example, the Alphatec Acquisition resulted in the incurrence of significant debt and amortization expenses related to goodwill and other intangible assets, and other charges to operations. Moreover, there can be no assurance that any equity or debt financings proposed in connection with any acquisition would be available to the Company on acceptable terms, or at all. Although the Company intends to carefully analyze any acquisition opportunity before committing its resources, there can be no assurance that any acquisition that is completed will result in long-term benefits to the Company or that the Company will be able to manage the resulting businesses effectively. LIMITED INDEMNIFICATION PROTECTION RELATED TO THE ALPHATEC ACQUISITION In connection with the Alphatec Acquisition, Alphatec contractually agreed to retain certain potential liabilities relating to the Manteca Operation and DTS and to indemnify the Company for damages that may be incurred by the Company with respect to such potential liabilities, including, without limitation, liabilities relating to environmental matters, litigation, trade payables, and tax and employment matters. If the Company were unable to enforce such indemnification obligations against Alphatec, or if Alphatec did not have sufficient assets to pay for Alphatec's obligations, third parties could assert claims for retained or other liabilities against the Company. In addition, it is possible that creditors of Alphatec may pursue the Company for the liabilities of Alphatec on a "successor liability" theory or otherwise. The inability to successfully seek recourse and recover against Alphatec and the inability of the Company to defend itself against claims of third parties, could cause the Company to incur significant damages, fees and expenses, could divert significant management time and attention and could materially adversely affect relationships with its customers and suppliers. Any such outcome would have a material adverse effect on the Company's business, financial condition and results of operations. EXPOSURE TO RAPID TECHNOLOGICAL CHANGE The semiconductor, PC and related industries are characterized by rapid technological change, including rapid increases in the diversity and complexity of ICs. This in turn requires rapid changes in the services offered by IC testing companies. Accordingly, the Company expects that it will need to continue to offer increasingly advanced IC testing procedures and services to its customers. The Company's efforts to develop advanced testing programs and procedures and to obtain and maintain advanced testing equipment will require significant capital expenditures in future years. Any failure by the Company to develop and enhance advanced testing procedures, or to obtain advanced testing equipment as technology changes, would have a material adverse effect on the 11 Company's business, financial conditions and results of operations. In addition, advances in technology typically lead to rapid and significant price erosion of ICs, which may lead to pricing pressure on testing services for these ICs. Any failure by the Company to increase its testing efficiencies in response to such pricing pressures would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS RELATING TO COMPLEXITY OF TESTING PROCESSES IC testing is a complex process involving significant technological and process expertise. In order to improve capacity utilization rates and efficiencies, the Company maintains advanced and costly equipment and develops conversion software programs which enable it to test certain ICs on multiple equipment platforms. Any failure by the Company to successfully develop conversion software programs could materially adversely affect its operating efficiencies. In addition, the Company's testing operations take place in test areas where air purity, temperature and humidity are controlled. The inability of the Company to control its testing environment could cause tested ICs or wafers to become nonfunctional. The Company has from time-to-time experienced, and may in the future experience, production interruptions due to technical problems occurring during the semiconductor testing process. Any interruption in the Company's operations resulting from prolonged production interruptions could have a material adverse effect on its business, financial condition and results of operations. See "Business--Facilities." NEW TESTING FACILITY IN SINGAPORE The Company is currently utilizing a temporary facility in Singapore, where it currently operates two of its testers for its one customer in such facility. The Company anticipates that it will move its current Singapore testing operations to a larger leased facility in Singapore in late 1998. The Company plans to continue to increase its testing capacity and to secure additional customers in Singapore. There can be no assurance that the Company will attract new customers in Singapore. If the Company's revenues do not increase commensurate with anticipated increases in capacity and expenses in Singapore, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business--Facilities". ABILITY TO OBTAIN TESTING EQUIPMENT IN A TIMELY MANNER The semiconductor testing and packaging business is capital intensive and requires investment in highly automated, expensive capital equipment manufactured by a limited number of suppliers, many of which are located in Asia or Europe. The market for capital equipment used in semiconductor testing has been, from time-to-time, characterized by intense demand, limited supply and long delivery cycles. The Company's operations and expansion plans are highly dependent upon its ability to obtain a significant amount of such capital equipment from a limited number of suppliers, including Credence Systems Corporation, Hewlett-Packard Company, LTX Corporation and Teradyne Corporation. The Company has no binding supply agreements with any such suppliers and acquires its testing equipment on a purchase order basis, which exposes the Company to substantial risks. For example, increased levels of demand in the capital equipment market may cause an increase in the price of equipment and may lengthen delivery cycles, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, adverse fluctuations in foreign currency exchange rates, particularly the Japanese yen, could result in increased prices for certain equipment purchased by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Services." DEPENDENCE ON KEY PERSONNEL AND AVAILABILITY OF SKILLED WORKFORCE The Company's future operating results depend to a large extent upon the continued services of its key executives and other skilled personnel. The Company is not the beneficiary of any "key person" life insurance policy on any such person. Moreover, none of the Company's key personnel is a party to any employment agreement or noncompetition agreement with the Company, except certain personnel of DTS who joined the 12 Company in connection with the Alphatec Acquisition. There can be no assurance that any such agreements are enforceable against such persons. Further, all of the Company's founders are fully vested in their ownership interests in the Company. Although the Company has granted stock options to certain of its key employees who are not founders in order to provide incentives for such employees to remain with the Company, there can be no assurance that the Company will be able to retain its key employees. The Company's future operating results also depend in significant part upon the Company's ability to attract and retain qualified management, manufacturing, quality assurance, engineering, marketing, sales and support personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for the Company to hire such personnel over time. The loss of some or all of such personnel, the loss of key engineers or other professionals, or the failure of the Company to recruit, train and retrain employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company may experience employee turnover due to several factors, including an expanding economy within the geographic area in which the Company maintains its principal business offices. High levels of employee turnover could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Employees." INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT The Company's future results of operations are dependent in part upon its proprietary technology. The Company has no patents and relies principally on confidentiality procedures, contractual provisions and trade secret laws to protect its intellectual property rights. There can be no assurance that any intellectual property rights owned by the Company will not be invalidated, circumvented or challenged or that the rights granted thereunder will provide competitive advantages to the Company. Further, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or that duplicate the Company's technology. As the Company expands its international operations, effective intellectual property protection may be unavailable or limited in certain foreign countries. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology. Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATIONS Federal, state and local regulations in the United States and regulations in other countries in which the Company operates impose various controls on the storage, handling, discharge and disposal of chemicals used in the manufacturing processes. The Company believes that its activities conform to present environmental and land use regulations applicable to its operations and current facilities. Increasing public attention has, however, been focused on the environmental impact of semiconductor manufacturing operations, and the risk to neighbors of chemical releases from such operations. The adoption of new ordinances or similar measures, or any failure by the Company to comply with applicable environmental and land use regulations or to restrict the discharge of hazardous substances, could subject the Company to future liability, require increased capital expenditures, curtail expansion plans or suspend the Company's operations. Compliance with such laws could result in significant costs which could have a material adverse effect on the Company's business, financial condition and results of operations. LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS The Company plans to continue to incur substantial costs associated with the expansion of its testing capacity and facilities. The Company believes that the net proceeds from the sale of the Common Stock in this 13 offering, together with existing cash balances, anticipated cash flow from operations and potentially available equipment lease financing, will be sufficient to meet its projected capital expenditures, working capital and other cash requirements for at least the next twelve months. There can be no assurance, however, that lower than expected revenues, increased expenses, increased costs associated with the purchase or maintenance of capital equipment, decisions to increase planned capacity or other events will not cause the Company to seek additional capital, or to seek capital earlier than currently expected. The timing and amount of the Company's actual capital requirements cannot be precisely determined and will depend upon a number of factors, including demand for the Company's services, availability of capital equipment, fluctuations in foreign currency exchange rates, changes in the condition of, and competitive factors in, the semiconductor, PC and related industries. There can be no assurance that additional capital will be available to the Company when needed or at all, or, if available, will be available on satisfactory terms. The Company's ability to incur additional indebtedness will be significantly limited as substantially all of its assets are secured by its principal bank lenders. Failure to obtain any additional capital in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." CONTINUED CONTROL BY EXISTING SHAREHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's officers and directors and their respective affiliates will, in the aggregate, own approximately 73.3% of the Company's outstanding shares of Common Stock after this offering. As a result, such shareholders, acting together, will be able to effectively control all matters requiring approval by the shareholders of the Company, including the election of at least a majority of the members of the Board of Directors, proxy contests, mergers or asset sales involving the Company, tender offers, open market purchase programs or other purchases of Common Stock that could give shareholders of the Company the opportunity to realize a premium over the then prevailing market price for their shares of Common Stock. In addition, such continued control, together with certain provisions of the Company's Articles of Incorporation, including the Company's classified Board structure, equity incentive plans and bylaws and California law, could also have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price and may adversely affect the market price of the Common Stock. The rights of holders of Common Stock will be subject to, and may be adversely affected by, the rights of holders of preferred stock that may be issued from time to time. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire control of the Company. See "Principal and Selling Shareholders." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding an aggregate of 22,500,000 shares of Common Stock, assuming the issuance of the 5,000,000 shares of Common Stock offered hereby and no exercise of the Underwriters' over-allotment option. Of the total outstanding shares of Common Stock, all 6,000,000 shares of Common Stock sold in this offering will be freely tradeable without restriction or further registration under the Act, unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Act. The remaining 16,500,000 shares will be "restricted securities" as defined in Rule 144 (the "Restricted Shares"). The Restricted Shares may be sold in the public market beginning 90 days after the date of this prospectus. Furthermore, the Company intends to register on a Registration Statement on Form S-8 at the date of this Prospectus, a total of 4,500,000 shares of Common Stock subject to outstanding options or reserved for issuance under the 1998 Stock Incentive Plan, and 600,000 shares of Common Stock reserved for issuance under the 1998 Employee Stock Purchase Plan. See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan." The Company, its directors and executive officers and each of its shareholders have agreed with the representatives of the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock, or securities convertible into or exchangeable or exercisable for shares of Common Stock, for a period of 180 days after the date of this Prospectus without the written consent of Donaldson, Lufkin & Jenrette Securities Corporation, which consent may be given in such institution's sole discretion. The number of outstanding shares that will be available for sale in the public market, after giving effect to the lock-up agreements, will be as follows: (i) no shares of 14 Common Stock, other than the 6,000,000 shares offered hereby, will be eligible for sale as of the effective date of this offering, (ii) 16,500,000 shares will be eligible for sale beginning 180 days after the effective date of this offering and (iii) approximately 903,375 shares issuable upon the exercise of vested options will be eligible for sale beginning 180 days after the effective date of this offering. Sales of substantial amounts of such Common Stock or other securities, or the prospect of such sales, could materially adversely affect the market price of the Common Stock and the Company's ability to raise capital through an offering of securities. See "Shares Eligible for Future Sale." ABSENCE OF PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK PRICE Prior to the consummation of this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or, if developed, will be maintained. The initial public offering price of the Common Stock will be determined by negotiations among the Company, the Selling Shareholders and the representatives of the Underwriters based on several factors, and may not be indicative of the market price of the Common Stock after the offering. See "Underwriting." In addition, the market price of the Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's results of operations, the introduction of new services by the Company or its competitors, conditions and trends in the semiconductor, PC and related industries or the market for testing and packaging services, changes in or failure by the Company to meet securities analysts' expectations and general market conditions. In addition, the stock market from time-to-time has experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology and other comparable companies. These broad market fluctuations may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has been brought against that company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon the Company's business, financial condition and results of operations. MATERIAL BENEFIT TO INSIDERS Directors and executive officers of the Company are selling an aggregate of 1,000,000 shares in this offering, for aggregate gross proceeds of $13.0 million. See "Management--Executive Officers, Directors and Key Employee," "Principal and Selling Shareholders" and "Certain Relationships and Related Transactions." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company has assessed its software and advanced testing equipment and does not currently expect that any significant modifications will be required for such software or equipment. Moreover, the Company does not currently believe that the total cost of any potential modifications will be material. There can be no assurance, however, that the Company or its vendors will be able to modify timely and successfully their respective services and systems to comply with year 2000 requirements. Any failure to become year 2000 compliant on the part of the Company or its vendors, or the incurrence by the Company or its vendors of any costs associated with related litigation, could have a material adverse effect on the Company's business, financial condition and results of operations. 15 LIMITATIONS ON DIVIDENDS The Company has not declared or paid cash dividends on its Common Stock, and the Company anticipates that any future earnings will be retained for investment in its business. Any payment of cash dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, extent of indebtedness and contractual restrictions. The Company's agreements with its lenders prohibits the payment of cash dividends. See "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." IMMEDIATE SUBSTANTIAL DILUTION Investors participating in this offering will incur an immediate substantial dilution of approximately 71.8% of their investment in the Common Stock in that the net tangible book value of the Common Stock after the offering will be approximately $3.67 per share as compared to an assumed initial public offering price of $13.00 per share. See "Dilution." 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,000,000 shares of Common Stock offered hereby are estimated to be approximately $58,700,000, assuming an initial public offering price of $13.00 per share and after deduction of the underwriting discounts and commissions and estimated related offering expenses payable by the Company. The Company currently intends to use the net proceeds from this offering to repay an aggregate of approximately $23.7 million of existing indebtedness (plus accrued interest) outstanding under various term loans, promissory notes and its line of credit, which bear interest at the prime rate plus applicable margins of up to 0.75% and mature from 1998 to 2003. The remaining proceeds will be used for other working capital and general corporate purposes, including capital expenditures to expand capacity. A portion of the net proceeds may also be used for strategic acquisitions of businesses, products or technologies complementary to those of the Company. There are currently no negotiations, commitments or agreements with respect to any acquisitions. Pending such uses, the Company intends to invest the net proceeds in short- term, investment-grade, interest-bearing securities. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders." DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. In addition, the Company is prohibited by certain agreements from paying cash dividends. See Note 4 of Notes to Consolidated Financial Statements of the Company. 17 CAPITALIZATION The following table sets forth at January 31, 1998: (i) the actual short- term debt, including current portion of long-term debt, and the capitalization of the Company and (ii) the short-term debt, including current portion of long-term debt, and the capitalization of the Company as adjusted to reflect the sale by the Company of 5,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of a portion of the proceeds therefrom to retire $23.7 million of outstanding indebtedness. This table should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus.
AS OF JANUARY 31, 1998 ------------------------ ACTUAL AS ADJUSTED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Short-term debt, including current portion of long- term debt............................................ $ 15,015 $ 2,283 =========== ========== Long-term debt, less current portion.................. $ 18,483 $ 7,533 ----------- ---------- Shareholders' equity: Preferred Stock, 3,000,000 shares, $.001 par value per share, authorized; none issued and outstanding actual and as adjusted ............................ -- -- Common Stock, 50,000,000 shares, $.001 par value per share, authorized; 17,500,000 shares issued and outstanding actual(1); 22,500,000 shares issued and outstanding as adjusted............................ 18 23 Additional paid-in capital.......................... 546 59,241 Retained earnings................................... 25,589 25,589 ----------- ---------- Total shareholders' equity........................ 26,153 84,853 ----------- ---------- Total capitalization.................................. $ 44,636 $ 92,386 =========== ==========
- --------------------- (1) Based on the number of shares of Common Stock outstanding as of January 31, 1998. Excludes as of January 31, 1998: (i) 2,648,400 shares of Common Stock issuable upon exercise of options currently outstanding under the Company's 1998 Stock Incentive Plan at a weighted average exercise price of $7.98 per share; (ii) 1,851,600 shares of Common Stock issuable upon exercise of options reserved for future issuance under the Company's 1998 Stock Incentive Plan and other stock incentives plans of the Company; and (iii) 600,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plans. Also excludes options to purchase 26,400 shares of Common Stock issued by the Company subsequent to January 31, 1998. See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan" and Note 5 of Notes to Consolidated Financial Statements of the Company. 18 DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value per share of Common Stock. The net tangible book value of the Company as of January 31, 1998 was $23,864,000, or $1.36 per share of Common Stock. "Net tangible book value" per share represents the amount of total tangible assets of the Company reduced by the amount of its total liabilities and divided by the total number of shares of Common Stock outstanding. Without taking into account any other changes in such net tangible book value after January 31, 1998, other than to give effect to the sale by the Company of 5,000,000 shares offered hereby at an assumed initial public offering price of $13.00 per share resulting in estimated net proceeds of $58,700,000 to the Company. The pro forma net tangible book value of the Company as of January 31, 1998 would have been approximately $82,564,000, or $3.67 per share. This represents an immediate increase in such net tangible book value of $2.31 per share to existing shareholders and an immediate dilution of $9.33 per share to new shareholders. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $13.00 Net tangible book value per share as of January 31, 1998.... $1.36 Increase attributable per share attributable to new investors.................................................. 2.31 ----- Pro forma net tangible book value per share after the offering..................................................... 3.67 ------ Dilution to new investors..................................... $ 9.33 ======
The following table summarizes, on a pro forma basis as of January 31, 1998, the differences between the existing shareholders and the new shareholders with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share, based upon an assumed public offering price of $13.00 per share (before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION ------------------ ------------------- AVERAGE PRICE AMOUNT PERCENT AMOUNT PERCENT PER SHARE Existing shareholders(1)........ 17,500,000 77.8% $ 564,000 0.9% $ 0.03 New public investors(1)........... 5,000,000 22.2 65,000,000 99.1 13.00 ---------- ----- ----------- ----- Total................. 22,500,000 100.0% $65,564,000 100.0% ========== ===== =========== =====
- --------------------- (1) Sales by the Selling Shareholders in this offering will reduce the number of shares of Common Stock held by existing shareholders to 16,500,000 shares or to approximately 73.3% of the total number of shares of Common Stock outstanding after this offering (16,500,000 shares or approximately 70.5% of the total number of shares of Common Stock outstanding after this offering if the Underwriters' over-allotment option is exercised in full) and will increase the number of shares held by new investors to 6,000,000 or to approximately 26.7% of the total number of shares of Common Stock outstanding after this offering (6,900,000 shares, or approximately 29.5% of the total number of shares of Common Stock outstanding after this offering, if the Underwriters' over-allotment option is exercised in full). See "Principal and Selling Shareholders." The above computations are based on the number of shares of Common Stock outstanding as of January 31, 1998. Excludes as of January 31, 1998: (i) 2,648,400 shares of Common Stock issuable upon exercise of options currently outstanding under the Company's 1998 Stock Incentive Plan at a weighted average exercise price of $7.98 per share; (ii) 1,851,600 shares of Common Stock issuable upon exercise of options available for future issuance under the Company's 1998 Stock Incentive Plan; and (iii) 600,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan. Also excludes options to purchase 26,400 shares of Common Stock issued by the Company subsequent to January 31, 1998. See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan" and Note 5 of Notes to Consolidated Financial Statements of the Company. 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, which appear elsewhere in this Prospectus. The selected consolidated statement of operations data presented below for each of the years ended October 31, 1995, 1996 and 1997 and the consolidated balance sheet data presented below as of October 31, 1996 and 1997 are derived from the audited consolidated financial statements of the Company included elsewhere in this Prospectus. The consolidated statement of operations data for the year ended October 31, 1994 and the consolidated balance sheet data as of October 31, 1995 are derived from audited consolidated financial statements of the Company not included herein. The consolidated statements of operations data for the year ended October 31, 1993 and the consolidated balance sheet data as of October 31, 1993 and 1994 are derived from unaudited consolidated financial statements not included herein. The consolidated statement of operations data for the three months ended January 31, 1997 and 1998 and the consolidated balance sheet data as of January 31, 1998 are derived from unaudited consolidated financial statements of the Company included elsewhere in this Prospectus. The unaudited consolidated financial statements of the Company include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. The consolidated statement of operations data for the three months ended January 31, 1998 are not necessarily indicative of the results that may be expected for the entire year ending October 31, 1998. 20 SELECTED CONSOLIDATED FINANCIAL DATA
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, ------------------------------------------- ------------------- 1993 1994 1995 1996 1997(1) 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues............... $13,440 $15,548 $22,321 $25,354 $35,532 $6,198 $20,291 Cost of revenues....... 6,557 6,760 8,953 12,094 17,950 3,430 9,483 ------- ------- ------- ------- ------- ------ ------- Gross profit........... 6,883 8,788 13,368 13,260 17,582 2,768 10,808 ------- ------- ------- ------- ------- ------ ------- Operating expenses: Research and development.......... 571 601 1,048 1,111 1,097 227 673 Selling, general and administrative....... 2,871 3,852 3,843 3,932 7,229 925 4,989 ------- ------- ------- ------- ------- ------ ------- Total operating expenses............ 3,442 4,453 4,891 5,043 8,326 1,152 5,662 ------- ------- ------- ------- ------- ------ ------- Income from operations............ 3,441 4,335 8,477 8,217 9,256 1,616 5,146 Other income (expense): Interest and other income (expense), net.................. 311 398 523 504 804 79 (33) Interest expense...... (412) (374) (403) (530) (741) (144) (869) ------- ------- ------- ------- ------- ------ ------- Total other income (expense)........... (101) 24 120 (26) 63 (65) (902) ------- ------- ------- ------- ------- ------ ------- Income before income taxes................. 3,340 4,359 8,597 8,191 9,319 1,551 4,244 Provision for income taxes................. 1,354 1,891 3,667 3,343 3,579 596 1,613 ------- ------- ------- ------- ------- ------ ------- Net income............. $ 1,986 $ 2,468 $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631 ======= ======= ======= ======= ======= ====== ======= Basic and diluted net income per share(2)... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 ======= ======= ======= ======= ======= ====== ======= Number of shares used in per share calculations:(2) Basic................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500 Diluted............... 17,500 17,500 17,500 17,500 17,500 17,500 17,768 AS OF OCTOBER 31, AS OF ------------------------------------------- JANUARY 31, 1993 1994 1995 1996 1997 1998 (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents........... $ 1,759 $ 2,457 $ 6,130 $ 4,655 $ 4,969 $ 6,077 Working capital (deficiency).......... 13 2,679 2,937 3,020 (8,665) (12,282) Total assets........... 12,975 14,658 24,713 29,995 70,843 81,749 Short-term debt, including current portion of long-term debt.................. -- 451 880 1,414 14,861 15,015 Long-term debt, less current portion....... 3,800 3,756 4,534 4,595 17,189 18,483 Retained earnings...... 4,975 7,440 12,370 17,218 22,958 25,589 Total shareholders' equity................ 5,515 8,004 12,934 17,782 23,522 26,153
- ------------------- (1) Results of operations data for fiscal 1997 include the results of operations of DTS and the Manteca Operation, which were acquired in September 1997 and accounted for under the purchase method of accounting. See Note 2 of Notes to Consolidated Financial Statements of the Company. (2) See Note 1 of Notes to Consolidated Financial Statements of the Company for an explanation of the method used to determine the number of shares used in computing net income per share. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to the other information in this Prospectus, the following discussion should be considered carefully in evaluating the Company and its business before purchasing the Common Stock offered by this Prospectus. Sections of this Prospectus, including this section and the sections entitled "Business" may contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company provides a broad range of integrated circuit ("IC") testing and evaluation services. The Company also offers semiconductor packaging services at its Manteca, California facility. Historically, the Company has focused on final testing of primarily logic and mixed-signal ICs. The Company also provides a variety of additional services related to IC testing, including wafer sort, production monitoring, reliability analysis and software development. The Company began providing testing services in the United States in 1983 and significantly increased its testing capacity in 1997. In order to address international opportunities, the Company established a testing presence in Hong Kong in 1995 and began testing operations in Singapore in March 1998. In the first quarter of fiscal 1998, approximately 81.0% of the Company's revenues were derived from operations in the United States, with the remainder derived from the Company's operations in Hong Kong. To expand its capacity and broaden its range of services, effective September 11, 1997, the Company purchased for approximately $31.2 million, including acquisition costs, certain assets of Alphatec USA, Inc. ("Alphatec") (the "Alphatec Acquisition"). The Alphatec Acquisition was financed by various term loans and short-term borrowings. The transaction was accounted for using the purchase method of accounting and, on this basis, the excess purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed was allocated to goodwill in the amount of $1.6 million and a covenant not to compete in the amount of $1.0 million. The assets acquired in the Alphatec Acquisition included 100% of the capital stock of Digital Testing Services, Inc. ("DTS"), and selected assets and liabilities of Alphatec relating to its Manteca, California packaging operation (the "Manteca Operation"). DTS provides a broad range of semiconductor testing and validation services throughout the semiconductor production process, with a primary focus on the initial development stage. The Manteca Operation provides semiconductor packaging services, including quickturn and prototype packaging. The consolidated financial statements of the Company include the results of the operations acquired in the Alphatec Acquisition from the date of acquisition. The Company has made significant investments to increase its testing capacity. As of October 31, 1995, 1996 and 1997 and January 31, 1998, the number of testers operated by the Company was 38, 55, 91 and 96, respectively. From time-to-time, the Company operates testers on consignment from its customers. As of January 31, 1998, ten of the testers operated by the Company were on consignment from customers. The Company's focus has primarily been on increasing capacity for testing higher complexity ICs. Since the Company generally charges for its services per hour of tester time, testing more complex, high-performance devices tends to generate higher revenues and margins, because testing services related to such products are priced significantly higher per CPU second and involve longer testing times than testing less complex or lower performance products. The Company expects to continue to make substantial investments in expanding its capacity in the future. As a result of the capital intensive nature of the Company's business, the Company's operations are characterized by high fixed costs. Consequently, gross margins can be significantly impacted by capacity utilization rates. As the Company expands its capacity, margins can be negatively affected for a period of time until utilization rates can be optimized. The Company attempts to improve its capacity utilization rates by (i) repositioning older test equipment to test less complex and lower performance products; (ii) developing test conversion programs, which allow the Company to test ICs on multiple platforms; (iii) developing internal maintenance capabilities, which help to decrease down time of the Company's testing equipment; and (iv) using 22 existing test equipment to provide other services, such as wafer sort. The Company's ability to maintain or enhance its gross margins will continue to be dependent, in part, on its ability to effectively manage capacity utilization rates. The average selling price for the Company's services, calculated on a hourly basis, historically has not fluctuated to a significant degree. However, the average selling price per device tested has varied and is expected to continue to vary due to a number of factors, including the level of device complexity and the time required to test each device. The Company expects that average selling prices for its services may decline in the future, principally due to intense competitive conditions and other factors. A decline in average selling prices of the Company's services, if not offset by reductions in the cost of providing those services or by a shift to testing higher margin products, would decrease the Company's gross margin and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes there is a trend toward customers requesting turnkey testing and packaging services. In February 1998, the Company entered into an arrangement with one of its customers to provide such turnkey services. In providing such turnkey services, the Company intends to use the services of independent assembly contractors to perform the assembly functions. The Company currently anticipates that, for the foreseeable future, the incremental costs incurred by it in utilizing the services of such independent assembly contractors will substantially offset the incremental revenues derived by it for providing assembly services under these turnkey arrangements. Consequently, the Company believes, while these arrangements will favorably impact its revenues, they will have a negative impact on its margins. The Company's customer base is comprised primarily of vertically integrated semiconductor companies and fabless semiconductor companies. The Company's customers include C-Cube Microsystems, Inc., Cirrus Logic, Inc. ("Cirrus Logic"), Hana Technologies, Hewlett-Packard Company, LSI Logic Corporation ("LSI Logic"), Motorola, Inc., National Semiconductor Corporation, Philips Electronics, N.V., S3 Incorporated and Xilinx, Inc. Hana Technologies accounted for 21.4%, 30.2% and 19.0% of the Company's revenues in fiscal 1996, fiscal 1997 and the three months ended January 31, 1998, respectively. A significant portion of the business that the Company derives from Hana Technologies relates to testing services for LSI Logic. Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the Company's revenue in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic accounted for 13.4% of the Company's revenues in the three months ended January 31, 1998. No other customer accounted for more than 10% of the Company's revenues during these periods. The United States dollar is the functional currency of the Company's foreign subsidiaries and substantially all of its revenues are collected in United States dollars. Exchange gains and losses resulting from transactions denominated in currencies other than the United States dollar are included in the Company's results of operations. To date, such amounts have not been material, and the Company has not undertaken any foreign currency hedging activities. 23 RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statement of operations data as a percentage of revenues for the periods indicated:
THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, ------------------------- ------------------ 1995 1996 1997 1997 1998 Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................ 40.1 47.7 50.5 55.3 46.7 ------- ------- ------- -------- -------- Gross profit.................... 59.9 52.3 49.5 44.7 53.3 ------- ------- ------- -------- -------- Operating expenses: Research and development...... 4.7 4.4 3.1 3.7 3.3 Selling, general and administrative............... 17.2 15.5 20.3 14.9 24.6 ------- ------- ------- -------- -------- Total operating expenses.... 21.9 19.9 23.4 18.6 27.9 ------- ------- ------- -------- -------- Income from operations.......... 38.0 32.4 26.1 26.1 25.4 Other income (expense): Interest and other income (expense), net............... 2.3 2.0 2.3 1.3 (0.1) Interest expense.............. (1.8) (2.1) (2.1) (2.4) (4.3) ------- ------- ------- -------- -------- Total other income (expense).................. 0.5 (0.1) 0.2 (1.1) (4.4) ------- ------- ------- -------- -------- Income before income taxes...... 38.5 32.3 26.3 25.0 21.0 Provision for income taxes...... 16.4 13.2 10.1 9.6 8.0 ------- ------- ------- -------- -------- Net income...................... 22.1% 19.1% 16.2% 15.4% 13.0% ======= ======= ======= ======== ========
REVENUES Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's revenues are comprised of revenue from final test, wafer sort, engineering, packaging, qualification, burn-in and related services. Revenues increased from $22.3 million in fiscal 1995 to $25.4 million in fiscal 1996 and to $35.5 million in fiscal 1997. The increase in revenues of 13.6% from fiscal 1995 to fiscal 1996 was due primarily to revenues derived from the Company's Hong Kong operations, which were established in late fiscal 1995. This increase was partially offset by a decline in revenues from the Company's domestic operations due to market conditions in the semiconductor industry. The increase in revenues of 40.1% from fiscal 1996 to fiscal 1997 was due primarily to the expansion of the Company's testing capacity and utilization thereof, primarily in its Hong Kong operations. In addition, fiscal 1997 revenues increased due to the inclusion of revenues from DTS and the Manteca Operation for the period subsequent to the Alphatec Acquisition. Three Months Ended January 31, 1997 and 1998. Revenues increased by over 227% from $6.2 million in the three months ended January 31, 1997 to $20.3 million in the three months ended January 31, 1998. Revenues in the three months ended January 31, 1998 include a full quarter of revenues generated by DTS and the Manteca Operation. In addition, revenues increased due to the continued expansion and utilization of the Company's testing capacity at all of its locations. The Company anticipates that due to prevailing conditions in the semiconductor market, its quarterly revenues in the near future will remain relatively flat and may possibly decline from current levels. GROSS PROFIT Fiscal Years Ended October 31, 1995, 1996 and 1997. Cost of revenues includes depreciation, direct and indirect labor, materials and overhead costs. Gross profit was $13.4 million in fiscal 1995, $13.3 million in fiscal 1996 and $17.6 million in fiscal 1997. Gross profit as a percentage of revenues, or gross margin, was 59.9% in fiscal 1995, 52.3% in fiscal 1996 and 49.5% in fiscal 1997. The decrease in gross margin from fiscal 1995 to 24 fiscal 1996 was due primarily to lower capacity utilization rates in the Company's domestic operations, partially offset by higher capacity utilization in its Hong Kong operations. The decrease in gross margin from fiscal 1996 to fiscal 1997 was due primarily to an increase in capacity that was under- utilized due to a general slowdown in the semiconductor industry. Three Months Ended January 31, 1997 and 1998. Gross profit increased by 290% from $2.8 million in the three months ended January 31, 1997 to $10.8 million in the three months ended January 31, 1998. This increase was due primarily to increased capacity at the Company's domestic and Hong Kong operations and the utilization thereof, and the inclusion of a full quarter of results of DTS. Gross margin increased from 44.7% in the three months ended January 31, 1997 to 53.3% in the three months ended January 31, 1998, reflecting an improvement in capacity utilization rates at all of the Company's locations. The Company's gross margin has tended to fluctuate due to timing of costs associated with the acquisition of additional equipment to expand capacity and the delay associated with utilizing such expanded capacity. As the Company continues to expand capacity, the Company expects that its gross margin will continue to fluctuate. RESEARCH AND DEVELOPMENT Fiscal Years Ended October 31, 1995, 1996 and 1997. Research and development expenses consist primarily of salaries, bonuses, facilities and other employee related costs. Research and development expenses were $1.0 million in fiscal 1995, $1.1 million in fiscal 1996 and $1.1 million in fiscal 1997. As a percentage of revenues, research and development expenses were 4.7%, 4.4% and 3.1% in fiscal 1995, 1996 and 1997, respectively. Research and development expenses remained relatively flat from fiscal 1995 to fiscal 1997, but decreased as a percentage of revenues as revenues increased. Three Months Ended January 31, 1997 and 1998. Research and development expenses increased from $227,000 in the three months ended January 31, 1997 to $673,000 in the three months ended January 31, 1998. This increase was primarily a result of the inclusion of a full quarter of the results of DTS. As a percentage of revenues, research and development expenses decreased from 3.7% in the three months ended January 31, 1997 to 3.3% in the three months ended January 31, 1998, primarily as a result of an increase in revenues between such periods. The Company expects that research and development expenses may increase in absolute dollars over historical levels. Additionally, such expenses will continue to fluctuate as percentage of revenues from period to period. SELLING, GENERAL AND ADMINISTRATIVE Fiscal Years Ended October 31, 1995, 1996 and 1997. Selling, general and administrative expenses consist primarily of salaries, bonuses, facilities maintenance expenses, selling and marketing expenses, other employee related costs and amortization of goodwill and other intangibles. Selling, general and administrative expenses were $3.8 million in fiscal 1995, $3.9 million in fiscal 1996 and $7.2 million in fiscal 1997. As a percentage of revenues, selling, general and administrative expenses were 17.2%, 15.5% and 20.3% in fiscal 1995, 1996 and 1997, respectively. The increase in selling, general and administrative expenses in fiscal 1997 compared to fiscal 1996 was due primarily to the inclusion of the results of DTS and the Manteca Operation and charges related to certain employment related bonuses aggregating $2.0 million. Three Months Ended January 31, 1997 and 1998. Selling, general and administrative expenses increased from $925,000 in the three months ended January 31, 1997 to $5.0 million in the three months ended January 31, 1998. As a percentage of revenues, selling, general and administrative expenses increased from 14.9% in the three months ended January 31, 1997 to 24.6% in the three months ended January 31, 1998. These increases were primarily a result of the inclusion of a full quarter of the results of DTS and the Manteca Operation and a charge of $1.8 million related to certain employment bonuses during the three months ended January 31, 1998. The Company expects that selling, general and administrative expenses may increase in absolute dollars over historical levels. Additionally, such expenses will continue to fluctuate as a percentage of revenues from period to period. 25 EXECUTIVE PERFORMANCE RELATED AND OTHER EMPLOYMENT RELATED COMPENSATION Historically, the Company has awarded significant amounts of performance related and other employment related compensation to its key executives. Performance and other employment related bonuses awarded to executives aggregated $2.1 million, $1.9 million, $3.3 million and $1.8 million in fiscal 1995, 1996, 1997 and the three months ended January 31, 1998, respectively. In October 1997, the Company introduced stock-based compensation for its executives and other employees. Consequently, the Company currently anticipates that executive performance and other employment related bonuses awarded to executives in future periods will be lower than historical levels. INTEREST AND OTHER INCOME (EXPENSE) Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest income includes income from certificates of deposits and other interest bearing deposits. Other income (expense) includes rental income and capital gains or losses from the sale of equipment. Interest and other income was $523,000, $504,000 and $804,000 in fiscal 1995, 1996 and 1997, respectively. The increase in fiscal 1997 compared to fiscal 1996 resulted primarily from capital gains on disposition of equipment. Three Months Ended January 31, 1997 and 1998. Interest and other income (expense) for the three months ended January 31, 1997 was a net income of $79,000. Interest and other income (expense) in the three months ended January 31, 1998 was a net expense of $33,000, due primarily to a loss on disposition of certain assets. INTEREST EXPENSE Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest expense consists primarily of interest payable on capital leases and term loans secured by the Company's facilities and equipment. The Company has historically financed the acquisition of equipment primarily through funds generated by operations and with limited use of capital leases. The Company financed the Alphatec Acquisition through various term loans and short-term lines of credit, which carry interest rates at prime plus applicable margins of up to 0.75%. Interest expense increased from $403,000 in fiscal 1995 to $530,000 in fiscal 1996 and to $741,000 in fiscal 1997. The increase in fiscal 1997 compared to fiscal 1996 was due primarily to the increased indebtedness incurred in connection with the Alphatec Acquisition. Three Months Ended January 31, 1997 and 1998. Interest expense in the three months ended January 31, 1997 and 1998 was $144,000 and $869,000, respectively. This increase was due primarily to an increase in indebtedness incurred in connection with the Alphatec Acquisition. PROVISION FOR INCOME TAXES Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's provisions for income taxes in fiscal 1995, 1996 and 1997 was $3.7 million, $3.3 million and $3.6 million, respectively, reflecting effective tax rates of approximately 43%, 41% and 38%, respectively. The decrease in the Company's effective tax rate from fiscal 1995 to fiscal 1997 primarily reflects the increase in operations in Hong Kong, where income tax rates are typically lower than those in the United States. Three Months Ended January 31, 1997 and 1998. The provision for income taxes in the three months ended January 31, 1997 and 1998 was $596,000 and $1.6 million, respectively, reflecting an effective tax rate of 38% for both periods. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131, "Disclosures About Segments of An Enterprise and Related Information" ("SFAS 131"). SFAS 130 established rules for reporting and displaying comprehensive income. SFAS 131 will require the Company to use the "management approach" in disclosing segment information. Both statements are effective for the Company during fiscal 1998. The Company does not believe that the adoption of either SFAS 130 or SFAS 131 will have a material impact on the financial statement disclosures made by the Company. 26 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited consolidated statement of operations data, both in dollar amounts and as a percentage of revenues, for the nine quarters in the period ended January 31, 1998. The data set forth below have been derived from unaudited consolidated financial statements of the Company and have been prepared on the same basis as the audited financial statements, and in the opinion of management, include all necessary adjustments, consisting of only normal recurring adjustments, that the Company considers necessary for a fair presentation of the results of interim periods. The quarterly statement of operations data should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. The Company's results of operations have varied and will continue to vary significantly from quarter to quarter and are not necessarily indicative of the results of any future period. In addition, as a result of the Alphatec Acquisition in September 1997, the Company believes that historical period-to-period comparisons should not be relied upon as an indication of future performance.
FISCAL 1998 FISCAL 1996 QUARTERS ENDED FISCAL 1997 QUARTERS ENDED QUARTER ----------------------------------- ----------------------------------- ENDED JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, 1996 1996 1996 1996 1997 1997 1997 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................ $6,285 $7,048 $6,488 $5,533 $6,198 $6,477 $7,707 $15,150 $20,291 Cost of revenues........ 3,072 3,155 3,156 2,711 3,430 3,487 3,797 7,236 9,483 ------ ------ ------ ------ ------ ------ ------ ------- ------- Gross profit............ 3,213 3,893 3,332 2,822 2,768 2,990 3,910 7,914 10,808 Operating expenses...... 1,208 1,319 1,256 1,260 1,152 1,144 1,260 4,770 5,662 ------ ------ ------ ------ ------ ------ ------ ------- ------- Income from operations.. 2,005 2,574 2,076 1,562 1,616 1,846 2,650 3,144 5,146 Other income (expense), net.................... (20) 166 (45) (127) (65) 41 (72) 159 (902) ------ ------ ------ ------ ------ ------ ------ ------- ------- Income before income taxes.................. 1,985 2,740 2,031 1,435 1,551 1,887 2,578 3,303 4,244 Provision for income taxes.................. 810 1,119 829 585 596 724 990 1,269 1,613 ------ ------ ------ ------ ------ ------ ------ ------- ------- Net income.............. $1,175 $1,621 $1,202 $ 850 $ 955 $1,163 $1,588 $ 2,034 $ 2,631 ====== ====== ====== ====== ====== ====== ====== ======= ======= Basic and diluted net income per share....... $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15 ====== ====== ====== ====== ====== ====== ====== ======= ======= Number of shares used in per share calculations: Basic.................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 Diluted................ 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,768 AS A PERCENTAGE OF REVENUES --------------------------------------------------------------------------------- Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 48.9 44.8 48.6 49.0 55.3 53.8 49.3 47.8 46.7 ------ ------ ------ ------ ------ ------ ------ ------- ------- Gross profit............ 51.1 55.2 51.4 51.0 44.7 46.2 50.7 52.2 53.3 Operating expenses...... 19.2 18.7 19.4 22.8 18.6 17.7 16.3 31.4 27.9 ------ ------ ------ ------ ------ ------ ------ ------- ------- Income from operations.. 31.9 36.5 32.0 28.2 26.1 28.5 34.4 20.8 25.4 Other income (expense), net.................... (0.3) 2.4 (0.7) (2.3) (1.1) 0.6 (0.9) 1.0 (4.4) ------ ------ ------ ------ ------ ------ ------ ------- ------- Income before income taxes.................. 31.6 38.9 31.3 25.9 25.0 29.1 33.5 21.8 21.0 Provision for income taxes.................. 12.9 15.9 12.8 10.6 9.6 11.2 12.9 8.4 8.0 ------ ------ ------ ------ ------ ------ ------ ------- ------- Net income.............. 18.7% 23.0% 18.5% 15.3% 15.4% 17.9% 20.6% 13.4% 13.0% ====== ====== ====== ====== ====== ====== ====== ======= =======
27 The Company's quarterly revenues are affected by the timing and size of the orders received from customers. Revenues in the two quarters ended October 31, 1996 and January 31, 1997 were negatively impacted by a slowdown in the semiconductor industry which adversely affected utilization at the Company's domestic testing facility. The Company's revenues increased significantly in the two most recent quarters ended October 31, 1997 and January 31, 1998, due primarily to revenues generated by DTS and the Manteca Operation, which were acquired in September 1997, and increased revenues derived from the Company's other facilities. As a result of the capital intensive nature of the Company's business, the Company's cost structure is characterized by high fixed costs. The Company's gross margin has tended to fluctuate due to timing of costs associated with the acquisition of additional equipment to expand capacity and the delay associated with utilizing such expanded capacity. In the quarter ended January 31, 1997, the Company's gross margin decreased to 44.7% from 51.0% in the prior quarter, primarily due to lower capacity utilization rates and pricing pressures as a result of a slowdown in the semiconductor industry. The Company's gross margin improved gradually in fiscal 1997 primarily as a result of improved capacity utilization rates. As the Company continues to expand capacity, the Company expects that its gross margin will continue to fluctuate. The Company's quarterly operating expenses increased only nominally on a quarterly basis through the quarter ended July 31, 1997. Operating expense in the quarters ended October 31, 1997 and January 31, 1998 increased significantly due primarily to the inclusion of a full quarter of the results of DTS and the Manteca Operation. In addition, in the quarters ended October 31, 1997 and January 31, 1998, the Company incurred certain employment related bonuses aggregating $2.0 million and $1.8 million, respectively, which resulted in a corresponding increase in operating costs. A variety of factors have materially affected, and are expected to continue to materially affect, the Company's operating results. These factors include the cyclical nature of the semiconductor, PC and related industries and the various markets that serve consumers of products incorporating semiconductors; absence of long-term contracts and the resulting lack of backlog from the Company's customers; price competition; timing and volume of orders received by the Company; reschedulings, delays, deferrals and cancellations of orders; evolutions in the life cycles of customers' products; erosion of semiconductor unit prices; changes in capacity utilization; allocation of testing capacity between the Company's facilities and those of its customers; availability, price and changes in advanced testing equipment; effectiveness in managing production processes; fluctuations in manufacturing yields; changes in product and service mix or devices tested or assembled; product obsolescence; availability of financing for expansion; the ability to develop and implement new technologies on a timely basis; the loss of key personnel or the shortage of available skilled workers; international political or economic events; and currency and interest rate fluctuations. Furthermore, the Company has historically experienced, and may continue to experience, seasonality in its sales and operating results. This seasonality, combined with other factors including those described above, has resulted and is likely to continue to result in significant variability in quarterly and annual operating results. The Company believes that due to prevailing conditions in the semiconductor market, its quarterly revenues in the near future will remain relatively flat and may possibly decline from current levels. See "Risk Factors--Significant Fluctuations in Operating Results." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has satisfied its liquidity needs principally from the cash generated from operations and equipment financing arrangements. At January 31, 1998, the Company had cash and cash equivalents of $6.1 million. In fiscal 1995, 1996 and 1997 and the three months ended January 31, 1998, cash generated from operating activities was $10.2 million, $6.0 million, $12.8 million and $10.4 million, respectively. In fiscal 1995, 1996 and 1997 and the three months ended January 31, 1998, capital expenditures were $8.0 million, $8.8 million, $17.1 million and $7.5 million, respectively. These capital expenditures related primarily 28 to the acquisition of advanced test equipment. The industry in which the Company operates is capital intensive, and the Company expects to continue to make significant capital expenditures to expand its capacity in the future. In fiscal 1995, 1996 and 1997, proceeds from financing activities, net of repayments, were $1.2 million, $595,000 and $25.5 million, respectively. The Alphatec Acquisition, which occurred in September 1997, was accounted for as a purchase and, on this basis, the excess purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed has been allocated to goodwill and a covenant not to compete. The Alphatec Acquisition was financed by various term loans and short-term borrowings under the Company's lines of credit, which are repayable at various dates through September 2002. Approximately $5.4 million of such borrowings were originally due on March 31, 1998, however the lender has extended the due date to September 30, 1998. The Company's outstanding borrowings are secured by all of its assets and require compliance with certain financial covenants, including those which restrict payment of dividends. In the three months ended January 31, 1998, net cash used by financing activities totalled $1.8 million for debt repayments. At January 31, 1998, the Company had a working capital deficiency of approximately $12.3 million, resulting primarily from its short-term borrowings of approximately $9.8 million and accounts payable associated with its purchase of capital equipment. In March 1998, the Company entered into a $10.0 million line of credit for capital equipment expiring March 1999. Additionally, the Company is currently negotiating to finance recently purchased capital equipment through a combination of lease and long-term equipment note borrowings. The Company believes that the net proceeds from the sale of Common Stock in this offering, a portion of which will be used to repay existing indebtedness, together with existing cash balances, anticipated cash flow from operations and available equipment lease financing and bank borrowings, will be sufficient to meet its projected working capital and other cash requirements for at least the next 12 months. There can be no assurance, however, that lower than expected revenues, increased expenses, increased costs associated with the purchase or maintenance of capital equipment, or other events will not cause the Company to seek more capital, or capital sooner than currently expected. The timing and amount of the Company's actual capital requirements will depend on a number of factors, including demand for the Company's services, availability of capital equipment, adverse fluctuations in foreign currency exchange rates, changes in semiconductor industry conditions and competitive factors. There can be no assurance that such additional financing will be available when needed or, if available, will be available on satisfactory terms. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company has assessed its software and advanced testing equipment and does not currently expect that any significant modifications will be required for such software or equipment. Moreover, the Company does not believe that the total cost of any potential modifications will be material. There can be no assurance, however, that the Company or its vendors will be able to modify timely and successfully their respective services and systems to comply with year 2000 requirements. Any failure to become year 2000 compliant on the part of the Company or its vendors or the incurrence of any costs associated with related litigation could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors-- Year 2000 Compliance." 29 BUSINESS GENERAL ISE is one of the leading independent integrated circuit ("IC") testing and evaluation companies in the world. Unlike many of its competitors, the Company offers a broad range of IC testing, evaluation and other services throughout the entire semiconductor manufacturing process. These services include software development, electrical verification, reliability analysis, failure analysis, wafer sort, production monitoring and quickturn and prototype packaging. A significant portion of the Company's revenues from testing services is derived from testing complex, high-performance logic and mixed- signal products, which are typically the higher-margin, faster growing segments of the testing services market. During the last twelve months, the Company has provided services to more than 250 customers worldwide. The Company's customers include a number of the world's leading vertically integrated and fabless semiconductor companies, distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and Xilinx. INDUSTRY BACKGROUND GENERAL Continual improvements in semiconductor process and design technologies have enabled the production of complex, highly integrated circuits with improved price/performance, functionality and reliability. This has enabled the rapid proliferation of a variety of semiconductor intensive applications in such areas as the Internet, multimedia and wireless communications. In addition, semiconductor content has increased significantly in a wide range of products, including consumer electronic devices, automotive products and industrial automation and control systems. As a result of these and other factors, Dataquest, a leading industry research organization, estimates that total worldwide semiconductor sales were over $150 billion in 1996 and will grow to approximately $300 billion by 2001. Further, according to Dataquest, sales of complex, high-performance logic products are expected to outpace the annual growth of the overall semiconductor market. SEMICONDUCTOR PRODUCTION PROCESS The production of semiconductors is a complex process that requires increasingly sophisticated engineering and manufacturing expertise. The major steps involved in the production of semiconductors can be characterized as circuit design development, wafer fabrication, wafer sort, packaging and final test. Throughout the semiconductor production process, ICs are subjected to a variety of analyses and comprehensive tests. Such continuous analysis and testing is critical to optimizing manufacturing process efficiencies and product yield. The following diagram illustrates the major steps in the semiconductor production process: [GRAPHIC: SEE APPENDIX] The design of an IC is developed by laying out circuit components and interconnections using computer automated design and computer automated engineering methodologies. During the circuit design process, design and test engineers develop the parameters of the testing methodology and may also develop a customized software program to test the IC for functionality and performance. Wafer fabrication begins with the creation of 30 a photomask, where each layer of the circuit pattern is exposed on a photographic negative, known as a "mask," by an electron beam or laser beam writer. These circuit patterns are transferred to the wafers using various advanced processes. A fabricated wafer contains numerous die, or individual ICs. Following wafer fabrication, a wafer sort is performed whereby each die is individually and comprehensively tested for integrity and excluded from the packaging process if it is non-conforming. The tested wafers are then sent for packaging, where the processed silicon wafers are diced into separate chips and encapsulated in plastic, ceramic or other forms of packaging. Following packaging, each packaged device is submitted to a final electrical test to verify that the product meets published specifications prior to shipment. The analysis and testing that occurs during the semiconductor production process may be broadly segmented into two stages: the Inventive Stage and the Production Stage. THE INVENTIVE STAGE The Inventive Stage of IC analysis and testing occurs during the initial development of the IC and includes (i) software development; (ii) electrical verification; (iii) reliability analysis; and (iv) failure analysis. Software Development. Prior to the electrical verification process, design and test engineers develop a customized software program and related hardware to test the IC on advanced test equipment. A customized software program is required to test the conformance of each particular IC type to its unique functionality and specification. As ICs continue to become increasingly complex, testing programs have become critical to the IC design and verification process. Electrical Verification. During the electrical verification process, a prototype of the designed IC (in either wafer or packaged form) is submitted to electrical tests using advanced test equipment, customized software programs and related hardware. These tests assess whether the prototype IC complies with a variety of different operating specifications, including functionality, frequency, voltage, current, timing and temperature range. This process is essential in order to avoid costly production runs of faulty products. Reliability Analysis. In addition to the electrical verification process, prototype ICs are frequently subjected to reliability testing designed to assess the long-term reliability of the IC and its suitability of use for intended applications. Reliability testing can include "burn-in" services, which electrically stress a device, usually at high temperature and voltage, for a period of time long enough to cause the failure of marginal devices. Reliability testing improves field reliability, reduces warranty costs and minimizes the shipment of marginal products. Failure Analysis. In the event that the prototype IC or wafer does not function to specifications during either the electrical verification or reliability testing processes, it is typically subjected to failure analysis, in which it is analyzed to determine why it did not perform as anticipated. As part of such failure analysis, the prototype IC or wafer may be subjected to a variety of analyses, including electron beam probing and electrical testing. The results of these analyses are critical to improve or remedy the IC design. Once a circuit design has been successfully validated through the above tests and analyses the prototype is released for production. THE PRODUCTION STAGE The Production Stage of IC analysis and testing occurs after a prototype IC has been released for manufacture. During this stage, all or a subset of the analyses and testing procedures performed on the prototype IC during the Inventive Stage are repeated throughout the volume production of the IC. For example, electrical verification may be performed during the Production Stage at the wafer level, whereby each individual die is electrically tested to determine if it is acceptable for packaging (wafer sort). Conforming die are then packaged and subjected to final electrical verification (final test). In addition to these tests, semiconductor manufacturers may monitor production quality and reliability on an ongoing basis. 31 Production monitoring is the periodic monitoring of the integrity of the IC fabrication and packaging processes after volume manufacturing of an IC has commenced. Production monitoring includes: (i) fab/design validation, in which the integrity of the circuit design is tested to determine if changes in fabrication processes adversely affect the IC's performance; (ii) packaging reliability monitoring, in which the packaged product is environmentally and mechanically screened on an ongoing basis with respect to thermal, humidity and mechanical stresses; and (iii) yield monitoring, in which failures identified during the wafer sort and final electrical tests are analyzed to improve the fabrication yield. Production monitoring permits products to be monitored to commercial and industrial specifications, as well as to more rigorous military, space and other high reliability specifications. THE IC TESTING OPPORTUNITY Improvements in semiconductor manufacturing process technologies have played a key role in achieving low-cost, high volume production of highly integrated circuits. However, the production of ICs is an extremely complex process that requires substantial investment in specialized equipment and facilities and sophisticated engineering and manufacturing expertise. As a result, many semiconductor companies have begun to rely on outsourcing various steps of the production process. Virtually every step of the semiconductor manufacturing process can now be effectively outsourced. Wafer foundry services and IC packaging are currently the largest segments of the market for outsourced semiconductor manufacturing services, while the testing services segment has only recently emerged as a major market opportunity. The Company believes that nearly all of the world's major vertically integrated semiconductor companies now use independent manufacturing services to maintain a strategic mix of internal and external manufacturing capacity. In addition, the availability of advanced manufacturing services has enabled the rapid growth of fabless semiconductor companies which focus on IC design and marketing. These companies typically outsource almost all of their manufacturing, packaging and testing requirements to focused service providers. According to industry estimates, sales by fabless semiconductor companies have grown from $3.2 billion in 1993 to more than $8 billion in 1997, representing 3.7% and 5.3%, respectively, of the worldwide market for semiconductors. By outsourcing their IC testing requirements, semiconductor companies can (i) focus on core business activities; (ii) access leading edge testing technologies; (iii) react more quickly to rapidly changing market conditions and reduce time to market for new products; and (iv) reduce capital expenditures, fixed costs and operating expenses. Several fundamental industry trends are increasing the demand for outsourced IC testing services. First, semiconductor companies are increasingly seeking to shorten their time to market for new products. As testing needs are identified for a specific product, semiconductor companies frequently do not have the equipment or expertise to implement such testing in the volumes required, nor sufficient time to develop these capabilities before introducing a product to market. In addition, faster new product introductions have made it increasingly difficult for semiconductor companies to maintain adequate internal capacity utilization levels necessary for cost effective IC testing. For these reasons, semiconductor companies are increasingly leveraging the resources and capabilities of independent test companies to deliver new products to market quickly. Second, as ICs continue to increase in pincount, complexity and speed, they require more sophisticated testing software programs and testing procedures and new generations of advanced test equipment. Equipment used to test advanced logic or mixed-signal devices, which can cost several million dollars per tester, can become obsolete for the most advanced ICs in as little as two years. Compared to in-house testing, an independent provider of IC testing services can allocate its fixed cost investment across a wider portfolio of customers and products to maximize capacity utilization. Testing service providers can also extend the useful life of test equipment by using test equipment which has become obsolete for testing complex high-performance products to test lower performance products. In addition, testing companies can gain substantial efficiencies from building specialized expertise in software program development and procedures for IC testing, and can also take advantage of economies of scale in purchasing equipment. 32 While a substantial majority of IC testing is still performed in-house by semiconductor companies, the Company believes that the overall growth of the market for ICs and the trend towards outsourcing services by both vertically integrated and fabless semiconductor companies are driving increasing demand for independent test services, such as those provided by the Company. A leading industry research organization estimates that the number of ICs packaged by independent contractors will grow from 7.7 billion units in 1996 to 18.8 billion units in 2001, or nearly 20% per year. The Company believes that the market for independent test services has grown and will continue to grow at a faster rate than the market for independent semiconductor packaging services. In the past, the market for testing services was comprised of independent IC testing companies which were relatively small in size and unable to offer the range of test services and advanced equipment necessary to perform high volume testing of complex ICs for major customers. Even today, most test service providers do not offer a full range of services in both the Inventive and Production Stages. The Company believes a substantial market opportunity exists for an independent IC testing company that can efficiently meet the needs of semiconductor companies by offering a broad range of advanced test services in both the Inventive and Production Stages. THE ISE SOLUTION As a result of the Company's broad range of IC testing services and its position as one of the largest independent testing companies in the world, the Company believes it is uniquely positioned to provide semiconductor companies with the ability to outsource a substantial amount of their testing requirements throughout the Inventive and Production Stages of the IC development and production process. In contrast to all of its major independent competitors, the Company's headquarters is located in the Silicon Valley. In addition to its significant United States presence, the Company has established substantial test capacity in Hong Kong and has more recently commenced testing operations in Singapore. The Company's proximity to a large number of the world's leading semiconductor companies, together with its broad service offerings, enables the Company to establish close working relationships with its customers' design engineers early in the IC development process. By establishing such early stage relationships with its customers, the Company believes it has a significant competitive advantage in competing for high volume future testing business. STRATEGY The Company's strategy is to become the leading independent provider of IC testing and evaluation services in the world. The principal components of the Company's strategy to achieve this objective are set forth below. Maintain Technological Leadership. Since the Company commenced operations in 1983, it has provided testing services involving technology and expertise that are among the most advanced in the global semiconductor industry. The Company was a pioneer in offering parallel testing of multiple logic ICs, complex test vector generation methodologies and cross-platform translators. The Company intends to maintain its leading technological position by continuing to invest in the latest and most advanced testing equipment and by recruiting qualified engineers and technical personnel. Through its close working relationships with customers and test equipment suppliers, the Company is also regularly involved in the modification and initial rollout of new testing platforms, and is often involved in the actual development of such platforms. For example, the Company currently offers testing services on the highest pincount (512 pins) and frequency (330 MHz) testers available from Credence and Hewlett- Packard, and was chosen as the initial rollout site for the Credence RF testing system. The Company also provides failure analysis and circuit pattern correction services using the latest EBEAM and Focused Ion Beam systems. The Company believes that maintaining its leading technological position is critical to its success and its ability to attract and retain customers. Provide Broadest Range of Services. The Company intends to continue to provide the broadest range of independent testing and related services to its customers throughout the Inventive and Production Stages of the semiconductor development and production process. These services include electrical verification, reliability analysis, failure analysis, wafer sort and production monitoring. In addition, during the Inventive Stage, the Company draws upon the extensive test engineering experience of its founders and engineers and uses its proprietary software tools to help its customers develop optimized test programs for verification of circuit 33 designs. The Company also facilitates the prototype and quickturn packaging needs of its customers through its Manteca Operation. The Company believes that offering a broad range of services beginning at the Inventive Stage and continuing throughout the Production Stage provides significant benefits to its customers, including reduced time to market and lower manufacturing costs. Leverage Strong Relationships with Diversified Customer Base. The Company's goal is to be the leading global provider of independent IC testing services to a diversified group of customers. The Company's customers include companies which have a long term strategic need to outsource their IC testing requirements and companies which use external suppliers to meet overflow or specialized testing needs. The Company believes that its diversified customer base enhances the stability of its operations, increases efficiencies and maximizes capacity utilization rates. The Company intends to leverage its geographical proximity to its customers and the relationships formed during the Inventive Stage to capture an increasing share of its customers' higher volume production business. Expand Capacity Worldwide. To take advantage of increasing demand for IC testing services and the continued outsourcing of IC testing by semiconductor companies, the Company plans to further expand its capacity worldwide. In 1997, the Company more than doubled its testing capacity through the acquisition of DTS and internal growth. The Company plans to continue to expand by increasing testing capacity in the Silicon Valley, Hong Kong and Singapore, and by opening additional facilities outside of North America in 1998 and thereafter. The Company believes that by expanding its capacity in international locations, it will be able to increase its participation in the significant Asian test market. In addition, the Company intends to enter into turnkey relationships with wafer foundries and complementary semiconductor services subcontractors in Asia. Focus on Testing Complex, High-Performance Logic ICs. The Company intends to maintain its primary focus on the market for testing complex, high-performance logic ICs, which is expected to outpace the growth of the overall semiconductor market. Due to the increasing complexity of high-performance ICs, and the increasing cost of advanced test equipment, the Company believes that it is becoming less cost-effective for its customers to test these products internally. Shorter product life cycles for high-performance ICs discourage customers from investing in expensive test equipment that will rapidly become obsolete. By focusing its resources on testing complex, high- performance ICs, the Company has developed significant technical expertise and is able to achieve economies of scale in equipment purchases and effective equipment utilization rates. In addition, to satisfy its customers' requirements, the Company also provides testing of lower performance products. SERVICES The Company offers a broad range of services, including software development, electrical verification, reliability analysis, failure analysis, wafer sort, production monitoring and quickturn and prototype packaging. The Company provides its testing and test-related services on all major types of ICs, including logic, mixed-signal, RF and memory ICs. Such products are used in a broad range of applications, including automotive, consumer electronics, the Internet, intranets, mass storage, military/aerospace, medical, multimedia and wireless communications. Further, the Company is able to provide testing services on all major IC package types. Certain of the Company's testing facilities are qualified by U.S., European and Japanese industry standards organizations. The Company's San Jose facility is also a military certified facility for test and certification of components used by the U.S. Department of Defense, military and aerospace suppliers, and the National Security Administration for classified programs. Advanced testing equipment is critical to providing leading edge testing services. The Company obtains advanced testing equipment from all major test equipment manufacturers, including Credence Corporation, Hewlett-Packard Company, LTX Corporation and Teradyne Corporation. The Company works closely with its vendors to evaluate and obtain the latest testing equipment and has long-term order forecasts in place to shorten the effective lead time necessary for the delivery of new equipment. In addition, certain of the Company's test equipment suppliers frequently use the Company's training facilities and staff to provide training to such suppliers' existing and prospective customers. Further, the Company works with its customers to ensure that it is 34 aware of the latest IC development trends, thereby allowing the Company to anticipate its customers' future testing needs and obtain the appropriate advanced test equipment. INVENTIVE STAGE SERVICES During the Inventive Stage, the Company provides a variety of services, including software development, electrical verification, reliability analysis and failure analysis. Software Development. The Company works closely with its customers to develop test software that comprehensively tests the functionality of ICs. The Company provides sophisticated software engineering services including test program development, conversion and optimization, and related hardware design. Generally, testing requires customized testing software and related hardware to be developed for each particular product. The Company's proprietary tool, ISEasyTest, facilitates rapid generation of test programs for digital-CMOS ICs. These test programs incorporate multiple IDD (static) measurements of the current contributed by the core of the IC, thereby enhancing the thoroughness of the test. The Company also develops customized software tools for converting programs from one equipment platform to another. In addition, the Company focuses its efforts on developing test software with rapid execution times. By utilizing high quality test software with rapid test execution on the latest advanced test equipment, the Company believes it is able to offer low per unit costs for testing. Electrical Verification. The Company tests wafers and/or a prototype of a packaged device to verify compliance with a variety of different operating specifications, including functionality, frequency, voltage, timing and temperature range. If the device functions to specification during this process, it is released for reliability testing. In the event that the functionality of the tested IC does not meet published specifications, the Company works with its customers' design and test engineers to determine the cause of the failure. If it is determined that the failure occurred due to a defect in the circuit design, the product is subjected to failure analysis. The Company is capable of testing ICs with up to 512 I/O pins and ICs operating at data rates of up to 330 MHz. Electrical verification may be provided to commercial or industrial specifications, as well as to more rigorous military, space and other high reliability specifications. Reliability Analysis. To ensure the continued functionality of an IC over time and under varying conditions, the Company offers reliability testing services during the Inventive Stage. The Company's reliability services assess the long-term reliability of ICs and their suitability of use for intended applications. Reliability testing provides data to improve field reliability, reduce warranty costs and minimize the shipment of marginal products. The Company is a leader in providing reliability test techniques that allow a rapid evaluation, thus reducing cycle time and facilitating the rapid time to market requirements of its customers. The Company offers reliability tests including burn-in services, highly accelerated stress testing (HAST), electrostatic discharge (ESD) and other accelerated shock testing techniques, such as latch-up, gross and fine leak, 85/85, mechanical shock and thermal shock. Once testing establishes the reliability of the IC, it is released for manufacture. The Company also issues reliability reports on customer ICs, which are often used by its customers as a benchmark for the IC's overall reliability. Failure Analysis. In the event that an IC does not meet the criteria established by design engineers during electrical verification or reliability testing, the Company offers its customers failure analysis services. Using the latest in non-contact EBEAM imaging equipment, which illustrates the flow of electrons through a device, the Company is able to aid design engineers in determining where an error in the IC design exists. The Company then assists the design engineers to correct the circuit design with Focused Ion Beam equipment, which removes and replaces the defective portion of the IC, allowing the prompt continuation of the testing process for the product. Additional tools used by the Company for failure analysis include acoustic x- ray and SEM imaging. PRODUCTION STAGE SERVICES The majority of the IC testing performed by the Company occurs during the Production Stage, once volume manufacturing of the IC has commenced. During this stage, the Company continues to provide electrical 35 verification services (wafer sort and final test), reliability analysis and failure analysis on ICs after they are released for manufacture. In addition, the Company provides a variety of additional production monitoring services. Wafer Sort. The Company commenced wafer sort services in 1984. Wafer sort occurs immediately prior to packaging ICs and involves the electrical testing of each die on the processed wafer to ensure conformance to customer specifications and to improve final yields of packaged ICs. The Company also offers performance sorting, in which die with different performance characteristics are identified and separated. This service allows customers to make a performance distinction prior to packaging. After the wafer sort has been completed, conforming die are packaged. Final Test. The Company commenced final test services in 1983. Final test occurs after ICs are packaged and involves electrical testing and inspection of the packaged ICs to ensure that they conform to customer specifications. After the final test has been completed, packaged ICs are either drop-shipped to the end-user or returned to the Company's customers. Production Monitoring. The Company production monitoring services are designed to assess the integrity of its customer's IC designs, wafer fabrication and packaging processes. Such integrity is measured by performing a subset of the reliability tests performed by the Company during the Inventive Stage on a sample of production ICs. The results of the Company's production monitoring services enable its customers to improve production yields and quality by remedying, where necessary, their IC designs and wafer fabrication and packaging processes. OTHER SERVICES Semiconductor Packaging Services. The Company provides a range of semiconductor packaging services through its facility located in Manteca, California. During the IC packaging process, an individual die is encapsulated in plastic or other material to protect the die from damage and to facilitate electrical connections and thermal dissipation. The Company's packaging capabilities include three package types: MQUAD; quad flat packages ("QFP"); and ball grid array ("BGA") packages. In addition, through ISE HK, the Company provides turnkey packaging services and high volume testing in collaboration with Hana Technologies, an independent semiconductor packaging service provider. The Company's Manteca Operation is focused on providing high value-added quickturn and prototype packaging services. Because semiconductor manufacturers continually attempt to shorten their time to market for new products, many semiconductor manufacturers require quickturn and rapid prototype packaging services like those provided by the Company. The Company's geographical proximity to Silicon Valley facilitates such quick turnaround design and prototype production. The Company believes that its ability to offer such packaging services will become an increasingly important competitive advantage by enabling the Company to develop close relationships with customers early in the development process. In addition to its quickturn and prototype business, the Company operates a captive packaging line for Delphi Electronics, a subsidiary of General Motors ("Delphi"). Delphi owns the equipment used in its packaging line, while the Company provides materials and staffing. The Delphi line packages sensors used in automotive applications. CUSTOMERS AND MARKETING During the last twelve months, the Company has provided services to more than 250 customers worldwide, consisting primarily of vertically integrated semiconductor companies and fabless semiconductor companies. In the aggregate, the top five customers accounted for 58.4%, 60.4%, 54.2% and 45.2% of total revenues in fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998, respectively. Hana Technologies accounted for 21.4%, 30.2% and 19.0% of the Company's revenues in fiscal 1996, fiscal 1997 and the three months ended January 31, 1998, respectively. A significant portion of the business that the Company derives from Hana Technologies relates to testing services for LSI Logic. Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the 36 Company's revenue in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic accounted for 13.4% of the Company's revenues in the three months ended January 31, 1998. No other customer accounted for more than 10% of the Company's revenues during these periods. The following table sets forth certain of the Company's major customers: 8x8, Inc. ESS Technology, Inc. Oak Technology, Inc. Actel Corporation European Silicon Orbit Semiconductor Adaptec, Inc. Structures Inc. Advansys Inc. Gadzoox Microsystems, Inc. Pantronix AHA, Inc. Hamilton Hallmark Corporation Alliance Semiconductor Technologies Philips Electronics Corporation Hana Technologies, Limited N.V. Altera Corporation Hewlett-Packard Company Quality AMI Instruments, Inc. Honeywell Inc. Semiconductor, Inc. Amkor Anam Test Services Hughes Defense Quantum Effect Inc. Communications Design Inc. Analog Devices, Inc. I-Cube, Inc. Rendition, Inc. Atmel Corporation ICS, Inc. S3 Incorporated Auravision Corporation Integrated Silicon Silicon Graphics, C-Cube Microsystems, Solution, Inc. Inc. Inc. Intel Corporation Silicon Image Inc. Chip Express Corporation Lattice Semiconductor SMC Corporation Chips and Technologies, Corporation Solectron Inc. Level One Technologies, Corporation Cirrus Logic, Inc. Inc. Synergy Credence Systems LSI Logic Corporation Microsystems, Inc. Corporation Marvel Semiconductor, Inc. Synopsys, Inc. Cypress Semiconductor Matra Design Semiconductor Trident Corporation Corporation Micro Devices Technology, Triquint Delphi (a subsidiary of Inc. Semiconductor, Inc. General Motors Minimed Technologies, Inc. TRW Inc. Corporation) Mosys International, Inc. Tseng Labs, Inc. Durel Corporation Motorola, Inc. Vitesse DynaChip Corporation NChip, Inc. Semiconductor Epic Corporation National Semiconductor Corporation Corporation WSI Corporation NeoMagic Corporation Wyle Laboratories, Novalog, Inc. Inc. Xilinx, Inc. Zoran Corporation Zycad Corporation The Company has based and will continue to base its marketing efforts on the established expertise and experience of its founders and senior management, their level of participation in the semiconductor market, and the contacts that such founders and senior management have developed among existing and potential customers within the semiconductor industry. The Company believes that its advanced testing technology and its reputation for high quality and reliable services have been important factors in attracting and retaining customers. The Company has received numerous awards from its customers recognizing the quality of its services. The Company's customer service group provides technical support to customers, aids in problem solving and provides product scheduling and tracking information before and during the processing cycles. The Company works closely with its customers during product development by providing technical input and guidance to assist in the development of product test programs, whether developed by the Company or the customer. In addition, the founders and the engineers of the Company continue to work with customers at the engineering level throughout the semiconductor development and production process. The Company has developed proprietary work in progress ("WIP") software that enables its customers to obtain real-time production status of products via the Internet. The Company believes that customer satisfaction has been critical to its past success and will continue to be critical to achieving future growth. Customers frequently require that the Company's facilities and procedures undergo a stringent vendor qualification process. The qualification process typically takes from two to six weeks, and can take longer depending on the requirements of the customer. After the Company has been qualified by a customer and before such customer delivers ICs to the Company for volume testing during the Production Stage, a process known as "correlation" is undertaken. During the correlation process, which typically takes from two days to two weeks, the customer provides the Company with sample ICs to be tested and either provides the Company with the test 37 program or requests that the Company develop a conversion program. In certain cases, the customer also provides the Company with a data log of results of any testing of the IC which the customer may have conducted previously. The ability of the Company to maintain close, satisfactory relationships with its customers is important to the ongoing success and profitability of its business. The Company expects that it will continue to be dependent upon a relatively limited number of customers for a significant portion of its revenues in future periods. None of the Company's customers is presently obligated pursuant to any contractual commitment or otherwise to purchase any amount of the Company's test or packaging services or to provide the Company with binding forecasts of product or service purchases for any period. Moreover, all of the Company's customers operate in the cyclical semiconductor industry and may vary order levels significantly from period to period. Accordingly, there can be no assurance that any of the Company's customers will continue to place orders with the Company in the future at the same levels as in prior periods. See "Risk Factors--Dependence on the Highly Cyclical Semiconductor and Personal Computer Industries" and "--Significant Customer Concentration; Absence of Long-Term Customer Contracts." Until recently, the Company's Manteca Operation has been almost entirely dependent on two customers. However, in January 1998 one of these customers notified the Company that by the end of the second quarter of fiscal 1998, it will no longer be a customer of the Company. Accordingly, the Company's Manteca Operation (which accounted for approximately 10% of the Company's revenues in the first quarter of fiscal 1998) is dependent on one customer, for substantially all of its revenues. In addition, the Company's Hong Kong subsidiary is dependent on Hana Technologies Limited, formerly Swire Technologies ("Hana Technologies"), the Company's largest customer, for substantially all of its revenues. Furthermore, a significant portion of the business that the Company derives from Hana Technologies relates to testing services for LSI Logic, which has historically been a significant customer of the Company's domestic test operations. There can be no assurance that any one or more of the Company's significant customers, including the major customers of the Company's Manteca Operation or Hong Kong subsidiary, will not reduce, cancel or delay orders or seek other suppliers, which could have a material adverse effect on the Company's business, financial condition or results of operations. The Company does not typically operate with any material backlog and, as a result, the Company expects that in the future, revenues in any quarter will be substantially dependent upon orders received in that quarter. The Company's expense levels are based in part on its expectations of future revenues and the Company may be unable to adjust costs in a timely manner to compensate for any revenue shortfall. See "Risk Factors--Significant Customer Concentration; Absence of Long-Term Customer Contracts." QUALITY CONTROL AND ASSURANCE The Company believes that its advanced testing technology and its reputation for high quality and reliable services have been important factors in attracting and retaining leading international semiconductor companies as customers. The quality requirements imposed by the diversified product markets served by the Company require the implementation and execution of quality assurance systems that impose strict process controls, statistical in-line monitors, supplier control, data review and management, quality controls and corrective action systems. The Company's quality control systems are designed to ensure that all test procedures adhere to the customer's specifications. These systems include, among other things, quality control stations along production lines, monitoring of the test area environment and product inspections prior to shipment. These quality control systems are designed to ensure high quality service to customers and testing reliability at the Company's facilities. Certain of the Company's testing operations are qualified by U.S., European and Japanese industry standards organizations. The Company's San Jose facility is also military certified for test and certification of components used by the U.S. Department of Defense, military and aerospace suppliers, and the National Security Administration for classified programs. See "--Customers and Marketing." The Company's facilities in San Jose and Santa Clara have been certified as meeting the ISO 9002 quality standards by the International Standards Organization (ISO). Although the ISO 9002 certification for the Manteca 38 Operation lapsed under its previous owner, the Company has renewed such certification. ISO 9002 standards apply to installation and production operations. The ISO certification process involves an evaluation of a company's production processes and its management systems. COMPETITION The Company competes in the independent semiconductor testing and packaging markets principally on the basis of engineering skills, quality, reliability, price, responsiveness and flexibility, delivery cycles and range of services available. The Company's competitors include large independent IC services providers, small independent IC testing and packaging companies offering niche services, and vertically integrated semiconductor manufacturers which have in- house testing and packaging capabilities. Large independent IC services providers with which the Company competes include Anam Industrial Co., Ltd., ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of Advanced Semiconductor Engineering, Inc., Siliconware Precision Industries Co., Ltd., ST Assembly Test Services Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd., many of which have significantly larger financial, marketing, distribution and other resources than the Company. Many of these companies have also established relationships with current or potential customers of the Company and have developed strategic relationships with third party providers of complementary semiconductor services to enlarge their businesses. The Company may be at a competitive disadvantage with such competitors that have fostered such relationships if the Company does not continue to develop such strategic relationships in the future. The small independent IC testing and packaging companies with which the Company competes generally offer a limited range of services and typically compete on the basis of price. Vertically integrated semiconductor manufacturers that are customers of the Company continuously evaluate the Company's services against developing or using their own in-house capabilities, and most of these customers also obtain testing services from other sources. Vertically integrated customers may have more advanced testing technologies and typically have greater financial, marketing, distribution and other resources than the Company. The Company believes that its primary competitors in the test portion of its business are located in Asia, particularly in Korea, Taiwan, Malaysia, Singapore and Japan. Certain of such competitors may locate testing facilities in North America in the future. In addition, several companies have announced plans to commence independent testing operations in Asia, and several independent testing companies in Asia which currently offer only memory testing services could add logic testing and wafer sort. These operations would compete directly with the Company. Although in recent years semiconductor companies have increasingly outsourced portions of the IC production process, including testing, to independent companies to reduce costs and shorten production cycles, there can be no assurance that this outsourcing trend will continue. From time-to-time, the Company has lost business from customers who have chosen to perform their testing operations in-house. A reversal of, or a slowdown in, this outsourcing trend would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Highly Competitive Industry." RESEARCH AND DEVELOPMENT The Company believes that its research and development program is an integral component of its business strategy. The Company's research and development efforts have focused on improving the efficiency and technology of its testing processes. The Company's current projects include continuing development of software tools that enable rapid automatic generation and cross-platform conversion of test programs to test logic and mixed signal ICs. The Company is also continuing to improve its existing programs that provide its customers with access to a variety of technical and operational data via the Internet. The Company's research and development efforts also include continuing development of interface designs to provide for high-frequency testing by minimizing electrical noise. In addition, the Company works closely with its customers in designing and modifying testing software and works with equipment vendors to increase the efficiency and reliability of testing equipment. The Company incurred research and development expenses of $1.0 million, $1.1 million, $1.1 million and $673,000, in fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998, respectively, representing approximately 4.7%, 4.4%, 3.1% and 3.3% of revenues, respectively. The Company has historically expensed all research and development costs as incurred and none are currently capitalized. 39 The semiconductor industry is characterized by rapid increases in the diversity and complexity of semiconductor products. As a result, the Company expects that it will need to offer, on an ongoing basis, more advanced testing technologies and procedures in order to respond to competitive industry conditions and customer requirements. The failure by the Company to achieve advances in its testing technology or process or to obtain access to advanced testing technology could have a material adverse effect on its business, financial condition and results of operations. FACILITIES The Company's testing operations are conducted in facilities located in San Jose and Santa Clara, California, and in Hong Kong and Singapore. These facilities have a total floor space of approximately 183,000 square feet and typically operate 24 hours per day in two or three shifts, seven days per week. The Company's packaging operations are conducted at its facility located in Manteca, California. Substantially all of the Company's other operations, including its principal executive offices, are located at its testing facilities. The Company owns two facilities totaling 86,000 square feet in San Jose, California, its 85,000 square foot facility in Manteca, California, and 20,000 square feet of its Hong Kong facility. The Company currently leases its 71,000 square foot facility in Santa Clara, California. The lease on this facility expires in September 2000. The Company also leases an additional 4,000 square foot office facility in Hong Kong. The lease on this facility expires in April 1999. Currently, the Company is temporarily utilizing approximately 1,000 square feet at a customer's facility in Singapore. However, the Company is currently negotiating a lease for a 10,000 square foot testing facility in Singapore. The Company expects that this lease will be effective in May 1998 and will terminate in May 2001. The Company believes that it has adequate facilities to accommodate its needs for at least the next 12 months. While the Company believes that it has effectively managed its expansion in recent years, there can be no assurance that it will be able to do so in the future. Failure of the Company to implement its expansion plans in a timely manner could materially adversely affect its ability to maintain, expand and diversify its customer base, and there can be no assurance that the implementation by the Company of its expansion plans will not materially adversely affect its existing operations. See "Risk Factors--Expansion of Testing Capacity; Results of Operations Affected by Capacity Utilization Rates" and "--No Assurance of Successful Expansion of Operations; Management of Recent Growth." The Company's testing operations take place in testing areas where air purity, temperature, humidity and electrostatic discharge are controlled. The inability of the Company to control its testing environment could cause some tested ICs or wafers to be nonfunctional. The Company has from time-to-time experienced, and may in the future experience, production interruptions due to technical problems in the testing process. Any interruption in the Company's operations could have a material adverse effect on its business, financial condition and results of operations. See "Risk Factors--Risks Relating to Complexity of Testing Processes." EMPLOYEES As of October 31, 1997, the Company had 561 employees, with 415 in general operations, 42 in engineering (including research and development), 51 in quality assurance, 31 in sales, administration and finance and 22 in other capacities. The Company has not entered into collective bargaining agreements with any of its employees. The Company has not experienced any strikes or work stoppages by its employees and believes that its relationship with its employees is good. See "Risk Factors--Dependence on Key Personnel and Availability of Skilled Workforce." LEGAL PROCEEDINGS From time-to-time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Prospectus, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition and results of operations. 40 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE The executive officers, directors and key employee of the Company, and their ages and positions as of January 31, 1998, are as follows:
NAME AGE POSITION Executive Officers and Directors Saeed A. Malik.......... 45 President, Chief Executive Officer and Director Sassan Raissi........... 53 President of Digital Testing Services, Inc. Ray G. Grammer.......... 60 Chief Financial Officer and Treasurer Laurence F. Jorstad..... 50 Vice President, Engineering and Director Alex M. Barrios......... 47 Vice President, Operations and Director Zafar A. Malik.......... 42 President of Integrated Qualification Labs Division Patrick H. Yu........... 44 Vice President, Applications Engineering Dharam V. Ahuja......... 56 Vice President, Business Development Muneer A. Malik......... 47 Director(1) Terry N. Holdt.......... 54 Director(1) Key Employee Rabbi-ul-Islam.......... 31 General Manager, ISE Hong Kong Limited
- --------------------- (1) Member of the Compensation and Audit Committees. Saeed A. Malik is a founder of the Company and has served as President and Chief Executive Officer and a Director of the Company since 1983. From 1980 to 1983, Mr. Malik was a partner of International Semiconductor Engineering ("IS"), a test-engineering consulting service. Prior thereto, Mr. Malik served in various management and test engineering capacities at American Microsystems, Inc., Fairchild Semiconductor Corporation ("Fairchild") and Raytheon Semiconductor, Inc. Mr. Malik is the brother of Messrs. Zafar A. and Muneer A. Malik. Mr. Malik holds a B.S. in Physics from the University of Karachi, an M.S. in Solid-State Physics from the University of Karachi, and an M.A. in Political Science from California State University, San Jose. Sassan Raissi has served as President of DTS since 1995. Dr. Raissi is a founder of DTS and from 1987 to 1995, served as its Vice President of Engineering and General Manager and from 1984 to 1986, served as its President. From 1977 to 1984, Dr. Raissi served in various positions at Fairchild, including Operations Manager for the Microprocessor Group. Dr. Raissi holds a B.A. in Mathematics from California State University, Sacramento, an M.S. in Mathematics from California State University, San Jose and a doctorate in Applied Mathematics from Washington State University. Ray G. Grammer has served as Chief Financial Officer of the Company since November 1997. From June 1991 to October 1997, Mr. Grammer served in various executive positions at Alphatec USA, Inc., including Chief Financial Officer and Vice President of Business Development. From 1989 to 1991, Mr. Grammer served as Vice President of Finance for Headland Technology, Inc., a subsidiary of LSI Logic, Inc. From 1984 to 1990, Mr. Grammer served as Corporate Controller of Signetics Corporation, a semiconductor manufacturer. Mr. Grammer holds a B.S. in Business from the University of Illinois. Laurence F. Jorstad is a founder of the Company and has served as Vice President of Engineering, and a Director of the Company since 1983. From 1980 to 1983, Mr. Jorstad was a partner at IS. Prior thereto, Mr. Jorstad served in various engineering capacities, including Test Engineer, at National Semiconductor Corporation, the camera and instrument division of Fairchild and Boeing Co. Mr. Jorstad holds a B.S. in Electrical Engineering from California State University, San Jose. Alex M. Barrios is a founder of the Company and has served as Vice President of Operations and a director of the Company since 1983. From 1980 to 1983, Mr. Barrios was a partner at IS. From 1978 to 1980, Mr. Barrios 41 was an independent consultant developing test software and hardware. Prior thereto, Mr. Barrios served in various engineering capacities at American Microsystems, Inc. including Test Engineer from 1975 to 1978. From 1972 to 1975 he served as an Assistant Engineer at Motorola, Inc. Mr. Barrios holds an A.A. in Electronics from Maricopa Technical Junior College. Zafar A. Malik has served as President of the Company's Integrated Qualification Labs Division ("IQL") since 1989. From 1985 to 1989, Mr. Malik served as the Director of Quality at LSI Logic. From 1982 to 1985, Mr. Malik served as Manager of Product Assurance at Ferranti Interdesign, Inc., a semiconductor manufacturer. Mr. Malik is the brother of Messrs. Saeed A. and Muneer A. Malik. Mr. Malik holds a B.S.C. in Finance from California State University, San Jose and an M.B.A. from the University of Phoenix. Patrick H. Yu is a founder of the Company and has served as its Vice President, Applications Engineering since 1996. From 1983 to 1996, Mr. Yu served in various management positions at the Company, including Engineering Manager and General Manager at ISE Hong Kong Limited. From 1980 to 1983, Mr. Yu was a partner at IS. Mr. Yu holds a B.S. in Electrical Engineering from Purdue University. Dharam V. Ahuja has served as Vice President, Business Development of the Company since March 1997. Since 1987, Mr. Ahuja has served as President of Strategic Alliance Inc., a consulting firm. From January 1997 to August 1997, Mr. Ahuja served as Vice President of Corporate Finance of Janda, Phillips and Garrington, an investment banking firm. Mr. Ahuja is a founder and served as Chief Executive Officer of Hypervision, Inc., a semiconductor equipment company, from 1989 to 1991. Mr. Ahuja is a founder and served as Chief Executive Officer of Shiva Multisystems, Inc., a software company, from 1984 to 1987. From 1983 to 1984, Mr. Ahuja served as Executive Vice President of Marketing and Sales for North Star Computers. From 1977 to 1982, Mr. Ahuja served in various positions at National Semiconductor Corporation, including Vice President of Worldwide Marketing of National Advanced Systems (now Hitachi Data Systems Corporation). From 1967 to 1975, Mr. Ahuja served in various positions at International Business Machines Corporation. Mr. Ahuja holds a B.S. in Chemical Engineering from the University of Delhi and an M.B.A. from the University of California, Los Angeles. Muneer A. Malik has served as a Director of the Company since December 1997. Since 1997, Mr. Malik has been a partner of Muneer A. Malik & Co. Attorneys At Law, Advocates in Karachi, Pakistan. From 1977 to 1997, Mr. Malik was a partner in Ahmed & Malik Attorneys at Law in Pakistan. Since 1990, Mr. Malik has served as an advocate of the Supreme Court of Pakistan. From 1990 to 1995, Mr. Muneer was elected as a member of the Bar Counsel in Pakistan, the highest authority regulating attorneys in Pakistan. From 1986 to 1987, Mr. Malik was President of the Karachi Bar Association. From 1974 to 1975, Mr. Malik was an associate at Price Waterhouse, LLP in San Jose, California. Mr. Malik is the brother of Messrs. Saeed A. and Zafar A. Malik. Mr. Malik holds a B.S. in Business Administration from California State University, San Jose and a J.D. from Santa Clara University. Terry N. Holdt has served as a Director of the Company since December 1997. Since January 1998, Mr. Holdt has been President, Chief Executive Officer and Chairman of the Board of Directors of S3 Incorporated, a multimedia and graphics company. From August 1996 to January 1998, Mr. Holdt served as Vice Chairman of S3 Incorporated. From January 1992 to August 1996, Mr. Holdt served as President and Chief Executive Officer of S3 Incorporated. Mr. Holdt was Chairman of the Board of Paradigm Technology, Inc., a semiconductor company, from June 1991 to January 1992 and was its President and Chief Executive Officer from June 1988 to May 1991. From 1986 to 1988, Mr. Holdt held various executive positions, including President, at Linear Corporation, a manufacturer of electronic telemetry and infrared security systems. From 1981 to 1985, Mr. Holdt held various executive positions at Western Digital Corporation, a manufacturer of computer peripherals, where he was most recently Executive Vice President and Chief Operating Officer. Mr. Holdt has served as a Director of S3 Incorporated, since January 1992. Mr. Holdt holds a B.S.E.E. and an M.S.E.E. from the University of Illinois. 42 Rabbi-ul-Islam has served as General Manager of ISE Hong Kong Limited since November 1997. From 1995 to 1997, Mr. Islam served in various positions at the Company, including test engineer, staff engineer and operation manager. From 1993 to 1995, Mr. Islam served as a design engineer of Hong Kong Connector Company Ltd. Mr. Islam holds a B.S. and an M.S. in Engineering from the Beijing University of Posts and Telecommunications. BOARD OF DIRECTORS The Company's Board of Directors consists of five directors, including two non-employee directors. Each director is elected for a period of one year at the Company's annual meeting of shareholders and serves until the next annual meeting or until his successor is duly elected and qualified. The executive officers serve at the discretion of the Board of Directors. Messrs. Saeed A. Malik, Zafar A. Malik and Muneer A. Malik are brothers. In addition to their participation in the 1998 Incentive Plan, directors are reimbursed for expenses incurred in connection with attending Board and committee meetings and receive $1,000 for each Board meeting attended and $250 for each committee meeting attended (provided such committee meeting does not occur on the same day as a Board meeting). Mr. Muneer A. Malik and Mr. Holdt will also receive a per annum fee of $30,000 for serving on the Board of Directors. Effective upon their election to the Board of Directors in December 31, 1997, each such non- employee Board member received a nonqualified stock option grant for 52,500 shares of Common Stock at $10.40 per share. Directors are not otherwise compensated for their services as directors. Upon the closing of this offering, the Company's Amended and Restated Articles of Incorporation will provide for a classified Board of Directors consisting of two classes of directors, each serving staggered two-year terms. As a result, approximately one-half of the Company's Board of Directors will be elected each year. Under California law, in order to implement a classified Board of Directors, the Company must satisfy numerous listing and trading criteria, including the provision that the Company must have 800 or more shareholders of record. Once the Company complies with such criteria, at the Company's next ensuing Annual Meeting of Shareholders approximately one-half of the nominees to the Board will be elected for one-year terms, and one-half will be elected for two-year terms. Thereafter, all directors will be elected for two-year terms. In December 1997, the Board established an Audit Committee and a Compensation Committee. The Audit Committee, which reviews the Company's annual audit and meets with the Company's independent accountants to review the Company's internal controls and financial management practices, currently consists of Messrs. Muneer A. Malik and Holdt. The Compensation Committee, which recommends to the Board compensation for certain of the Company's personnel and administers the Company's stock plans, currently consists of Messrs. Muneer A. Malik and Holdt. Prior to the formation of the Compensation Committee, decisions regarding compensation of executive officers were made by the Board of Directors as a whole. 43 EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation paid or accrued by the Company and its subsidiaries to or on behalf of the Company's Chief Executive Officer and each of the four other most highly paid executive officers whose aggregate compensaton during the last fiscal year exceeded, or would have exceeded on an annualized basis, $100,000 officers of the Company (hereinafter referred to as the Named Executive Officers) services rendered in all capacities to the Company and its subsidiaries for the fiscal year ended October 31, 1997 (no option grants were made to, and no options were exercised by, the Named Executive Officers during the last fiscal year): SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- NAME AND PRESENT PRINCIPAL POSITION SALARY BONUS Saeed A. Malik............................................. $ 217,800 $ 320,000 President and Chief Executive Officer Laurence F. Jorstad........................................ 188,760 220,000 Vice President, Engineering Alex M. Barrios............................................ 156,200 180,000 Vice President, Operations Patrick H. Yu.............................................. 110,000 180,000 Vice President, Applications Engineering Zafar A. Malik............................................. 72,589 220,000 President of IQL Division
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors are Mr. Holdt and Mr. Muneer A. Malik. No executive officer of the Company serves on the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. 1998 STOCK INCENTIVE PLAN The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to serve as the successor equity incentive program to the Company's 1997 Stock Option/Stock Issuance Plan (the "Predecessor Plan"). The 1998 Plan was adopted by the Board of Directors and was approved by the shareholders on April 2, 1998. The 1998 Plan became effective on April 2, 1998 (the "Plan Effective Date"). A total of 4,500,000 shares of Common Stock have been authorized for issuance under the 1998 Plan. Such share reserve consists of the number of shares available for issuance under the Predecessor Plan on the date the Underwriting Agreement for this offering is executed (the "Underwriting Date"), including the shares subject to outstanding options plus an additional 1,000,000 shares. In addition, the number of shares of Common Stock reserved for issuance under the 1998 Plan will automatically be increased on the first trading day of each calendar year, beginning in calendar year 1999, by an amount equal to the lesser of three percent (3%) of the total number of shares of Common Stock outstanding on the last trading day of the preceding calendar year or 1,000,000 shares. In no event, however, may any one participant in the 1998 Plan receive after the Underwriting Date option grants, separately exercisable stock appreciation rights or direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year. On the Underwriting Date, outstanding options and unvested shares issued under the Predecessor Plan will be incorporated into the 1998 Plan, and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to 44 extend one or more features of the 1998 Plan to those options. Except as otherwise noted below, the incorporated options have substantially the same terms as will be in effect for grants made under the Discretionary Option Grant Program of the 1998 Plan. The 1998 Plan is divided into five separate components: (i) the Discretionary Option Grant Program under which eligible individuals in the Company's employ or service (including officers, non-employee Board members and consultants) may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 100% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services, (iii) the Salary Investment Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants, (iv) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date and (v) the Director Fee Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow non-employee Board members the opportunity to apply a portion of the annual retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. The Discretionary Option Grant Program and the Stock Issuance Program will be administered by the Compensation Committee. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non- statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. However, any discretionary option grants or stock issuances to members of the Compensation Committee shall be made by a disinterested majority of the Board. The Compensation Committee will also have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the Salary Investment Option Grant Program in the event that such program is activated for one or more calendar years, but neither the Compensation Committee nor the Board will exercise any administrative discretion with respect to option grants under the Salary Investment Option Grant Program or under the Automatic Option Grant or Director Fee Option Grant Program for the non-employee Board members. All grants under those three latter programs will be made in strict compliance with the express provisions of each such program. The exercise price for the shares of Common Stock subject to option grants made under the 1998 Plan may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the Plan Administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. The Plan Administrator will have the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to 45 the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. None of the incorporated options from the Predecessor Plan contain any stock appreciation rights. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the Discretionary Option Grant and Stock Issuance Programs will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. The Plan Administrator will have complete discretion to grant one or more options under the Discretionary Option Grant Program which will become fully exercisable for all of the option shares in the event those options are assumed in the acquisition and the optionee's service with the Company or the acquiring entity terminates within a designated period following such acquisition. The vesting of outstanding shares under the Stock Issuance Program may be accelerated upon similar terms and conditions. The Plan Administrator will also have the authority to grant options which will immediately vest upon an acquisition of the Company, whether or not those options are assumed by the successor corporation. The Plan Administrator is also authorized in its sole discretion under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights may immediately vest in connection with a change in control of the Company (whether by successful tender offer for more than fifty percent (50%) of the outstanding voting stock or a change in the majority of the Board by reason of one or more contested elections for Board membership), with such vesting to occur either at the time of such change in control or upon the subsequent termination of the individual's service within a designated period (not to exceed eighteen months) following such change in control. The options incorporated from the Predecessor Plan have similar acceleration features. In addition, the Plan Administrator will have the sole discretion to extend the acceleration provisions of the 1998 Plan to those options. In the event the Plan Administrator elects to activate the Salary Investment Option Grant Program for one or more calendar years, each executive officer and other highly compensated employee of the Company selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. If such election is approved by the Plan Administrator, the individual will automatically be granted, on the first trading day in January of the calendar year for which that salary reduction is to be in effect, a non-statutory option to purchase that number of shares of Common Stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of Common Stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the amount of salary invested in that option. The option will vest in a series of twelve (12) equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting upon certain changes in the ownership or control of the Company. Under the Automatic Option Grant Program, each individual who first becomes a non-employee Board member at any time after the Underwriting Date will automatically receive an option grant for 25,000 shares on the date such individual joins the Board, provided such individual has not been in the prior employ of the Company. In addition, on the date of each Annual Stockholders Meeting held after the Underwriting Date, each non-employee Board member who is to continue to serve as a non-employee Board member either before or after the Underwriting Date will automatically be granted an option to purchase 2,500 shares of Common Stock, provided such individual has served on the Board for at least six months. Each automatic grant for the non-employee Board members will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable for all of the option shares; however, any unvested shares purchased under the option will be subject to repurchase by the Company, at the exercise price paid per share, should the optionee cease Board service prior to vesting in those shares. Each automatic option grant will vest over a four-year period as follows: 25% of 46 the Option Shares will vest on the one (1) year anniversary of the option grant date, and the balance of the Option Shares will vest in twelve (12) successive and equal quarterly installments upon the individual's completion of each quarter of continuous Board service measured from the one (1) year anniversary of the option grant date. However, the shares subject to each automatic grant will immediately vest in full upon certain changes in control or ownership of the Company or upon the optionee's death or disability while a Board member. Should the Director Fee Option Grant Program be activated in the future, each non-employee Board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of Common Stock on the grant date. As a result, the total spread on the option (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the portion of the retainer fee invested in that option. The option will become exercisable for the option shares in a series of twelve (12) equal monthly installments over the calendar year for which the election is to be in effect. However, the option will become immediately exercisable for all the option shares upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board member. The shares subject to each option under the Salary Investment Option Grant, Automatic Option Grant and Director Fee Option Grant Programs will immediately vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the successful completion of a tender offer for more than 50% of the Company's outstanding voting stock or a change in the majority of the Board effected through one or more contested elections for Board membership. Limited stock appreciation rights will automatically be included as part of each grant made under the Automatic Option Grant, Salary Investment Option Grant and Director Fee Option Grant Programs and may be granted to one or more officers of the Company as part of their option grants under the Discretionary Option Grant Program. Options with such a limited stock appreciation right may be surrendered to the Company upon the successful completion of a hostile tender offer for more than 50% of the Company's outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from the Company in an amount per surrendered option share equal to the excess of (i) the highest price per share of Common Stock paid in connection with the tender offer over (ii) the exercise price payable for such share. The Board may amend or modify the 1998 Plan at any time, subject to any required stockholder approval. The 1998 Plan will terminate on the earliest of (i) April 1, 2008, (ii) the date on which all shares available for issuance under the 1998 Plan have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with certain changes in control or ownership of the Company. 1998 EMPLOYEE STOCK PURCHASE PLAN The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board and approved by the shareholders on April 2, 1998 and will become effective immediately upon the execution of the Underwriting Agreement for this offering. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deductions under the Purchase Plan, and an initial reserve of 600,000 shares of Common Stock has been established for this purpose. The reserve will be increased, beginning in calendar year 1999, by an amount equal to the lesser of three percent (3%) of the total number of shares of Common Stock outstanding on the last trading day of the preceding calendar year or 1,000,000 Shares. The Purchase Plan will be implemented in a series of successive offering periods, each with a maximum duration for 24 months. However, the initial offering period will begin on the execution date of the Underwriting 47 Agreement and will end on the last business day in July 2000. The next offering period will commence on the first business day in August 2000, and subsequent offering periods will commence as designated by the Plan Administrator. Individuals who are eligible employees (scheduled to work more than 20 hours per week for more than 5 calendar months per year) on the start date of any offering period may enter the Purchase Plan on that start date or on any subsequent semi-annual entry date (the first business day of February or August each year). Individuals who become eligible employees after the start date of the offering period may join the Purchase Plan on any subsequent semi- annual entry date within that offering period. Payroll deductions may not exceed 10% of base salary, and the accumulated payroll deductions of each participant will be applied to the purchase of shares on his or her behalf on each semi-annual purchase date (generally the last business day in January and July each year) at a purchase price per share equal to 85% of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. The initial purchase date under the Purchase Plan will be January 29, 1999. In no event, however, may any one participant purchase more than 1,500 shares, nor may all participants in the aggregate purchase more than 150,000 shares on any one semi-annual purchase date. Should the fair market value per share of Common Stock on any purchase date be less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day, with all participants in the terminated offering to be automatically transferred to the new offering period. In the event the Company is acquired by merger or asset sale, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to 85% of the lower of (i) the fair market value per share of Common Stock on the participant's entry date into the offering period in which such acquisition occurs or (ii) the fair market value per share of Common Stock immediately prior to such acquisition. The Purchase Plan will terminate on the earlier of (i) the last business day of July 2008 (ii) the date on which all shares available for issuance under the Purchase Plan shall have been sold pursuant to purchase rights exercised thereunder or (iii) the date on which all purchase rights are exercised in connection with an acquisition of the Company by merger or asset sale. The Board may at any time alter, suspend or discontinue the Purchase Plan. However, certain amendments to the Purchase Plan may require shareholder approval. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS In October 1997, the Company entered into an employment and non-competition agreement with Dr. Raissi for a term ending on September 30, 2000. The annual base salary for Dr. Raissi is $175,000. The employment agreement provides that the Board may increase the annual base salary of Dr. Raissi as appropriate. The Company paid $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to the employment and non-competition agreement. In addition, the Company will pay $1,500,000 to Dr. Raissi as a result of his completion by January 31, 1998 of certain performance objectives relating to the integration of ISE and DTS. In the event the Company terminates the agreement other than for cause, the Company must pay to Dr. Raissi, in addition to all accrued and unpaid salary and benefits, his salary and certain benefits for three months from the date of such termination. If the Company terminates Dr. Raissi's employment for cause or if Dr. Raissi terminates his employment for any reason whatsoever, then Dr. Raissi will be entitled to receive only his accrued but unpaid salary through the date of such termination. In October 1997, the Company entered into an employment and non-competition agreement with Mr. Grammer for a term ending on September 30, 2000. The annual base salary of Mr. Grammer is $175,000. The 48 employment agreement provides that the Board may increase the annual base salary of Mr. Grammer as appropriate. The Company paid $175,000 to Mr. Grammer as a sign-on bonus pursuant to the employment and non-competition agreement. In addition, the Company will pay $100,000 to Mr. Grammer as a result of his completion by January 31, 1998 of certain performance objectives relating to the integration of ISE and DTS. In the event the Company terminates the agreement other than for cause, the Company must pay to Mr. Grammer, in addition to all accrued and unpaid salary and benefits, his salary and certain benefits for three months from the date of such termination. If the Company terminates Mr. Grammer's employment for cause or if Mr. Grammer terminates his employment for any reason whatsoever, then Mr. Grammer will be entitled to receive only accrued but unpaid salary through the date of such termination. DIRECTOR REMUNERATION Non-employee directors elected to the Board of Directors prior to the Underwriting Date receive an annual fee of $30,000, as well as $1,000 for each Board meeting attended while serving on the Board of Directors, and $250 for each committee meeting attended (provided such committee meeting does not occur on the same day as a Board meeting), and are reimbursed for expenses they incur in attending Board and committee meetings. Each non-employee Board member elected or appointed after the Underwriting Date shall be entitled to the same fees for attendance at Board and committee meetings, but not the annual cash fee. Under the Automatic Option Grant Program, each individual who first becomes a non-employee Board member at any time after the Underwriting Date will automatically be granted an option to purchase 25,000 shares on the date such individual joins the Board, provided such individual has not been previously employed by the Company. In addition, on the date of each annual shareholders meeting held after the Plan Effective Date, each non-employee Board member who is to continue to serve as a non-employee Board member will automatically be granted an option to purchase 2,500 shares of Common Stock, provided such individual has served on the Board for at least six months. Each granted option will have an exercise price per share equal to the fair market value per share on the grant date. Each automatic grant for the non-employee Board members will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable for all of the option shares; however, any unvested shares purchased under the option will be subject to repurchase by the Company, at the exercise price paid per share, should the optionee cease Board service prior to the vesting of any such shares. Each 25,000-share and 2,500- share automatic option grant will vest over a four-year period of continuous service on the Board of Directors, twenty-five percent (25%) at the end of one full year of continuous service from the option grant date and quarterly thereafter for the following twelve (12) quarters in equal amounts until fully vested four (4) years after the option grant date. However, the shares subject to each automatic grant will immediately vest in full upon certain changes in control or ownership of the Company or upon the optionee's death or disability during such individual's service on the Board. For further information concerning the Automatic Option Grant Program, see "Management--1998 Stock Incentive Plan." LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by California law. The Company is also empowered under its Amended and Restated Articles of Incorporation to enter into indemnification agreements with its directors, officers, employees and agents and to purchase insurance on behalf of any person whom it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into an indemnification agreement with each of its directors and officers. In addition, the Company's Amended and Restated Articles of Incorporation provide that to the fullest extent permitted by California law, the Company's directors will not be personally liable for monetary damages for breach of the directors' fiduciary duty of care to the Company and its shareholders. This provision in the Articles of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under California law. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for 49 acts or omissions involving intentional misconduct or knowing and culpable violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Company or its shareholders when the director was aware or should have been aware of a risk of serious injury to the Company or its shareholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, for improper transactions between the director and the Company, for improper distributions to shareholders and loans to directors and officers, or for acts or omissions by the director as an officer. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In October 1997, the Company agreed to pay $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to his employment agreement. In addition, the Company will pay $1,500,000 to Dr. Raissi as a result of his completion by January 31, 1998 of certain performance objectives relating to the integration of ISE and DTS. See "Management--Employment Contracts and Termination of Employment and Change of Control Arrangements." In October 1997, the Company agreed to pay $175,000 to Mr. Grammer as a sign-on bonus pursuant to an employment and non-competition agreement. In addition, the Company will pay $100,000 to Mr. Grammer as a result of his completion by January 31, 1998 of certain performance objectives relating to the integration of ISE and DTS. See "Management--Employment Contracts and Termination of Employment and Change of Control Arrangements." The Company has entered into an indemnification agreement with each of the directors and officers of the Company pursuant to which the Company will indemnify such directors and officers for all matters related to their status or service as a director or officer to the maximum extent permissible under California law. Mr. Holdt, a director of the Company, is the President, Chief Executive Officer and Chairman of the Board of S3 Incorporated. In the years ended October 31, 1995, 1996, 1997 and the first quarter of fiscal 1998, the Company sold approximately $1,907,000, $1,635,000, $2,552,000, and $749,000, respectively, of products and services to S3 Incorporated. The accounts receivable from S3 Incorporated was approximately $372,000, $646,000 and $447,000 in the years ended October 31, 1996, 1997 and the first quarter of fiscal 1998, respectively. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal shareholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 51 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth at January 31, 1998 certain information with respect to the beneficial ownership of the Common Stock, and as adjusted to reflect the sale of Common Stock hereby for (i) each person who is known by the Company to beneficially own more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the executive officers named in the Summary Compensation Table above, (iv) all directors named executive offciers and current officers as a group, and (v) the Selling Shareholders.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1)(2) AFTER OFFERING(1)(2) ------------------------- NUMBER OF ----------------------- NUMBER OF SHARES BEING NUMBER OF NAME SHARES(3) PERCENT OFFERED SHARES PERCENT Saeed A. Malik(3)....... 4,748,849 27.1% 271,600 4,477,247 19.9% Laurence F. Jorstad..... 4,748,849 27.1 271,600 4,477,247 19.9 Alex M. Barrios......... 4,748,849 27.1 271,600 4,477,247 19.9 Zafar A. Malik.......... 1,582,969 9.0 90,100 1,492,867 6.6 Patrick H. Yu........... 1,582,969 9.0 90,100 1,492,867 6.6 Dharam V. Ahuja(4)...... 437,514 2.5 5,000 432,514 1.9 Muneer A. Malik(5)...... 52,500 * 0 52,500 * Terry N. Holdt(6)....... 52,500 * 0 52,500 * All directors, named executive officers and current officers as a group (10 persons)(7).. 18,805,000 100.0% 1,000,000 17,805,000 74.8%
- --------------------- * Less than 1.0% (1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock. (2) The number of shares of Common Stock deemed outstanding prior to and after this offering includes the shares issuable pursuant to stock options that may be exercised by the respective person or group within 60 days after January 31, 1998. Shares issuable pursuant to such options are deemed outstanding for computing the percentage of the person holding such options, but are not deemed outstanding for computing the percentage of any other person. The number of shares of Common Stock outstanding after this offering includes the 5,000,000 shares of Common Stock offered by the Company hereby. (3) Includes 545,249 shares issuable upon exercise of Common Stock purchase warrants granted by Mr. Saeed A. Malik to his dependent children exercisable within sixty (60) days of January 31, 1998. Shares beneficially owned exclude shares held by Messrs. Zafar A. and Muneer A. Malik. (4) Includes 350,000 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to a right of repurchase in favor of the Company with respect to all 350,000 shares. (5) Includes 52,500 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to a right of repurchase in favor of the Company with respect to all 52,500 shares. (6) Includes 52,500 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to a right of repurchase in favor of the Company with respect to all 52,500 shares. (7) Includes 1,305,000 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to a right of repurchase in favor of the Company with respect to all 1,305,000 shares. Also see Notes 3, 4, 5 and 6 above. 52 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, $.001 par value per share and 3,000,000 shares of Preferred Stock, $.001 par value per share. COMMON STOCK As of January 31, 1998, there were 17,500,000 shares of Common Stock outstanding which were held of record by 6 shareholders. There will be 22,500,000 shares of Common Stock outstanding after giving effect to the sale by the Company of 5,000,000 shares of Common Stock offered hereby. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders, except that all such holders are entitled to cumulate their votes in the election of directors. Each shareholder voting for the election of directors may cumulate such shareholder's votes and give one candidate the number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or distribute such shareholder's votes on the same principle among as many candidates as the shareholder may select, provided that votes cannot be cast for more than the number of director positions subject to such election. However, no shareholder shall be entitled to cumulate votes unless the names of candidates for which votes are being cumulated have been placed in nomination prior to the voting and the shareholder, or any other shareholder, has given notice prior to the commencement of the voting of such shareholder's intention to cumulate the shareholder's votes. These cumulative voting provisions will terminate if and when the Company meets certain listing and trading standards, including a requirement for 800 record holders of the Company's securities as of the record date of the Company's most recent annual meeting of shareholders. This provision may have the effect of delaying, deferring or preventing a change in control of the Company. Subject to preferences that may be applicable to any outstanding preferred stock that may come into existence, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time-to-time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of any liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be outstanding upon completion of this offering will be fully paid and nonassessable. PREFERRED STOCK The Company's Articles of Incorporation authorizes 3,000,000 shares of Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the shareholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the shareholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, the Company has no plans to issue any of the Preferred Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar of the Common Stock will be Boston Equiserve Limited Partnership. 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the shares of Common Stock of the Company. Future sales of substantial number of shares of Common Stock in the public market could materially adversely affect prevailing market prices. Upon completion of this offering, the Company will have outstanding an aggregate of 22,500,000 shares of Common Stock, assuming the issuance of the 5,000,000 shares of Common Stock offered hereby and no exercise of the Underwriters' over-allotment option. Of the total outstanding shares of Common Stock, all 6,000,000 shares of Common Stock sold in this offering will be freely tradeable without restriction or further registration under the Act, unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Act. The remaining 16,500,000 shares will be "restricted securities" as defined in Rule 144 (the "Restricted Shares"). The Restricted Shares may be sold in the public market beginning 90 days after the date of this prospectus. The Company's executive officers and directors and all of its shareholders, holding in the aggregate 17,500,000 shares of Common Stock, have agreed pursuant to certain agreements (the "Lockup Agreement"), that they will not, subject to certain exceptions, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of the Common Stock, or cause a registration statement covering any shares of Common Stock to be filed, without the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation for a period of 180 days following the date of this Prospectus (the "180 day Lockup Period"), except that the Company may, without such consent, issue shares upon the exercise of outstanding options or grant certain options pursuant to the 1998 Stock Incentive Plan or issue shares of Common Stock pursuant to the Company's Employee Stock Purchase Plan. Following the expiration of the 180 day Lockup Period, all 16,500,000 shares of outstanding Common Stock that are not being sold in this offering will be available for sale in the public market subject to compliance with Rule 144 or Rule 701. In general, under Rule 144 as currently in effect, an affiliate of the Company or a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least two (2) years, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent (1%) of the then outstanding shares of the Company's Common Stock or the average weekly trading volume of the Company's Common Stock on the Nasdaq Stock Market during the four (4) calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the ninety (90) days preceding a sale, and who has beneficially owned shares for at least three (3) years (including any period of ownership of preceding non-affiliated holders), would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company plans to file, upon the consummation of the offering made hereby, a registration statement on Form S-8 under the Act covering the 5,100,000 shares of Common Stock reserved for issuance under its 1998 Stock Incentive Plan and the 1998 Employee Stock Purchase Plan. See "Management-- 1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan." Shares registered under such registration statement would be available for sale in the open market in the future unless such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. The Company has also agreed not to offer, sell, contract to sell or otherwise dispose of shares of Common Stock or any securities convertible into Common Stock for a period of thirty days after the date of this Prospectus, without the prior written consent of the Donaldson, Lufkin & Jenrette Securities Corporation, subject to certain limited exceptions. 54 UNDERWRITING Subject to certain terms and conditions contained in an underwriting agreement (the "Underwriting Agreement"), a syndicate of underwriters named below (the "Underwriters") for whom Donaldson, Lufkin & Jenrette Securities Corporation and BT Alex. Brown Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company and the Selling Shareholders an aggregate of 6,000,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER NAME OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation................... BT Alex. Brown Incorporated........................................... --------- Total............................................................... 6,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and to certain other conditions. If any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares of Common Stock (other than the shares of Common Stock covered by the over-allotment option described below) must be so purchased. Prior to this offering, there has been no established trading market for the Common Stock. The initial public offering price to the public for the Common Stock offered hereby will be determined by negotiation among the Company, the Selling Shareholders and the Representatives. The factors to be considered in determining the initial public offering price to the public will include the history of and the prospects for the industry in which the Company competes, the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the general condition of the securities markets at the time of this offering and the recent market prices of securities of generally comparable companies. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company and the Selling Shareholders have been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $ per share to any other Underwriter and certain other dealers. 55 The Company has granted to the Underwriters an option to purchase up to an aggregate of 900,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions solely to cover over-allotments, if any. Such option may be exercised in whole or in part from time to time during the 30 day period after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. The Company, its officers and directors and all of the Company's shareholders have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for Common Stock during the 180-day lockup period without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, provided that the Company may grant options and issue shares of Common Stock upon the exercise of options under its 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan. See "Shares Eligible for Future Sale." The Company has agreed to pay to Donaldson, Lufkin & Jenrette Securities Corporation a nonaccountable expense allowance of $750,000 in connection with this offering. From time to time, in the ordinary course of business, Donaldson, Lufkin & Jenrette Securities Corporation has provided and may in the future provide financial advisory or other services to the Company. To date, Donaldson, Lufkin & Jenrette Securities Corporation has not received any fees in connection with such services. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company and the Selling Shareholders by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, is acting as counsel to the Underwriters in connection with this offering. EXPERTS The consolidated financial statements of ISE Labs, Inc. as of October 31, 1996 and 1997 and for each of the three years in the period ended October 31, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated statements of operations, of shareholders deficit and of cash flows, of Alphatec USA, Inc. for the years ended December 31, 1994, 1995 and 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 56 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities and Exchange Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected, without charge, at the public reference facilities maintained by the Securities and Exchange Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 500 West Madison Street, Chicago, IL 60661, and 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration Statement may also be accessed through the EDGAR terminals in the Commission's public reference facilities in Washington, D.C. or through the Securities and Exchange Commission's World Wide Web site at http://www.sec.gov. The Company intends to furnish holders of the Common Stock with annual reports containing consolidated financial statements audited by an independent accounting firm and quarterly reports for the first three quarters of each fiscal year containing interim unaudited financial information. 57 ISE LABS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ISE LABS, INC. Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Income.......................................... F-4 Consolidated Statements of Shareholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7 ALPHATEC USA, INC. Report of Independent Accountants.......................................... F-16 Consolidated Statements of Operations...................................... F-17 Consolidated Statements of Shareholders' Deficit........................... F-18 Consolidated Statements of Cash Flows...................................... F-19 Notes to Consolidated Financial Statements................................. F-20 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Unaudited Pro Forma Combined Statement of Operations....................... F-27 Notes to Unaudited Pro Forma Combined Statement of Operations.............. F-29
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of ISE Labs, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of ISE Labs, Inc. and its subsidiaries at October 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP. Price Waterhouse LLP San Jose, California December 12, 1997, except for Note 10, which is as of April 2, 1998 F-2 ISE LABS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31, JANUARY 31, --------------- ----------- 1996 1997 1998 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents........................ $ 4,655 $ 4,969 $ 6,077 Accounts receivable, net of allowance for doubtful accounts and returns of $96, $1,127 and $1,127 (unaudited).............................. 4,475 12,743 15,339 Inventories--raw materials....................... -- 78 192 Prepaid expenses and other current assets........ 115 1,086 569 Deferred income taxes............................ 102 254 317 ------- ------- ------- Total current assets........................... 9,347 19,130 22,494 Property, plant and equipment, net................. 19,161 49,222 56,966 Intangible assets, net............................. -- 2,491 2,289 Other non-current assets........................... 1,487 -- -- ------- ------- ------- Total.......................................... $29,995 $70,843 $81,749 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt.................................. $ -- $ 9,812 $ 9,812 Accounts payable................................. 1,145 5,668 11,211 Accrued liabilities.............................. 2,892 6,186 6,937 Income taxes payable............................. 876 1,080 1,613 Current portion of long-term debt................ 1,414 5,049 5,203 ------- ------- ------- Total current liabilities...................... 6,327 27,795 34,776 Deferred income taxes.............................. 1,291 2,337 2,337 Long-term debt, less current portion............... 4,595 17,189 18,483 ------- ------- ------- Total liabilities.............................. 12,213 47,321 55,596 ------- ------- ------- Commitments (Note 7) Shareholders' Equity: Common stock, $0.001 par value; 50,000,000 shares authorized; 17,500,000 shares issued and outstanding..................................... 18 18 18 Additional paid in capital....................... 546 546 546 Retained earnings................................ 17,218 22,958 25,589 ------- ------- ------- Total shareholders' equity..................... 17,782 23,522 26,153 ------- ------- ------- Total.......................................... $29,995 $70,843 $81,749 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 ISE LABS, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEARS ENDED OCTOBER 31, JANUARY 31, ------------------------- ------------------- 1995 1996 1997 1997 1998 (UNAUDITED) Revenues...................... $22,321 $25,354 $35,532 $ 6,198 $ 20,291 Cost of revenues.............. 8,953 12,094 17,950 3,430 9,483 ------- ------- ------- -------- --------- Gross profit.................. 13,368 13,260 17,582 2,768 10,808 ------- ------- ------- -------- --------- Operating expenses: Research and development.... 1,048 1,111 1,097 227 673 Selling, general and administrative............. 3,843 3,932 7,229 925 4,989 ------- ------- ------- -------- --------- Total operating expenses.. 4,891 5,043 8,326 1,152 5,662 ------- ------- ------- -------- --------- Income from operations........ 8,477 8,217 9,256 1,616 5,146 ------- ------- ------- -------- --------- Other income (expense): Interest and other income (expense), net............. 523 504 804 79 (33) Interest expense............ (403) (530) (741) (144) (869) ------- ------- ------- -------- --------- Total other income (expense)................ 120 (26) 63 (65) (902) ------- ------- ------- -------- --------- Income before income taxes.... 8,597 8,191 9,319 1,551 4,244 Provision for income taxes.... 3,667 3,343 3,579 596 1,613 ------- ------- ------- -------- --------- Net income.................... $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631 ======= ======= ======= ======== ========= Net income per share: Basic....................... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 ======= ======= ======= ======== ========= Diluted..................... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 ======= ======= ======= ======== ========= Shares used in computing net income per share: Basic....................... 17,500 17,500 17,500 17,500 17,500 ======= ======= ======= ======== ========= Diluted..................... 17,500 17,500 17,500 17,500 17,768 ======= ======= ======= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 ISE LABS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ------------------ PAID-IN RETAINED SHAREHOLDERS' SHARES BALANCE CAPITAL EARNINGS EQUITY Balance as of October 31, 1994.................... 17,500,000 $18 $546 $ 7,440 $ 8,004 Net income............. -- -- -- 4,930 4,930 ---------- --- ---- ------- ------- Balance as of October 31, 1995.................... 17,500,000 18 546 12,370 12,934 Net income............. -- -- -- 4,848 4,848 ---------- --- ---- ------- ------- Balance as of October 31, 1996.................... 17,500,000 18 546 17,218 17,782 Net income............. -- -- -- 5,740 5,740 ---------- --- ---- ------- ------- Balance as of October 31, 1997.................... 17,500,000 18 546 22,958 23,522 Net income (unaudited)........... -- -- -- 2,631 2,631 ---------- --- ---- ------- ------- Balance as of January 31, 1998 (unaudited)........ 17,500,000 $18 $546 $25,589 $26,153 ========== === ==== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 ISE LABS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED OCTOBER 31, JANUARY 31, -------------------------- -------------------- 1995 1996 1997 1997 1998 (UNAUDITED) Cash flows from operating activities: Net income.................. $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631 Reconciliation to net cash provided by operating activities: Depreciation and amortization.............. 2,016 3,829 6,269 1,259 3,186 Deferred income taxes...... 243 141 242 (313) (63) Changes in assets and liabilities: Accounts receivable....... (1,191) (1,212) (3,315) (311) (2,596) Inventory................. -- -- 16 -- (114) Prepaid expenses and other current assets........... 544 (53) (821) 24 517 Other non-current assets.. -- (1,212) (363) 1,487 -- Accounts payable.......... 2,036 (1,216) 2,125 1,741 5,543 Accrued liabilities....... 1,382 (167) 2,035 (2,043) 751 Income taxes payable...... 236 997 857 917 533 ------- ------- -------- --------- --------- Net cash provided by operating activities.... 10,196 5,955 12,785 3,716 10,388 ------- ------- -------- --------- --------- Cash flows from investing activities: Acquisition of property, plant and equipment........ (7,984) (8,750) (17,089) (4,219) (7,508) Proceeds from sale of equipment.................. 254 725 4,202 -- -- Acquisition of certain assets of Alphatec USA, net of cash acquired........... -- -- (25,036) -- -- ------- ------- -------- --------- --------- Net cash used in investing activities.... (7,730) (8,025) (37,923) (4,219) (7,508) ------- ------- -------- --------- --------- Cash flows from financing activities: Proceeds from loans......... 1,820 1,684 29,074 1,473 -- Repayments of long-term debt....................... (613) (1,089) (3,622) (413) (1,772) ------- ------- -------- --------- --------- Net cash provided by financing activities.... 1,207 595 25,452 1,060 (1,772) ------- ------- -------- --------- --------- Net increase (decrease) in cash and equivalents........ 3,673 (1,475) 314 557 1,108 Cash and equivalents at beginning of period......... 2,457 6,130 4,655 4,655 4,969 ------- ------- -------- --------- --------- Cash and equivalents at end of period................... $ 6,130 $ 4,655 $ 4,969 $ 5,212 $ 6,077 ======= ======= ======== ========= ========= SUPPLEMENTAL DISCLOSURES: Cash paid for interest...... $ 402 $ 501 $ 663 $ 144 $ 869 Cash paid for income taxes.. 2,630 2,205 1,525 -- -- Property, plant and equipment acquired under capital leases............. -- -- -- -- 3,220
The accompanying notes are an integral part of these consolidated financial statements. F-6 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: GENERAL ISE Labs, Inc. (the "Company") was incorporated in California in 1983 and is engaged in providing testing and assembly of integrated circuits to customers in the semiconductor industry. The Company has operations in Silicon Valley and Manteca, California, and provides testing services to customers in Hong Kong through its subsidiary, ISE Labs Hong Kong Limited. Effective September 11, 1997, the Company acquired the semiconductor assembly operations of Alphatec USA, Inc. and all of its equity in its wholly owned subsidiary, Digital Testing Services, Inc., a provider of integrated circuit test and engineering services to the semiconductor industry. The acquisition was accounted for as a purchase. (See Note 2). BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of ISE Labs, Inc. and its wholly owned subsidiaries, ISE Labs Hong Kong Limited, ISE Technology, Inc. and Digital Testing Services, Inc. All significant intercompany balances and transactions have been eliminated on consolidation. MANAGEMENT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and expenses during the reported period. Actual results could differ from these estimates. FOREIGN CURRENCY The functional currency of the Company's Hong Kong operations is U.S. dollars. Gains and losses from foreign currency translation are included in the results of operations and have not been material to date. The Company has not undertaken any foreign currency hedging activities. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. Cash equivalents also include various certificates of deposit with maturities of three months or less totaling $1,101,000 and $0 at October 31, 1996 and 1997, respectively. REVENUE RECOGNITION The Company recognizes revenue upon completion of assembly and test services and shipment of the customer's products back to the customer. INVENTORY Inventories are stated at the lower of cost or market value, cost being determined using the first in first out method. F-7 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation on equipment is computed using the straight-line method over estimated useful lives of three to five years. Depreciation on buildings is computed using the straight-line method over an estimated useful life of thirty one years. Building improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the life of the building. INTANGIBLE ASSETS Goodwill represents the excess of the purchase price of the acquired business over the fair value of the identifiable net assets acquired and is amortized using the straight-line method over a period of five years. Covenant not to compete is amortized using the straight-line basis over an estimated useful life of three years. LONG-LIVED ASSETS Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS 121"), the Company reviews long-lived assets, including the identifiable intangible assets and goodwill for recoverability and will reserve for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. STOCK-BASED COMPENSATION The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations thereof. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the stock option exercise price. In addition, the Company complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). INCOME TAXES The Company utilizes the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. No provision for U.S. deferred income taxes is made for the undistributed earnings of the Company's foreign subsidiary to the extent such earnings are deemed to be indefinitely reinvested in such operations. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents with major financial institutions. The Company's sales are derived from customers in the semiconductor industry. The Company performs ongoing credit evaluations of its customers and provides reserves for potential credit losses when considered necessary. To date, the Company has not experienced any significant losses as a result F-8 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of uncollectible accounts. The Company holds product and certain equipment on consignment from its customers while services are being performed and maintains insurance against risk of loss. The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities. The carrying value of long-term debt approximates fair value as the interest rates approximate current market rates of similar debt. The Company does not hold or issue financial instruments for trading purposes. NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The Company has presented earnings per share for all periods to comply with the new standard. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share includes the effect of dilutive potential common shares (options) issued during the period (using the treasury stock method). Options totaling 2,407,600 at an exercise price of $7.80 were excluded from the computation of diluted earnings per share for the year ended October 31, 1997 as the exercise price was higher than the average fair value of the common stock for the entire fiscal year. Approximately 268,000 shares of potential common stock related to options were included in the computation of diluted earnings per share for the three months ended January 31, 1998. Supplemental net income per share to reflect the impact of retirement of debt from the proceeds of the initial public offering has not been presented, as the per share amounts are not materially different from those showing on the income statement. STOCK SPLIT On November 4, 1997, the Company implemented a 54.524948 for 1 stock split. The share and per share amounts have been retroactively restated for all periods presented. COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). This statement will be effective for the Company's fiscal year ending October 31, 1999. The statement establishes presentation and disclosure requirements for reporting comprehensive income. Comprehensive income includes charges or credits to equity that are not the result of transactions with shareholders. The Company plans to adopt the disclosure requirements and report comprehensive income as part of the Consolidated Statements of Shareholders' Equity as permitted under SFAS 130, and currently expects there to be no material impact on the Company's financial statements disclosures as a result of the adoption of this new accounting standard. SEGMENT REPORTING In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement will be effective for the Company's fiscal year ending October 31, 1999. The statement requires the Company to report certain financial information about operating segments in financial statements of the Company and in condensed financial statements for interim periods. It also requires that the Company report certain information about its services, the geographic areas in which it operates and its major customers. The method specified in SFAS 131 for determining what information to report is referred to as the "management approach". The management F-9 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The adoption of SFAS 131 will not have a significant impact on segment disclosures of the Company. INTERIM RESULTS (UNAUDITED) The accompanying consolidated balance sheet as of January 31, 1998, the consolidated statements of income and of cash flows for the three months ended January 31, 1997 and 1998 and the consolidated statement of shareholders' equity for the three months ended January 31, 1998 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of interim periods. The data disclosed in notes to the consolidated financial statements for these periods are unaudited. NOTE 2--ACQUISITION OF ALPHATEC USA: Effective September 11, 1997, the Company acquired certain assets of the semiconductor assembly operations of Alphatec USA, Inc. ("Alphatec") and all its equity in its wholly owned subsidiary Digital Testing Services Inc. ("DTS") a provider of integrated circuit test and engineering services to the semiconductor industry. The transaction was accounted for as a purchase. The consolidated financial statements of the Company include the results of operations of Alphatec since the date of acquisition. The purchase price was approximately $31.2 million, including acquisition costs. In connection with the acquisition, the Company assumed certain liabilities and acquired cash of Alphatec resulting in a net cash payment of approximately $25.0 million to Alphatec. The purchase price was allocated based on an independent appraisal of the property, plant and equipment to the fair value of assets acquired which included $28.6 million of tangible assets. The excess of the purchase price over the fair value of the net tangible assets acquired was allocated to goodwill and a covenant not to compete of approximately $1.6 million and $1.0 million, respectively. Goodwill is being amortized over five years and the covenant not to compete over three years, both using the straight-line basis. The unaudited consolidated results of operations on a pro forma basis for the years ended October 31, 1996 and 1997 prepared on the basis as if Alphatec were acquired at the beginning of the Company's fiscal years 1996 and 1997 are as follows (in thousands, except per share data):
YEAR ENDED OCTOBER 31, ---------------------- 1996 1997 Revenues............................................ $86,347 $ 74,602 Net income (loss)................................... 1,028 (13,162) Net income (loss) per share (Basic and Diluted)..... 0.06 (0.75)
F-10 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--BALANCE SHEET COMPONENTS:
OCTOBER 31, JANUARY 31, ------------------ ----------- 1996 1997 1998 (UNAUDITED) (IN THOUSANDS) Property, plant and equipment: Machinery and equipment.................. $ 24,041 $ 55,036 $ 65,966 Furniture and fixtures................... 95 297 297 Buildings................................ 4,665 7,445 7,445 Building improvements.................... 265 1,182 1,182 -------- -------- -------- 29,066 63,960 74,890 Less accumulated depreciation and amortization............................ (11,491) (17,124) (20,310) -------- -------- -------- 17,575 46,836 54,580 Land..................................... 1,586 2,386 2,386 -------- -------- -------- $ 19,161 $ 49,222 $ 56,966 ======== ======== ======== Accrued liabilities: Accrued employee compensation............ $ 2,217 $ 2,313 $ 2,871 Other.................................... 675 3,873 4,066 -------- -------- -------- $ 2,892 $ 6,186 $ 6,937 ======== ======== ========
NOTE 4--DEBT:
OCTOBER 31, ----------------- 1996 1997 (IN THOUSANDS) Equipment loans at prime rate (8.5% at October 31, 1997), due through 2002........................................ $ 3,152 $ -- Mortgage loan at prime rate (8.5% at October 31, 1997), due through August 2003................................. 2,857 2,454 Borrowings under line of credit of $8 million at 8.5% per annum, which expires on September 30, 1998,............. -- 4,412 Note payable at prime rate plus applicable margin up to 0.75% (9.0% at October 31, 1997), due March 1998........ -- 5,400 Note payable at 9.97% per annum, due through April 1999.. -- 534 Note payable at prime rate (8.5% at October 31, 1997), due through January 2001................................ -- 4,650 Note payable at prime rate plus applicable margin up to 0.75% (9.0% at October 31, 1997), due through September 2002.................................................... -- 14,600 ------- -------- 6,009 32,050 Current portion of long term debt and short term debt.... (1,414) (14,861) ------- -------- Long term debt, less current portion..................... $ 4,595 $ 17,189 ======= ========
Borrowings under the above arrangements are secured by all assets of the Company and require compliance with certain financial tests and ratios, dividend restrictions and maintenance of working capital requirements. F-11 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the terms of the 9.0% Note Payable due 2002, beginning in March 1998 and continuing until June 1999, the Company is required to make payments on account equaling 25% of the Company's consolidated net income after taxes excluding depreciation and amortization for the preceding quarter, until the Company has made principal payments totaling $6 million. The Company is also required to make payments to bring the total principal paid to $6 million on the earlier of June 1999, on the sale of equity securities of more than $10 million or in the event of sale of certain property, plant and equipment. The following table summarizes future minimum principal payments on long term debt as of October 31, 1997 (in thousands):
FISCAL YEAR ENDING OCTOBER 31, 1998................................................................ $ 5,049 1999................................................................ 5,016 2000................................................................ 4,750 2001................................................................ 3,789 2002................................................................ 3,172 Thereafter.......................................................... 462 ------- $22,238 =======
NOTE 5--STOCK OPTIONS: In October 1997, the Board of Directors and shareholders adopted the 1997 Stock Option/Stock Issuance Plan (the "1997 Plan") which provides for granting of incentive stock options ("ISOs") and nonqualified stock options ("NSOs") to purchase shares of common stock to employees, consultants and advisors of the Company. In accordance with the 1997 Plan, the stated exercise price shall be not less than 100% and 85% of the estimated fair market value of common stock on the date of grant for ISOs and NSOs, respectively, as a determined by the Board of Directors. The 1997 Plan provides that the options shall be exercisable over a period not to exceed ten years. Options granted under the 1997 Plan are immediately exercisable and generally vest 25% one year after the date of grant and in equal quarterly amounts thereafter for the subsequent 12 quarters months. The following table summarizes activities under the 1997 Plan:
WEIGHTED SHARES AVERAGE AVAILABLE STOCK OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE Balance at October 31, 1996.................. -- -- -- Options authorized........................... 4,500,000 -- -- Options granted.............................. (2,407,600) 2,407,600 $7.80 ---------- --------- Balance at October 31, 1997.................. 2,092,400 2,407,600 $7.80 ========== ========= Options vested at October 31, 1997........... --
All options were granted with exercise prices equal to the estimated fair market value of the Company's Common Stock at the date of grant, as determined by its board of directors. The following table summarizes the stock options outstanding and exercisable at October 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER CONTRACTUAL NUMBER CONTRACTUAL OUTSTANDING LIFE EXERCISABLE LIFE RANGE OF EXERCISE PRICES AT 10/31/97 (YEARS) AT 10/31/97 (YEARS) $7.80...................... 2,407,600 10 2,407,600 10
F-12 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FAIR VALUE DISCLOSURES The weighted average minimum value of options granted during fiscal 1997 was $1.89 per share. The minimum value of options at date of grant was estimated using the Black- Scholes model with the following assumptions:
1997 Expected life (years)................................................. 5 Risk-free rate........................................................ 5.56% Dividend yield........................................................ --
Had compensation cost for the Company's stock options been determined based on the minimum value of such options at the grant date as prescribed by SFAS No. 123, the impact on the Company's net income and net income per share would not have been materially different. NOTE 6--INCOME TAXES: Consolidated income before income taxes includes non U.S. income (loss) of approximately $(32,000), $1,338,000, and $3,773,000 in fiscal 1995, 1996 and 1997, respectively. The provision for income taxes for the years ended October 31, 1995, 1996 and 1997 consists of the following (in thousands):
YEAR ENDED OCTOBER 31, --------------------- 1995 1996 1997 Current: United States........................................ $3,424 $2,740 $2,639 Foreign.............................................. -- 105 46 ------ ------ ------ 3,424 2,845 2,685 ------ ------ ------ Deferred: United States........................................ 240 514 551 Foreign.............................................. 3 (16) 343 ------ ------ ------ 243 498 894 ------ ------ ------ Total.................................................. $3,667 $3,343 $3,579 ====== ====== ======
The Company's net deferred tax assets and liabilities consist of the following (in thousands):
OCTOBER 31, ---------------- 1996 1997 Deferred tax assets: Provisions and reserves................................. $ 102 $ 254 Deferred tax liabilities: Depreciation............................................ (934) (1,328) Unremitted foreign income............................... (357) (1,009) ------- ------- (1,291) (2,337) ------- ------- Net deferred taxes...................................... $(1,189) $(2,083) ======= =======
F-13 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a reconciliation of the Company's effective tax rate to the U.S. federal income tax rate of 34%:
YEAR ENDED OCTOBER 31, -------------------------- 1995 1996 1997 Tax at statutory rates............................ 34% 34% 34 % State income tax, net of federal benefit.......... 6% 6% 6 % Benefit of lower tax rate on foreign income....... -- -- (2)% Other............................................. 3% 1% -- ------- ------- -------- 43% 41% 38 % ======= ======= ========
The Company has generated approximately $2.6 million of income from foreign operations for which no U.S. tax has been provided. These earnings are considered to be permanently reinvested outside of the United States. NOTE 7--COMMITMENTS: The Company leases office space and equipment under noncancelable operating lease agreements. The future minimum lease payments under these leases as of October 31, 1997 were as follows (in thousands):
OPERATING FISCAL YEAR ENDING OCTOBER 31, LEASE PAYMENTS 1998.......................................................... $ 3,999 1999.......................................................... 4,006 2000.......................................................... 3,346 2001.......................................................... 1,228 2002.......................................................... 85 ------- $12,664 =======
Rental expense for the years ended October 31, 1995, 1996 and 1997 was $353,000, $124,000 and $516,000, respectively. The Company rents certain of its owned land and buildings under a noncancelable operating lease which expires in July 1998. Total rental income related to this lease was $317,000, $291,000 and $226,000 for the years ended October 31, 1995, 1996 and 1997, respectively, and is included in other income. Rents receivable under this lease aggregate $113,000 for the year ending October 31, 1998. NOTE 8--MAJOR CUSTOMERS: Revenues from one customer represented approximately 30% and 16% of total revenues for the years ended October 31, 1995 and 1996, respectively. Revenues from another customer represented approximately 21% and 30% of total revenues for the years ended October 31, 1996 and 1997, respectively. Receivables from two customers represented 24% and 26% of total receivables at October 31, 1996. Receivables from three customers represented 10%, 13% and 23% of total receivables at October 31, 1997. F-14 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--GEOGRAPHIC INFORMATION: The Company's operations by geographical region were as follows (in thousands):
YEAR ENDED OCTOBER 31, ------------------------ 1995 1996 1997 Revenues: United States..................................... $22,042 $19,929 $24,784 Hong Kong......................................... 279 5,425 10,748 ------- ------- ------- $22,321 $25,354 $35,532 ======= ======= ======= Operating income (loss): United States..................................... $ 8,509 $ 6,879 $ 5,483 Hong Kong......................................... (32) 1,338 3,773 ------- ------- ------- $ 8,477 $ 8,217 $ 9,256 ======= ======= ======= OCTOBER 31, --------------- 1996 1997 Identifiable assets: United States..................................... $21,695 $57,840 Hong Kong......................................... 8,300 13,003 ------- ------- $29,995 $70,843 ======= =======
Revenues are designated to the region which records the sales. NOTE 10--SUBSEQUENT EVENTS: On April 2, 1998, the Company's shareholders approved the 1998 Stock Incentive Plan (the "1998 Plan") to succeed the Company's 1997 Plan. A total of 4,500,000 shares of common stock have been authorized for issuance under the 1998 Plan, including the options granted and outstanding under the 1997 Plan. The shareholders also approved the 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"). A total of 600,000 shares are reserved for future issuance under the Stock Purchase Plan, which will become effective upon the closing of the initial public offering. F-15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Alphatec USA, Inc. In our opinion, the accompanying consolidated statements of operations, of shareholders' deficit and of cash flows of Alphatec USA, Inc. (a wholly-owned subsidiary of Alphatec Electronics Co. Ltd.) and its subsidiary, present fairly, in all material respects, the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of Alphatec USA's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Price Waterhouse LLP San Jose, California February 7, 1997 F-16 ALPHATEC USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- ----------------- 1994 1995 1996 1996 1997 (UNAUDITED) Revenues......................... $38,128 $55,038 $61,521 $30,342 $ 21,589 Cost of revenues................. 38,328 53,332 61,795 29,966 25,217 ------- ------- ------- ------- -------- Gross profit (loss).............. (200) 1,706 (274) 376 (3,628) ------- ------- ------- ------- -------- Operating expenses: Research and development....... 267 332 463 281 451 Selling and marketing.......... 959 1,228 587 343 145 General and administrative..... 1,038 3,412 1,952 1,580 3,421 Impairment of property, plant and equipment................. -- -- -- -- 9,348 ------- ------- ------- ------- -------- Total operating expenses..... 2,264 4,972 3,002 2,204 13,365 ------- ------- ------- ------- -------- Loss from operations............. (2,464) (3,266) (3,276) (1,828) (16,993) Interest expense, net............ 914 412 1,624 570 1,249 ------- ------- ------- ------- -------- Net loss......................... $(3,378) $(3,678) $(4,900) $(2,398) $(18,242) ======= ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-17 ALPHATEC USA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL ---------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL Balance at December 31, 1993....................... 5,000,000 $5,000 $ -- $ (4,324) $ 676 Net loss.................... -- -- -- (3,378) (3,378) --------- ------ ------- -------- -------- Balance at December 31, 1994....................... 5,000,000 5,000 -- (7,702) (2,702) Conversion of shareholder debt, accounts payable and accrued interest to equity..................... -- -- 14,704 -- 14,704 Additional contributed capital.................... -- -- 15,000 -- 15,000 Net loss.................... -- -- -- (3,678) (3,678) --------- ------ ------- -------- -------- Balance at December 31, 1995....................... 5,000,000 5,000 29,704 (11,380) 23,324 Interest on loan from related party contributed to capital................. -- -- 191 -- 191 Net loss.................... -- -- -- (4,900) (4,900) --------- ------ ------- -------- -------- Balance at December 31, 1996....................... 5,000,000 5,000 29,895 (16,280) 18,615 Interest on loan from related party contributed to capital (unaudited)..... -- -- 123 -- 123 Net loss (unaudited)........ -- -- -- (18,242) (18,242) --------- ------ ------- -------- -------- Balance at June 30, 1997 (unaudited)................ 5,000,000 $5,000 $30,018 $(34,522) $ 496 ========= ====== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-18 ALPHATEC USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ------------------ 1994 1995 1996 1996 1997 (UNAUDITED) Cash flows from operating activities: Net loss..................... $(3,378) $ (3,678) $ (4,900) $ (2,398) $(18,242) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization.............. 1,892 3,739 6,806 3,060 3,949 Amortization of license and loan fees................. 68 182 61 30 30 Loss (gain) on sale of equipment................. (56) 34 186 -- -- Interest accrued on advance from related party........ 387 -- 191 -- 123 Impairment of property, plant and equipment....... -- -- -- -- 9,348 Changes in assets and liabilities, net of effects from acquisition of Digital Testing Services, Inc. Accounts receivable....... 297 (3,172) (590) (493) 1,599 Receivable from related party.................... (61) (885) 584 (105) 993 Inventories............... 1,244 (3,125) 1,628 654 2,609 Prepaid expenses and other assets................... 157 (659) (2,454) 5 2,572 Accounts payable.......... (2,508) 8,005 (1,005) 128 1,103 Accrued expenses.......... 349 122 (2,068) 4,096 693 ------- -------- -------- -------- -------- Net cash provided by (used in) operating activities.............. (1,609) 563 (1,561) 4,977 4,777 ------- -------- -------- -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment......... (3,729) (13,126) (11,249) (17,171) (3,982) Proceeds from sale of equipment................... 205 1,877 820 -- -- Acquisition of Digital Testing Services, Inc. net of cash acquired............ -- (5,509) -- -- -- ------- -------- -------- -------- -------- Net cash used in investing activities.... (3,524) (16,758) (10,429) (17,171) (3,982) ------- -------- -------- -------- -------- Cash flows from financing activities: Borrowings from shareholders................ 3,513 -- -- -- -- Net borrowings (repayments) under revolving line of credit...................... 292 5,090 104 (1,105) (1,887) Proceeds from (payments on) equipment term loan......... 573 (122) 5,669 6,084 702 Payment of capital lease obligations................. (120) (543) (1,473) (380) (244) Advance from related party... 523 -- 4,477 4,477 1,325 Proceeds from additional contributed capital......... -- 15,000 -- -- -- ------- -------- -------- -------- -------- Net cash provided by (used in) financing activities.............. 4,781 19,425 8,777 9,076 (104) ------- -------- -------- -------- -------- Net (decrease) increase in cash......................... (352) 3,230 (3,213) (3,118) 691 Cash and cash equivalents at beginning of period.......... 353 1 3,231 3,231 18 ------- -------- -------- -------- -------- Cash and cash equivalents at end of period................ $ 1 $ 3,231 $ 18 $ 113 $ 709 ======= ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest................ $ 486 $ 605 $ 1,433 $ 570 $ 1,249 Obligations incurred under capitalized leases.......... 800 1,670 -- -- 3,869 Conversion of shareholder debt and accounts payable to equity...................... -- 14,704 191 -- 123
The accompanying notes are an integral part of these consolidated financial statements. F-19 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ALPHATEC USA: ALPHATEC USA Alphatec USA, Inc. ("Alphatec USA"), formerly Indy Electronics, Inc., was incorporated in California in March 1993. Alphatec USA performs semiconductor assembly on a subcontract basis for semiconductor manufacturers. On May 12, 1995 Alphatec USA acquired Digital Testing Services, Inc. ("DTS"), which provides integrated circuit test and engineering services (see Note 3). Alphatec USA is a wholly-owned subsidiary of the Alphatec Electronics Co. Ltd. ("Alphatec"), a company based in Thailand. Alphatec has several subsidiaries and a number of related companies. These companies are related through certain shared ownership, management and a common significant shareholder. The common significant shareholder was the sole shareholder of Alphatec USA prior to 1995. During 1995, Alphatec commenced the process of acquiring Alphatec USA. The acquisition was accomplished in two steps. In the first step, in March 1995, Alphatec USA's then sole shareholder transferred the outstanding stock to Janall Investment Limited ("Janall") a Hong Kong investment company. In the second step, Alphatec acquired the outstanding stock of Alphatec USA from Janall in July 1996. The accompanying financial statements of Alphatec USA do not reflect any impact of the above noted changes in ownership, as such changes represented transfer of entities under common control. In conjunction with the above noted changes in ownership of Alphatec USA, outstanding debt and interest totaling approximately $10 million payable to Alphatec USA's sole shareholder in 1995 were converted to contributed capital. Additionally, approximately $15 million of cash was contributed as capital by Alphatec and approximately $4.7 million of Alphatec USA's accounts payable to Alphatec were canceled as additional contribution of capital by Alphatec. ACQUISITION OF ALPHATEC USA (UNAUDITED) Effective September 11, 1997, ISE Labs, Inc. ("ISE") acquired the semiconductor assembly operations of Alphatec USA and all of its equity in DTS. (Note 11). Pursuant to Securities and Exchange Commission financial statement requirements, an audited balance sheet of Alphatec USA has not been presented as Alphatec USA's balances were included in the consolidated balance sheet of ISE Labs, Inc. at October 31, 1997. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Alphatec USA and its wholly owned subsidiary, DTS. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Revenues from integrated circuit test and assembly foundry services are recognized upon shipment of product back to customer. CASH AND CASH EQUIVALENTS Alphatec USA considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out basis. F-20 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method based upon the estimated useful lives of the assets, generally five years for equipment and thirty years for buildings, or the lease term of the respective assets, as applicable. RESTRICTED CASH During 1995, Alphatec USA entered into an equipment leasing agreement for which an irrevocable standby letter of credit is required. Accordingly, Alphatec USA has maintained a $420,000 certificate of deposit with a lending company to collateralize the letter of credit. The deposit cannot be withdrawn until the leasing obligations have been repaid. LONG-LIVED ASSETS Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS 121"), the Company reviews long-lived assets, including the identifiable intangible assets and goodwill for recoverability and will reserve for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. INCOME TAXES Alphatec USA provides for income taxes using an asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INTERIM RESULTS (UNAUDITED) The consolidated statements of operations and of cash flows for the six months ended June 30, 1996 and 1997 and the consolidated statements of shareholders' deficit for the six months ended June 30, 1997 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the results for the interim periods. The data disclosed in the consolidated financial statements at such dates and for such periods are unaudited. F-21 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--ACQUISITION OF DIGITAL TESTING SERVICES, INC.: On May 12, 1995, Alphatec USA acquired Digital Testing Services, Inc. ("DTS"), which provides integrated circuit test and engineering services to semiconductor manufacturers. The purchase price was approximately $9.8 million, including acquisition costs of approximately $100,000. The acquisition was accounted for as a purchase. The purchase price was allocated to the acquired assets and liabilities based upon an estimate of their fair market values which included an independent appraisal of the equipment, as of the acquisition date as follows (in thousands): Cash................................................................ $ 4,300 Accounts receivable................................................. 2,020 Equipment........................................................... 9,070 Other assets........................................................ 80 Accounts payable and accrued expenses............................... (4,041) Capitalized lease obligations....................................... (1,620) ------- $ 9,809 =======
The results of operations of DTS are included with those of Alphatec USA for periods subsequent to the date of the acquisition. Set forth below is the unaudited pro forma combined summary of operations of Alphatec USA and DTS for 1994 and 1995 as though the acquisition had been made at the beginning of 1994 (in thousands).
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 Revenues............................................... $ 50,200 $ 59,900 Gross profit........................................... 6,650 3,500 Income (loss) from operations.......................... 1,850 (1,700) Net income (loss)...................................... 50 (2,180)
The acquisition was financed with a $10 million capital contribution received by Alphatec USA in March 1995 from Alphatec's sole shareholder. The 1994 pro forma combined results of operations shown above reflect imputed interest charges of approximately $800,000 resulting from this additional financing. No imputed interest charges were included in the 1995 pro forma operating results as the debt was converted to equity (see Note 1). In connection with the purchase, six key employees and former DTS shareholders signed long-term employment contracts. These employment contracts provide for profit sharing payments to these key employees of a certain percentage of DTS' pretax income, as defined, for the years 1995 to 1999. The percentage increases over that period from 20% to 40%. The 1994 and 1995 pro forma combined results of operations shown above reflect payments charged to compensation expense totaling $1,050,000 and $1,120,000, respectively, to these former shareholders. In 1996, the related charge to compensation expense was $1,853,000. F-22 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--RELATED PARTY TRANSACTIONS: During 1994, 1995 and 1996, Alphatec USA entered into the following transactions with its shareholder and the Alphatec Group (in thousands):
ALPHATEC GROUP -------------------- NOTES PAYABLE TO SHAREHOLDER ADVANCE RECEIVABLES Balances due (to)/from related parties at December 31, 1993................... $(5,618) $ -- $ 43 Borrowings from shareholder, including interest of $387....................... (3,900) -- -- Advances to Alphatec USA ............... -- (523) -- Director's fees......................... (120) -- -- Administrative fees..................... -- -- (262) Equipment purchases..................... -- -- (660) Equipment sales......................... -- -- 351 Net payments............................ 120 -- 632 ------- ------- ------- Balances due (to)/from related party at December 31, 1994...................... (9,518) (523) 104 Borrowings from shareholder............. (5,186) -- -- Conversion of debt to equity............ 14,704 -- -- Director's fees......................... (120) -- -- Allocation of joint operational costs incurred by the Company................ -- -- 589 Net advances paid by the Company........ -- -- 1,000 Net payments............................ 120 -- (104) ------- ------- ------- Balances due (to)/from related party at December 31, 1995...................... -- (523) 1,589 Advance to/(from) related party......... -- (5,000) 1,000 Director's fees......................... (180) -- -- Allocation of joint operational costs incurred by the Company................ -- -- 816 Net advances paid by the Company........ -- -- 1,600 Net payments............................ 180 523 (4,000) ------- ------- ------- Balances due (to)/from related party at December 31, 1996...................... $ -- $(5,000) $ 1,005 ======= ======= =======
Alphatec USA has undertaken to act as an agent for Alphatec to assist with the acquisition and implementation of MQUAD(C) manufacturing equipment on its behalf and is to receive full reimbursement for such activities. Additionally, during 1994, Alphatec USA entered into an agreement with Alphatec to develop the Ball Grid Array ("BGA") package and the assembly processes necessary to manufacture the package for both companies. Projected costs for development of the new package have been divided equally between the companies. During 1996, Alphatec USA recognized $523,000 as contract development revenue related to the project. Notes payable to the shareholder accrued interest at rates ranging from 10% to 14% during 1994. All such interest was accrued as additional notes payable. The debt and interest payable to the shareholder were converted to equity in 1995. In June 1996, Alphatec USA obtained an interest free advance of $5 million from the Alphatec Group. The advance is subordinated to the bank debt and no repayment terms have been specified. Interest is imputed at 7% and recorded as additional contributed capital. During 1996, Alphatec USA and Alphatec jointly purchased a technology license for the MQUAD(C) package assembly technology for $1 million, of which $500,000 was paid for by Alphatec as its share of the cost of the license. The cost of the license is being amortized on a straight-line basis over the estimated economic life of the license which is seven years. F-23 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--BORROWINGS: In December 1995, Alphatec USA entered into a joint revolving line of credit and two equipment term loans with two institutions. The revolving line of credit was renewed in 1996 and matured in April 1997. Under the terms of the $10 million revolving line of credit, with $5 million to be paid severally by each institution, the outstanding balance is limited to 80% of eligible accounts receivable plus 40% of eligible inventory. The inventory advance is limited to $2 million. The line of credit requires monthly interest payments which accrue at 1.25%, as amended, in excess of the higher of the prime rate of either institution per annum. The interest rates for the revolving line of credit at December 31, 1995 and 1996 were both 9.5%. Under the terms of the first equipment term loan facility, the outstanding balance is limited to an amount equal to 80% of the cost of new equipment, in a total aggregate amount not to exceed $5 million. Under the terms of the second equipment term loan facility, the outstanding balance is limited to an amount equal to 70% of the "forced sale value", as defined, of specified equipment, in a total aggregate amount not to exceed $5 million. The balances of both term loans are being repaid monthly at a rate equal to 1/60 of the original loan balances. The maturity dates are thirty-six months from the end of the draw down period and thirty-six months from the closing date for the first and second term loans, respectively. Balloon payments equivalent to any outstanding balances are due at maturity. Both equipment term loans require monthly interest payments which accrue at 1.75% in excess of the higher of the prime rate of either institution per annum. The interest rates for the equipment term loans at December 31, 1996 and 1995 were both 9.5%. On a consolidated basis, Alphatec USA is required to maintain certain covenants, including a minimum tangible net worth, quick ratio and cash flow coverage, as defined. Under the terms of the revolving credit facility and the equipment term loan facilities, upon an event of default all amounts, at the bank's discretion, become immediately due and payable. At December 31, 1995 and 1996, Alphatec USA was in default of certain covenants of the term loan. 1993 AND 1994 CREDIT FACILITIES Under agreements with financial institutions dated October 1993 and June 1994, Alphatec USA borrowed funds under a revolving line of credit and an equipment term loan at interest rates of prime plus 1.5% to 1.75% (approximately 11% at December 31, 1994). Except for the first equipment term loan, as discussed above, the agreements were terminated and the balances repaid in June 1994 and March 1995, respectively. F-24 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--INCOME TAXES: There was no provision for income taxes for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 because of the losses incurred. Deferred tax assets at December 31, 1995 and 1996 were as follows (in thousands):
DECEMBER 31, ---------------- 1995 1996 Net operating loss....................................... $ 2,060 $ 4,539 Reserves and accruals.................................... 742 769 ------- ------- 2,802 5,308 Valuation Allowance...................................... (2,802) (5,308) ------- ------- $ -- $ -- ======= =======
Based on factors which include a history of losses and the lack of carryback capacity, it is more likely than not that Alphatec USA will not be able to realized its deferred tax assets and thus a full valuation reserve has been recorded. At December 31, 1996, Alphatec USA had net operating loss carryforwards available to reduce future taxable income of approximately $12 million for federal income tax purposes. Alphatec USA's net operating loss carryforwards expire in different years through 2011. The income tax benefit from utilization of net operating loss carryforwards is limited due to cumulative stock ownership changes of more than 50% over a three-year period. NOTE 7--SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISKS: Financial instruments which potentially subject Alphatec USA to concentration of credit risk consist principally of bank deposits and trade accounts receivable. Alphatec USA places its cash and cash equivalents in checking and market rate accounts with major financial institutions and has not recorded any losses related to these investments. Alphatec USA's assembly and test foundry service revenue is received from semiconductor manufacturers located primarily in the United States. Alphatec USA performs ongoing evaluations of its customers' financial conditions and maintains allowances for potential credit losses. Two customers accounted for 43% and 11% of revenues for the year ended December 31, 1994. Two customers accounted for 24% and 14% of revenues for the year ended December 31, 1995. One customer accounted for 20% of revenues for the year ended December 31, 1996. Revenues from export sales for the year ended December 31, 1994, 1995 and 1996 were not significant. F-25 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--COMMITMENTS: Alphatec USA leases most of its manufacturing and office facilities under noncancelable operating lease agreements that expire at various dates through 2001. These leases require Alphatec USA to pay taxes, insurance, and maintenance expenses, and provide for renewal options at the then fair market rental value of the property. Future minimum lease payments for capital and noncancelable operating leases were as follows at December 31, 1996:
FISCAL YEAR CAPITAL OPERATING (IN THOUSANDS) 1997....................................................... $ 244 $ 5,081 1998....................................................... 224 4,455 1999....................................................... 24 4,240 2000....................................................... 4 3,449 2001....................................................... -- 1,862 ----- ------- Total minimum lease payments............................... 496 $19,087 ======= Less: amount representing interest......................... (60) ----- Present value of net minimum payments...................... 436 Less: current portion...................................... (201) ----- Capitalized lease obligations, less current portion........ $ 235 =====
Total operating lease expense was $111,000, $327,000 and $1,907,000 for the years ended December 31, 1994, 1995 and 1996, respectively. At December 31, 1996, Alphatec USA had purchase commitments aggregating approximately $9 million, principally for the purchase of manufacturing equipment. NOTE 9--LITIGATION, CLAIMS AND ASSESSMENTS: Alphatec USA is subject to legal proceedings and claims that arise in the normal course of business. The amount of liability, if any, from such claims cannot be determined with certainty; however, in the opinion of management, the ultimate outcome of such claims will not have a material adverse effect on Alphatec USA's results of operations or cash flows. During 1995, Alphatec USA recorded a one-time pre-tax charge to general and administration expense of $1,400,000 with respect to several claims. The claims were settled during 1996 for a total of $312,000 and the difference was credited against general and administrative expense in 1996. NOTE 10--IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT: (UNAUDITED). Due to a decrease in revenues and an increase in operating losses, Alphatec USA significantly downsized its workforce and re-evaluated the value of property, plant and equipment at June 30, 1997 relating to the semiconductor assembly operations. This resulted in the establishment of a provision for impairment totaling $9,348,000 which was recorded as an operating expense in the six months ended June 30, 1997. NOTE 11--SUBSEQUENT EVENT: (UNAUDITED) Effective September 11, 1997, Alphatec USA, Inc. sold the semiconductor assembly operations of Alphatec USA Inc., and all of its equity in Digital Testing Services, Inc. to ISE Labs, Inc. F-26 ISE LABS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS The following unaudited pro forma combined statement of operations gives effect to the acquisition by ISE Labs, Inc. ("ISE" or "the Company") on September 11, 1997 of substantially all of the assets of Alphatec USA, Inc. ("Alphatec") including all of the shares of capital stock of Digital Testing Services, Inc. in a transaction accounted for as a purchase. The unaudited pro forma combined statement of operations is based on the individual statements of operations of ISE for the year ended October 31, 1997, appearing elsewhere in this prospectus, and Alphatec for the period from November 1, 1996 through September 10, 1997. Alphatec's operating results for the period from September 11, 1997 to October 31, 1997 are included in ISE's historical consolidated statement of operations for the year ended October 31, 1997. Adjustments have been made to such information to give effect to the September 11, 1997 acquisition of Alphatec, as if the acquisition had occurred on November 1, 1996. The following unaudited pro forma combined statement of operations are not necessarily indicative of the future results of operations of the Company or the results of operations which would have resulted had the Company and Alphatec been combined during the periods presented. In addition, the pro forma results are not intended to be a projection of future results. The unaudited pro forma combined statement of operations should be read in conjunction with the consolidated financial statements of ISE and subsidiaries and the financial statements of Alphatec, including the notes thereto, appearing elsewhere in this Prospectus. F-27 ISE LABS, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997 ------------------------------------------ ISE ALPHATEC PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS COMBINED (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues........................... $35,532 $ 39,070 $ -- $ 74,602 Cost of revenues................... 17,950 41,469 (270)(a) 59,149 ------- -------- ------ -------- Gross profit (loss)................ 17,582 (2,399) 270 15,453 ------- -------- ------ -------- Operating expenses: Research and development......... 1,097 608 -- 1,705 Selling, general and administrative.................. 7,229 6,540 544(b) 14,313 Impairment of plant and machinery....................... -- 9,348 -- 9,348 ------- -------- ------ -------- Total operating expenses........ 8,326 16,496 544 25,366 ------- -------- ------ -------- Income (loss) from operations...... 9,256 (18,895) (274) (9,913) Interest and other income (expense), net.................... 804 -- -- 804 Interest expense................... (741) (2,193) (730)(c) (3,664) ------- -------- ------ -------- Income (loss) before income taxes.. 9,319 (21,088) (1,004) (12,773) Provision for income taxes......... 3,579 -- (3,190)(d) 389 ------- -------- ------ -------- Net income (loss).................. $ 5,740 $(21,088) $2,186 $(13,162) ======= ======== ====== ======== Pro forma net loss per share ...... $ (0.75) ======== Number of shares used in pro forma per share computation............. 17,500 ========
See accompanying notes F-28 ISE LABS, INC. NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATION NOTE 1--BASIS OF PRESENTATION: The unaudited pro forma combined statement of operations has been prepared to reflect the acquisition of Alphatec by ISE, as if the acquisition had occurred on November 1, 1996. ISE acquired Alphatec effective September 11, 1997 and consequently, ISE's results of operations for the year ended October 31, 1997 include Alphatec's results of operations for the period from September 11, 1997 to October 31, 1997. Accordingly, in preparing the pro forma combined statement of operations, the Company combined its results of operations for the year ended October 31, 1997 with Alphatec's results of operations for the period from November 1, 1996 to September 10, 1997. NOTE 2--PRO FORMA ADJUSTMENTS: The purchase price was approximately $31.2 million, including acquisition costs. The purchase price was allocated, based on an independent appraisal of the property, plant and equipment, to the fair value of the assets acquired which included $28.6 million of tangible assets. The excess of the purchase price over the fair value of the net tangible assets acquired was allocated to goodwill and a covenant not to compete of approximately $1.6 million and $1.0 million, respectively. The following adjustments were applied to the historical statement of operations to arrive at the pro forma combined statement of operations: (a) Reflects the adjustments to depreciation of property, plant and equipment related to recording the Alphatec assets at fair market value. (b) Reflects the additional amortization expense of $544,000 related to intangible assets resulting from the acquisition of Alphatec over their estimated useful lives. (c) Reflects the additional interest expense relating to the incremental debt assumed to finance the acquisition. The debt assumed bears interest at prime rate plus applicable margin ranging from 0 to 0.75%. The effect on net income (loss) before income taxes of a 1/8% variance in interest rates would have been $12,000. (d) Reflects the elimination of ISE's domestic income tax expense based on the pro forma loss for the year. F-29 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CON- NECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REP- RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS
PAGE Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Consolidated Financial Data..................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 29 Management............................................................... 40 Certain Relationships and Related Transactions........................... 50 Principal and Selling Shareholders....................................... 51 Description of Capital Stock............................................. 52 Shares Eligible for Future Sale.......................................... 53 Underwriting............................................................. 55 Legal Matters............................................................ 56 Experts.................................................................. 56 Additional Information................................................... 57 Index to Consolidated Financial Statements............................... F-1
--------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF- FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, RESTRICTED SECURITIES WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO- SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,000,000 SHARES ISE LABS, INC. COMMON STOCK --------------- PROSPECTUS --------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Appendix Graphics Inside Front Cover ISE LABS, INC. ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent integrated circuit ("IC") testing and evaluation companies in the world. Unlike many of its competitors, the Company offers a broad range of IC testing, evaluation and other services throughout the entire semiconductor manufacturing process. The major steps involved in the production of semiconductors can be characterized as a circuit design development, wafer fabrication, wafer sort, packaging and final test. Throughout the semiconductor production process, ICs are subjected to a variety of analyses and comprehensive tests. Such continuous analysis and testing is critical to optimizing manufacturing process efficiencies and product yield. Once a circuit design has been successfully validated through such tests and analyses the prototype is released for production. The analysis and testing that occurs during the semiconductor production process may be broadly segmented into two stages: the Inventive Stage and the Production Stage. The Inventive Stage of IC analysis and testing occurs during the initial development of the IC and includes (i) software development; (ii) electrical verification; (iii) reliability analysis; and (iv) failure analysis. The Production Stage of IC analysis and testing occurs after a prototype IC has been released for manufacture. During this stage, all or a subset of the analysis and testing procedures performed on the prototype IC during the Inventive Stage are repeated throughout the volume production of the IC. In addition to these tests, semiconductor manufacturers may monitor production quality and reliability on an ongoing basis. In contrast to all of its major independent competitors, the Company's headquarters is located in the Silicon Valley. In addition to its significant United States presence, the Company has established substantial test capacity in Hong Kong and has more recently commenced testing operations in Singapore. The Company's proximity to a large number of the world's leading semiconductor companies, together with its broad service offerings, enables the Company to establish close working relationships with its customers' design engineers early in the IC development process. By establishing such early stage relationships with its customers, the Company believes it has a significant competitive advantage in competing for high volume future testing business. During the last twelve months, the Company has provided services to more than 250 customers worldwide. The Company's customers include a number of the world's leading vertically integrated and fabless semiconductor companies, distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus Logic, Hana Technologies, Hamilton Hallmark Technologies, Hewlett-Packard, LSI Logic, Motorola, National Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and Xilinx. Service Domain . Test Methodology / Test Program . Modify Design . Repair . Analyze . Inventive Stage . IC Design . Wafer Manufacturing [Picture of round wafer] . Wafer Sort . Back End . Package . Final Test . Production Stage . Monitor . Failure Analysis . Environmental Tests . High Reliability Screening [Picture of IC] [Flowchart depicting service domain, set on a backdrop picture of the Company's testing operations] Inside Front Cover [Picture of engineers working at the Company's testing facility] Inventive Stage . Design . Prototype . Test . Characterization and Failure Analysis . Test Program Development . Burn-in Production Stage . Wafer Manufacture . Wafer Sort (Test) . Packaging Monitoring . Final (Electrical) Test . Burn-in . Process Reliability Monitor . ESD . Latch-up . Assembly Reliability Monitor . Hast . 85/85 . Mechanical Shock . Gross and Fine Leak . Thermal Shock [Flowchart depicting Inventive Stage, Production Stage and Monitoring] [Picture of "FIB" tester] FIB [Picture of Packaging equipment] Packaging [Picture of engineers working at workstations] Software Development [Picture of Wafer Sort tested] Wafer Sort [Picture of Final Test equipment] Final Test [Picture of Burn-in tester] Burn-in [Picture of engineer standing in front of a HAST tester] HAST [Picture of engineer standing in front of an ESD tester] ESD [Picture of engineer working on a Failure Analysis work station] BEAM PAGE 30 Inventive Stage . Design . Prototype . Test . Characterization and Failure Analysis . Test Program Development . Burn-in Production Stage . Wafer Manufacture . Wafer Sort (Test) . Packaging Monitoring . Final (Electrical) Test . Burn-in . Process Reliability Monitor . ESD . Latch-up . Assembly Reliability Monitor . Hast . 85/85 . Mechanical Shock . Gross and Fine Leak . Thermal Shock [Flowchart depicting Inventive Stage, Production Stage and Monitoring] Inside Back Cover [Picture of World Map] . Hong Kong . Singapore [Map of Silicon Valley] . San Francisco . Manteca . Santa Clara . Silicon Valley . San Jose ISE Locations: ISE Labs, Inc. 2095 Ringwood Avenue San Jose, CA 95131 USA ISE Labs, Inc. / DTS 3600 Peterson Way Santa Clara, CA 95054 USA ISE Labs Assembly 400 Industrial Park Drive Manteca, CA 95337 ISE Labs Hong Kong Ltd. 22/D, Southeast Ind. Bldg. 611-619 Castle Peak Road Tsuen Wan, N7, Hong Kong ISE Labs Singapore Pte. Ltd. Blk. 1020 Tai Seng Avenue #7-3508/12 Singapore 534416 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an itemized statement of all estimated costs and expenses (all of which will be paid by the Registrant) in connection with the issuance and distribution of the securities being registered pursuant to this Registration Statement:
AMOUNT TO BE COMPANY PAID BY THE ------- ------------ Securities and Exchange Commission Registration Fee........ $28,000 NASD Filing Fee............................................ $10,000 Nasdaq/NNM Listing Fee..................................... $95,000 Legal Fees and Expenses.................................... * Blue Sky Qualification Fees and Expenses................... * Accounting Fees and Expenses............................... * Printing and Engraving Expenses............................ * Transfer Agent's and Registrar's Fees and Expenses......... * Nonaccountable Expense Allowance for Donaldson, Lufkin & Jenrette Securities Corporation........................... * Miscellaneous Fees......................................... * ------- Total.................................................. $ * =======
- --------------------- * To be completed by amendment ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The California General Corporation Law provides that directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as directors, including such conduct during a merger or tender offer, in certain circumstances. See Item 17 of this Registration Statement regarding the opinion of the Securities and Exchange Commission as to indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"). Such limitation does not affect liability for any breach of a director's duty to the Company or its shareholders (i) with respect to approval by the director of any transaction from which he derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that he believes to be contrary to the best interests of the Company, or its shareholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern of inattention that amounts to an abdication of his duty to the Company or its shareholders, or that show a reckless disregard for his duty to the Company or its shareholders in circumstances in which he was, or should have been aware, in the ordinary course of performing his duties, or a risk of serious injury to the Company or its shareholders or (iii) based on transactions between the Company and its directors or another corporation with interrelated directors or on improper distributions, loans, or guarantees under applicable sections of the California Corporations Code. Such limitations of liability also do not affect the availability of equitable remedies such as injunctive relief or rescission, although in certain circumstances equitable relief may not be available as a practical matter. The limitation may relieve the directors of monetary liability to the Company for grossly negligent conduct, including conduct in situations involving attempted takeovers of the Company. No claim or litigation is currently pending against the Company's directors that would be affected by the limitation of liability. Section 317 of the California Corporations Code authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Act. Article IX of the Second Amended and Restated Articles of Incorporation of the Registrant (Exhibit 3.1A) and Article VI, Section 4 of the Company's Bylaws (Exhibit 3.2) provide for indemnification of its directors and officers and other agents to the maximum extent permitted by the California Corporations Code. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and executive officers and other persons for certain liabilities, including liabilities arising under the Act. The Company also maintains insurance for the benefit of its directors and officers that insures such persons against certain II-1 liabilities, including liabilities under the securities laws. The Registrant has entered into an indemnification agreement (Exhibit 10.7) with each of its directors whereby the Company will reimburse its directors against certain liabilities, including liabilities arising under the securities laws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since November 1, 1994, the Company has issued options to purchase securities without registration under the Securities Act of 1933, as amended (the "Act") in the transactions and in reliance on the exemptions from registration described below. From October 20, 1997 through March 31, 1998, the Company issued options to purchase an aggregate of 2,658,800 shares of Common Stock pursuant to grants to certain employees, directors and service providers of the Company under the 1998 Stock Incentive Plan and other stock incentive plans of the Company. These issuances were made in reliance on Rule 701 promulgated under the Act due to the fact that they were offered and sold pursuant to a written compensatory plan. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement. 2.1 Business Sales Agreement, dated as of August 21, 1997, by and between the Registrant and Alphatec USA, Inc. (including Digital Testing Services, Inc.). 3.1 Form of Second Amended and Restated Articles of Incorporation of the Registrant. 3.2 Form of Amended and Restated Bylaws of Registrant. 4.1* Specimen Certificate of Common Stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Assignment and Assumption of Lease by and among RND Funding Company, Inc., Alphatec Electronics Company Limited (Public) and Digital Testing Services, Inc. dated as of September 12, 1997. 10.2 Lease Agreement between Kim Camp No. VII and Alphatec Electronics Company Limited for 3600 Peterson Way, Santa Clara, California, dated as of March 23, 1995. 10.3 Tenancy Agreement between Hing Seng Plastic Factory Limited and ISE Labs (HK) Limited, dated as of April 25, 1996. 10.4 Loan and Security Agreement, by and among Comerica Bank-California, as Lender, and the Registrant, ISE Technology Inc. and Digital Testing Services, Inc., as Borrowers, dated October 2, 1997. 10.4A Manteca Note in the principal amount of $5,400,000, dated October 2, 1997. 10.4B Equipment Acquisition Note in the principal amount of $14,600,000, dated October 2, 1997. 10.4C Revolving Promissory Note in the principal amount of $8,000,000, dated October 2, 1997. 10.4D Equipment Refinance Note in the principal amount of $4,650,000, dated October 2, 1997. 10.4E Amendment to Loan and Security Agreement, by and among Comerica Bank- California, as Lenders, and the Registrant, ISE Technology Inc. and Digital Testing Services, Inc., as Borrowers, dated April 1, 1998. 10.5 Employment and Noncompetition Agreement by and between the Registrant and Dr. Sassan Raissi. 10.6 Employment and Noncompetition Agreement by and between the Registrant and Ray G. Grammer. 10.7 Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors.
II-2
NUMBER DESCRIPTION ------ ----------- 10.8 Finance/Capital Lease Line of Credit Agreement by and among Comerica Leasing Corporation, as Lessor, and the Registrant, and Digital Testing Services Inc., as Co-Lessees, dated March 30, 1998. 10.9 1998 Stock Incentive Plan. 10.10 1998 Employee Stock Purchase Plan. 10.11 Promissory Note in the principal amount of $2,520,000 dated August 22, 1994. 11.1 Statement of Computation of Net Income Per Share. 21.1 List of Subsidiaries of the Registrant. 23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of counsel filed as Exhibit 5.1 hereto). 23.2 Consent of Price Waterhouse, Independent Accountants relating to the consolidated financial statements of ISE Labs, Inc. 23.3 Consent of Price Waterhouse, Independent Accountants relating to the consolidated financial statements of Alphatec USA, Inc. 24.1 Power of Attorney (included on page II-4 of this Registration Statement). 27.1 Financial Data Schedule.
- --------------------- *To be filed by amendment. (b) Financial Statement Schedules: Schedules other than those listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING OF FORM S-1 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN SAN JOSE, CALIFORNIA ON THIS 8TH DAY OF APRIL, 1998. ISE Labs, Inc. By: /s/ Saeed A. Malik -------------------------------- SAEED A. MALIK President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Saeed A. Malik and Ray G. Grammer and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments and any related registration statement pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys- in-fact, or his substitutes, may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED: SIGNATURE TITLE DATE /s/ Saeed A. Malik President and Chief April 8, 1998 - ------------------------------------- Executive Officer, (SAEED A. MALIK) Director (Principal Executive Officer) /s/ Ray G. Grammer Chief Financial April 8, 1998 - ------------------------------------- Officer (Principal (RAY G. GRAMMER) Financial and Accounting Officer) /s/ Laurence F. Jorstad Director April 8, 1998 - ------------------------------------- (LAURENCE F. JORSTAD) /s/ Alex M. Barrios Director April 8, 1998 - ------------------------------------- (ALEX M. BARRIOS) /s/ Muneer A. Malik Director April 8, 1998 - ------------------------------------- (MUNEER A. MALIK) /s/ Terry N. Holdt Director April 8, 1998 - ------------------------------------- (TERRY N. HOLDT) II-4 EXHIBIT INDEX
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement. 2.1 Business Sales Agreement, dated as of August 21, 1997, by and between the Registrant and Alphatec USA, Inc. (including Digital Testing Services, Inc.). 3.1 Form of Second Amended and Restated Articles of Incorporation of the Registrant. 3.2 Form of Amended and Restated Bylaws of Registrant. 4.1* Specimen Certificate of Common Stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP. 10.1 Assignment and Assumption of Lease by and among RND Funding Company, Inc., Alphatec Electronics Company Limited (Public) and Digital Testing Services, Inc. dated as of September 12, 1997. 10.2 Lease Agreement between Kim Camp No. VII and Alphatec Electronics Company Limited for 3600 Peterson Way, Santa Clara, California, dated as of March 23, 1995. 10.3 Tenancy Agreement between Hing Seng Plastic Factory Limited and ISE Labs (HK) Limited, dated as of April 25, 1996. 10.4 Loan and Security Agreement, by and among Comerica Bank-California, as Lender, and the Registrant, ISE Technology Inc. and Digital Testing Services, Inc., as Borrowers, dated October 2, 1997. 10.4A Manteca Note in the principal amount of $5,400,000, dated October 2, 1997. 10.4B Equipment Acquisition Note in the principal amount of $14,600,000, dated October 2, 1997. 10.4C Revolving Promissory Note in the principal amount of $8,000,000, dated October 2, 1997. 10.4D Equipment Refinance Note in the principal amount of $4,650,000, dated October 2, 1997. 10.4E Amendment to Loan and Security Agreement, by and among Comerica Bank- California, as Lender, and the Registrant, ISE Technology Inc. and Digital Testing Services, Inc., as Borrowers, dated April 1, 1998. 10.5 Employment and Noncompetition Agreement by and between the Registrant and Dr. Sassan Raissi. 10.6 Employment and Noncompetition Agreement by and between the Registrant and Ray G. Grammer. 10.7 Form of Indemnification Agreement entered into between the Registrant and each of its officers and directors. 10.8 Finance/Capital Lease Line of Credit Agreement by and among Comerica Leasing Corporation, as Lessor, and the Registrant, and Digital Testing Services Inc., as Co-Lessees, dated March 30, 1998. 10.9 1998 Stock Incentive Plan. 10.10 1998 Employee Stock Purchase Plan. 10.11 Promissory Note in the principal amount of $2,520,000 dated August 22, 1994. 11.1 Statement of Computation of Net Income Per Share. 21.1 List of Subsidiaries of the Registrant. 23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of counsel filed as Exhibit 5.1 hereto). 23.2 Consent of Price Waterhouse, Independent Accountants relating to the consolidated financial statements of ISE Labs, Inc. 23.3 Consent of Price Waterhouse, Independent Accountants relating to the consolidated financial statements of Alphatec USA, Inc. 24.1 Power of Attorney (included on page II-4 of this Registration Statement). 27.1 Financial Data Schedule.
- --------------------- *To be filed by amendment. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 WSGR DRAFT -- 4/8/98 -------------------- 6,000,000 Shares ISE LABS, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- ____________, 1998 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN INCORPORATED As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: ISE LABS, INC., a California corporation (the "COMPANY"), proposes to issue and sell to the several underwriters named in Schedule I hereto (the "UNDERWRITERS"), and the shareholders of the Company named in Schedule II hereto (the "SELLING SHAREHOLDERS") severally propose to sell to the several Underwriters, an aggregate of 6,000,000 shares of the common stock, par value $0.001 per share of the Company (the "FIRM SHARES"), of which 5,000,000 shares are to be issued and sold by the Company and 1,000,000 shares are to be sold by the Selling Shareholders, each Selling Shareholder selling the amount set forth opposite such Selling Shareholder's name in Schedule II hereto. The Company also proposes to issue and sell to the several Underwriters not more than an additional 900,000 shares of its common stock, par value $0.001 per share (the "ADDITIONAL SHARES") if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "SHARES". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". The Company and the Selling Shareholders are hereinafter sometimes referred to collectively as the "SELLERS." SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "COMMISSION") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "ACT"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS". If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Company agrees to issue and sell 5,000,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from each Seller at a price per Share of [$________] (the "PURCHASE PRICE") the number of Firm Shares that bears the same proportion to the total number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth opposite the name of such Underwriter in Schedules I hereto bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 900,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than five business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Commission) or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"); provided however, that notwithstanding the foregoing, during such period (a) the Company may grant stock options or issue shares of Common Stock to service providers as permitted by the terms of the Company's existing stock option plan or stock purchase plans; (b) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof; (c) if the Seller is an individual, he or she may transfer any of his or her shares either during his or her lifetime or on death by gift, will or intestacy to his -2- or her immediate family or to a trust the beneficiary of which is exclusively such individual and/or members of his or her immediate family; (d) if the Seller is a partnership, the partnership may transfer any of its shares to a partner of such partnership as of the date such partner executed a lock-up agreement in connection herewith, or a retired partner of such partnership who retires after the date hereof, to the estate of any such partner or retired partner, and any partner who is an individual may transfer any of his or her shares by gift, will or intestacy to his or her immediate family or to a trust the beneficiary of which is exclusively such partner and/or members of his or her immediate family; and (e) if the Seller is a trust, the trust may transfer any of its shares to any beneficiary of such trust as of the date such Seller executed a lock-up agreement in connection herewith or to the estate of any such beneficiary, and any beneficiary who is an individual may transfer any such shares by gift, will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the beneficiary and/or members of his or her immediate family; provided, that, in any case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Seller's shares subject to the provisions hereof and subject to a lock-up agreement in connection herewith, and there shall be no further transfer of the Seller's shares except in accordance with the provisions hereof and thereof. For the purposes of the foregoing, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor. Other than the filing of a registration statement on Form S-8 with the Commission, the Company also agrees not to file any registration statement with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 30 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition, each Selling Shareholder agrees that, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by (i) each Selling Shareholder, (ii) each of the directors and officers of the Company who is not a Selling Shareholder and (iii) each shareholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the effective date of the Prospectus and ending 180 days after the effective date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Corporation, and other than the filing of a registration statement on Form S-8 with the Commission, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. SECTION 3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. SECTION 4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on __________ , 1998 (the "CLOSING DATE") at the offices of Brobeck, Phleger & Harrison, LLP, 2200 Geng Road, Two Embarcadero Place, Palo Alto, California 94303, or such other place as you shall designate. The Closing Date and the location of delivery of and payment for the Firm Shares may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as you shall designate at 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 (an "OPTION CLOSING DATE"). Any such Option Closing Date and the location of delivery of and payment for such Additional Shares may be varied by agreement between you and the Company. -3- The Company authorizes DLJ to register the Shares in the name of Cede & Co., a nominee of the Depositary Trust Company ("DTC") or such other name as DLJ shall determine prior to the Closing Date or an Option Closing Date, as the case may be. On the Closing Date or the applicable Option Closing Date, as the case may be, with any transfer tax thereon duly paid by the Sellers against payment to the Sellers by the several Underwriters of the Purchase Price for the Shares in same day funds, the Company will cause DTC to credit the Shares to the account of Donaldson, Lufkin & Jenrette Securities Corporation at DTC for the benefit of the several Underwriters. The Shares shall be made available to DLJ for inspection not later than 9:30 a.m., New York City time, on the business day immediately preceding the Closing Date. SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you three (3) signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. -4- (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company and its subsidiaries shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To make generally available to its shareholders as soon as practicable an earnings statement covering the twelve-month period ending April 30, 1999 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request in writing. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the Sellers' obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and any Selling Shareholder's counsel (in addition to the Company's counsel) in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and reasonable fees and disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel (but not counsel's fees) for the Underwriters in connection with the review and clearance of the offering of the Shares by the National -5- Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depositary, (ix) a nonaccountable expense allowance in the amount of $750,000 payable to DLJ upon the Closing Date, the payment of which will not require DLJ to provide any accounting therefor and (x) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders hereunder for which provision is not otherwise made in this Section. The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholders may otherwise have for allocation of such expenses among themselves. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to use its best efforts to maintain the listing of the Shares on the Nasdaq National Market for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Act and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the -6- Registration Statement, the Prospectus or any amendments or supplements thereto based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus or any amendments thereto based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 of the Registration Statement. Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (e) No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which is required by the Act to be described in the Registration Statement or the Prospectus which is not so described. (f) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company or any of its subsidiaries relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company or any of its subsidiaries, except as otherwise disclosed in the Registration Statement or option offers pursuant to outstanding employment offers. (g) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights except as otherwise disclosed in the Registration Statement; and the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (h) All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature except as otherwise disclosed in the Registration Statement. (i) The authorized, issued and outstanding capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. -7- (j) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, except in each case where failure to be so in compliance would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (k) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby and by the Prospectus will not (i) require any material consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states, the Exchange Act or the rules and regulations promulgated by the National Association of Securities Dealers, Inc.), (ii) materially conflict with or constitute a material breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (iii) materially violate or materially conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (iv) result in the suspension, termination or revocation of any material Authorization (as defined below) of the Company or any of its subsidiaries or any other impairment of the rights of the holder of any such material Authorization. (l) To the Company's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (m) To the Company's knowledge, neither the Company nor any of its subsidiaries has violated any federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. (n) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "AUTHORIZATION") of, and has made all material filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. Each such Authorization is valid and in full force and effect in all material respects and each of the Company and its subsidiaries is in compliance in all material respects with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having -8- jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization, except where such failure to be valid and in full force and effect or to be in compliance or the occurrence of any such event would not, singly or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (o) There are no material costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (p) To the Company's knowledge, there is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or threatened against the Company or any of its subsidiaries before the National Labor Relations Board or any state or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending or threatened against the Company or any of its subsidiaries or (iii) union representation question existing with respect to the employees of the Company and its subsidiaries, except for such actions specified in clause (i) , (ii) or (iii) above, which, singly or in the aggregate, would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. To the Company's knowledge, no collective bargaining organizing activities are taking place with respect to the Company or any of its subsidiaries. (q) This Agreement has been duly authorized, executed and delivered by the Company. (r) Price Waterhouse LLP are independent public accountants with respect to the Company and its subsidiaries as required by the Act. (s) The execution and delivery of the Business Sales Agreement dated as of August 21, 1997 (the "SALES AGREEMENT") between Alphatec USA, Inc. ("ALPHATEC") and the Company, effecting the acquisition of certain of the assets of Alphatec, including 100% of the stock of Digital Testing Services, Inc. ("DTS") and selected assets of Alphatec in Manteca, California, was duly authorized by all necessary corporate action on the part of the Company, and all governmental and third party consents or approvals necessary to effect the transactions contemplated by sale of the assets have been waived, indemnified against or obtained, except where failure to so obtain such consents or approvals would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. The Company had as of the date of the Sales Agreement all corporate power and authority to execute and deliver the Sales Agreement and to consummate the sale of the assets contemplated by the Sales Agreement, and the Sales Agreement at the time of execution constituted a valid and binding obligation of the Company, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. (t) The audited financial statements of each of the Company and Alphatec individually, and any financial statements presenting such entities on a combined basis, included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the financial position, results of operations and changes in financial position of the Company and Alphatec on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes and the unaudited financial information of the Company filed as part of the -9- Registration Statement and the prospectus (and any amendment or supplement thereto) have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and Alphatec, as applicable. (u) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (w) Any and all contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement have been satisfied or validly waived. (x) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change in the condition, financial or otherwise, or the business or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any liability or obligation, except liabilities and obligations incurred by the Company in the ordinary course of business. (y) The Company and its subsidiaries own or possess, or, to the Company's knowledge, can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by them in connection with the business now operated by them except where the failure to own or possess or otherwise be able to acquire such Intellectual Property would not, singly or in the aggregate, have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; and neither the Company nor any of its subsidiaries has received any written notice of infringement of or conflict with asserted rights of others with respect to any of such Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. -10- (z) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith or for which adequate reserves have been provided. (aa) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; and neither the Company nor any of its subsidiaries (i) has received written notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance or (ii) has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not have a material adverse effect on the business, financial conditions or results of operations of the Company and its subsidiaries, taken as a whole. (bb) The Company has good and marketable title to all the physical properties and assets reflected as owned in the financial statements hereinabove described (or elsewhere in the Prospectus), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements or elsewhere in the Registration Statement, or (ii) those which are not material in amount and do not materially adversely affect the use made and proposed to be made of such property by the Company. The Company holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company and its subsidiaries, taken as a whole, and except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. Except as disclosed in the Registration Statement, the Company owns or leases all such properties as are necessary to its operations as now conducted. (cc) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters in accordance herewith shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each Selling Shareholder represents and warrants as to itself only to each Underwriter that: (a) such Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has, and on the Closing Date will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever, other than pursuant to this Agreement and the Registration Statement. (b) To such Selling Shareholders knowledge, the Shares to be sold by such Selling Shareholder have been duly authorized and are validly issued, fully paid and non-assessable. (c) Such Selling Shareholder has, and on the Closing Date will have, the legal right, power and authority, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement signed by such Selling Shareholder and Boston Equiserve LLP, as Custodian, relating to the deposit of the Shares to be sold by -11- such Selling Shareholder (the "CUSTODY AGREEMENT") and the Power of Attorney of such Selling Shareholder appointing certain individuals as such Selling Shareholder's attorneys-in-fact (the "ATTORNEYS") to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder in the manner provided herein and therein. (d) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder. (e) The Custody Agreement of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. (f) The Power of Attorney of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. Pursuant to such Power of Attorney, such Selling Shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such Selling Shareholder's behalf this Agreement and any other document that they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement. (g) Upon delivery of and payment for the Shares to be sold by such Selling Shareholder pursuant to this Agreement, valid and marketable title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (h) The execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney of such Selling Shareholder by or on behalf of such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any material consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states, the Exchange Act or the rules and regulations promulgated by the National Association of Securities Dealers, Inc.), (ii) materially conflict with any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or any property of such Selling Shareholder is bound or (iii) to such Selling Shareholder's knowledge, violate or conflict with any applicable material law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over such Selling Shareholder or any property of such Selling Shareholder. (i) Such Selling Shareholder has reviewed the information contained in the Registration Statement and, based on such review and such Selling Shareholder's knowledge of the industry, the Company and its -12- business (but without further investigation), nothing has come to such Selling Shareholder's attention that would lead such Selling Shareholder to believe that, at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Additional Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained or will contain any untrue stattement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, and any amendments or supplements thereto effective on or prior to the Closing Date or any Option Closing Date, contained or will contain any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (j) At any time during the period described in Section 5(d), if there is any change in the information referred to in Section 7(i), such Selling Shareholder will immediately notify you of such change. (k) Each certificate signed by or on behalf of such Selling Shareholder and delivered to the Underwriters or counsel for the Underwriters in accordance herewith shall be deemed to be a representation and warranty by such Selling Shareholder to the Underwriters as to the matters covered thereby. (l) Such Selling Shareholder has reviewed the representations and warranties of the Company contained in this Agreement. Based on the foregoing, such Selling Shareholder has no reason to actually believe and does not actually believe that such representations and warranties (other than those set forth in Sections 6(b) and (c), as to which no representation or warranty is being made by any Selling Shareholder) of the Company contained in Section 6 of this Agreement are not true and correct in all material respects. SECTION 8. INDEMNIFICATION. (a) The Sellers, jointly and severally, agree to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto effective on or prior to the Closing Date or any Option Closing Date), the Prospectus (or any amendment or supplement thereto effective on or prior to the Closing Date or any Option Closing Date) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter directly or through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus (as then amended or -13- supplemented, provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages and liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in such Prospectus and the delivery of such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Shareholder and each person, if any, who controls such Selling Shareholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Sellers to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter directly or through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as soon as possible (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for (i) the fees and expenses of more than one separate firm of attorneys (in addition to any local -14- counsel) for all Underwriters, if any, who control any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and all persons, if any, who control the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section, and all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of any Underwriters, such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such separate firm for the Company and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such control persons of any Selling Shareholders, such firm shall be designated in writing by the Attorneys. The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action effected with its written consent. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 8 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Sellers on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Sellers on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand shall be deemed to be, to the extent the amount to be indemnified is less than or equal to the total net proceeds from the offering, in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions and the nonaccountable expense allowance (referred to in Section 5(i)(ix) hereof), but before deducting expenses) received by the Sellers, and the total underwriting discounts and commissions and the nonaccountable expense allowance (referred to in Section 5(i)(ix) hereof) received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. -15- The Sellers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) Notwithstanding anything in this Agreement to the contrary, no claim for indemnification shall be made against any Selling Shareholder pursuant to this Agreement until a claim shall first have been made against the Company by an Underwriter and either (i) the Company shall have refused to pay any material portion of the amount claimed or (ii) two (2) years shall have elapsed from the date of such claim against the Company. (g) Notwithstanding anything in this Agreement to the contrary, the liability of each Selling Shareholder under the representations, warranties, covenants and agreements contained herein and under the indemnity agreements contained in the provisions of this Agreement shall be limited to an amount equal to the net proceeds received by such Selling Shareholder upon the sale of the Firm Shares by such Selling Shareholder to the Underwriters. SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or threatened by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by Saeed A. Malik and Ray Grammer, in their respective capacities as the Chief Executive Officer and Chief Financial Officer of the Company, confirming the matters set forth in Sections 6(x), 9(a) and 9(b) and that the -16- Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change in the financial condition, business, or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) All the representations and warranties of each Selling Shareholder contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same force and effect as if made on and as of the Closing Date and you shall have received on the Closing Date a certificate dated the Closing Date from each Selling Shareholder to such effect and to the effect that such Selling Shareholder has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by such Selling Shareholder on or prior to the Closing Date. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Brobeck, Phleger & Harrison, LLP, counsel for the Company and the Selling Shareholders, to the effect that: (i) each of the Company and DTS has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of California and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) to such counsel's knowledge, each of the Company and DTS is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; (iii) all the outstanding shares of capital stock of the Company outstanding prior to the issuance of the Shares (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and, to such counsel's knowledge, not subject to any preemptive or similar rights; (iv) the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares and, to such counsel's knowledge, will not be subject to any preemptive or similar rights; (v) all of the outstanding shares of capital stock of DTS have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature, except as set forth in the Registration Statement; -17- (vi) this Agreement has been duly authorized, executed and delivered by the Company and by or on behalf of each Selling Shareholder; (vii) the authorized, issued and outstanding capital stock of the Company is as set forth under the heading "Actual" under the caption "Capitalization" in the Prospectus; (viii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to such counsel's knowledge after due inquiry, pending before or threatened in writing by the Commission; (ix) the statements under the captions "Risk Factors-Shares Eligible for Future Sale," "Management-Compensation Plans," "Shares Eligible for Future Sale," "Description of Capital Stock" and "Underwriting" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (x) the execution, delivery and performance of this Agreement by the Company do not (A) require any material consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency applicable to the Company, (B) conflict with or constitute a breach of any of the material terms or provisions of, or a default under, any material provision of the charter or by-laws of the Company or any material provision of any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company is a party or by which the Company or its property is bound as set forth on the list of Exhibits set forth in the Registration Statement or (C) violate or conflict with any material provision of applicable California or federal securities law or any rule, regulation (except such as will have been obtained under the Securities Act and the Exchange Act and such as may be required under the securities or Blue Sky laws of the various states, as for which such counsel need not express any opinion), judgment, order or decree known to such counsel of any court or any governmental body or agency having jurisdiction over the Company; (xi) such counsel has no knowledge of any legal or governmental proceedings pending or threatened to which the Company is a party that is required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xii) to such counsel's knowledge, any and all contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement have been satisfied or validly waived; (xiii) to such counsel's knowledge, based on a Certificate provided by such Selling Shareholder and relied upon by such counsel, each Selling Shareholder has the right, power and authority, and the authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney of such Selling Shareholder and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder in the manner provided herein and therein; -18- (xiv) to such counsel's knowledge, based on a Certificate provided by such Selling Shareholder and relied upon by such counsel, the Custody Agreement of each Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms; (xv) to such counsel's knowledge, based on a Certificate provided by such Selling Shareholder and relied upon by such counsel, the Power of Attorney of each Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder, enforceable in accordance with its terms and, pursuant to such Power of Attorney, such Selling Shareholder has, among other things, authorized the Attorneys, or either one of them, to execute and deliver on such Selling Shareholder's behalf this Agreement and any other document they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement; (xvi) to such counsel's knowledge, based on a Certificate provided by such Selling Shareholder and relied upon by such counsel, upon delivery of and payment for the Shares to be sold by each Selling Shareholder pursuant to this Agreement, each of the Underwriters will receive valid and marketable title to the Shares purchased by it from such Selling Shareholder, free of any adverse claim, assuming the Underwriters purchase such Shares for value, in good faith and without notice of any adverse claim, as such terms are defined in the Uniform Commercial Code in effect in the State of New York. (xvii) the execution, delivery and performance of this Agreement, the Custody Agreement and Power of Attorney of each Selling Shareholder by such Selling Shareholder and the consummation of the transactions contemplated hereby and thereby will not (A) to such counsel's knowledge require any material consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency, (B) to such counsel's knowledge, conflict with or constitute a breach of any material provision of, or a default under, any material provision of any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Shareholder is a party or by which any property of such Selling Shareholder is bound or (C) violate or conflict with any applicable material law or, to such counsel's knowledge, any rule, regulation (except such as may be required under the securities or Blue Sky laws of the various states, as for which such counsel need not express any opinion), judgment, order or decree of any court or any governmental body or agency having jurisdiction over such Selling Shareholder. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Additional Shares are to be purchased, the Registration Statement and any amendment or supplement thereto filed on or prior to the Closing Date (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the -19- Additional Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto filed on or prior to the Closing Date (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (collectively, a "NEGATIVE ASSURANCES REPRESENTATION"). The opinion of Brobeck, Phleger & Harrison, LLP described in Section 9(f) above shall be rendered to you at the request of the Company and the Selling Shareholders and shall so state therein. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, as to the matters referred to in Sections 9(f)(iv), 9(f)(vi) (but only with respect to the Company), 9(f)(ix) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting"), and including a Negative Assurances Representation substantially similar to that set forth in this Section 9. In giving such opinions with respect to the matters covered by Section 9(f)(xix), counsel for the Company and the Selling Shareholders and counsel for the Underwriters may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (h) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you and to Price Waterhouse LLP, independent accountants, from Price Waterhouse LLP, independent accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) The Company shall have delivered to you the agreements specified in Section 2 hereof, which agreements shall be in full force and effect on the Closing Date. (j) The Shares shall have been approved and duly listed for quotation on the Nasdaq National Market. (k) The Company and the Selling Shareholders shall not have failed on or prior to the Closing Date to perform or comply with any of the material agreements herein contained and required to be performed or complied with by the Company or the Selling Shareholders, as the case may be, on or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Sellers if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United -20- States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non- defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided, that, in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you, the Company and the Selling Shareholders for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders, except to the extent provided in Section 8 hereof. In any such case which does not result in termination of this Agreement, either you or the Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non- defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 11. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder agrees with you and the Company to pay or to cause to be paid all transfer taxes payable in connection with the transfer of the Shares to be sold by such Selling Shareholder to the Underwriters. -21- SECTION 12. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company or the Selling Shareholders, to ISE Labs, Inc., 2095 Ringwood Avenue, San Jose, California 95131, Attn: Saeed Malik, with a copy to: Brobeck, Phleger & Harrison, LLP, 2200 Geng Road, Two Embarcadero Place, Palo Alto, California 94303, Attn: Warren T. Lazarow, Esq.; and (ii) if to any Underwriter or to you, to you, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, with a copy to Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304, Attn: Jeffrey A. Herbst, Esq., or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Selling Shareholders and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Company, the officers or directors of the Company, any person controlling the Company, any Selling Shareholder or any person controlling such Selling Shareholder and (ii) acceptance of the Shares and payment for them hereunder. If for any reason the Shares are not delivered by or on behalf of any Seller as provided herein (other than as a result of any termination of this Agreement pursuant to Section 10), the Company shall reimburse the several Underwriters for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Selling Shareholders, the Underwriters, the Underwriters', any controlling persons referred to herein, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. -22- Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, ISE LABS, INC. By:____________________________________ Title:_________________________________ THE SELLING SHAREHOLDERS NAMED IN SCHEDULE II HERETO, ACTING SEVERALLY By:____________________________________ Attorney-in-fact DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN INCORPORATED Acting severally on behalf of themselves and the several other Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By:__________________________________ -23- SCHEDULE I ---------- Underwriters Number of Firm Shares to be Purchased Donaldson, Lufkin & Jenrette Securities Corporation BT Alex. Brown Incorporated --------- Total 6,000,000 -24- SCHEDULE II ----------- Selling Shareholders --------------------
Name Number of Firm Shares Being Sold Saeed A. Malik....................... 271,600 Laurence F. Jorstad.................. 271,600 Alex M. Barrios...................... 271,600 Zafar Malik.......................... 90,100 Patrick Yu........................... 90,100 Dharam Ahuja......................... 5,000 --------- Total................................ 1,000,000
-25- Annex I Saeed A. Malik Laurence F. Jorstad Alex M. Barrios Zafar Malik Patrick Yu Dharam Ahuja -26- EX-2.1 3 BUSINESS SALES AGREEMENT Exhibit 2.1 BUSINESS SALES AGREEMENT ------------------------ August 21, 1997 This BUSINESS SALE AGREEMENT (hereafter, this "Agreement") is made as of the 21st day of August, 1997, by and between Alphatec USA, Inc., a California corporation (including, unless otherwise specifically noted or unless the context otherwise requires, Digital Testing Services, Inc., collectively "SELLER"); and ISE Labs, Inc., a California corporation ("BUYER"). W I T N E S S E T H: WHEREAS, SELLER conducts the Contract Assembly Business (as such term is defined below) at the Facility (as such term is defined below), and the Integrated Circuit Test Business (as such term is defined below) at the Leased Premises (as such term is defined below) through its wholly owned subsidiary Digital Testing Services, Inc. ("DTS"); and WHEREAS, BUYER desires to acquire the Contract Assembly Business and the Integrated Circuit Test Business from SELLER, upon the terms specifically provided herein and in the exhibits attached hereto. NOW, THEREFORE, in consideration of the representations, warranties, agreements and covenants hereinafter set forth and other good and valuable consideration, the receipt of which is hereby acknowledged and agreed, the parties agree as follows: ARTICLE 1 DEFINITIONS ----------- 1.1 Definitions. For purposes of this Agreement, the following terms shall ----------- have the following meanings: 1.1.1 "Business" shall mean the "Integrated Circuit Test Business" and the "Contract Assembly Business." 1.1.2 "Integrated Circuit Test Business" shall mean the business of providing testing services performed by DTS. 1.1.3 "Facility" shall mean Alphatec USA, Inc.'s facility in Manteca, California including the Land (as such term is defined in Section 2.2.3 hereof). 1.1.4 "Contract Assembly Business" shall mean the business of contract assembly of electronic devices into electronic packages. 1.1.5 "Leased Premises" shall mean the building located at 3600 Peterson Way, Santa Clara, CA 95054. 1.1.6 "Closing Date" shall be September 15, 1997 or when all conditions to Closing specified in Article 6 are satisfied or waived. 1.1.7 "Inventory" shall mean the piece parts and materials, spare parts, office supplies, and other items used in the Contract Assembly Business and listed, and items of a character similar to those listed, on Schedule 1.1.7 and owned by SELLER on the Closing Date. ARTICLE 2 PURCHASE AND SALE ----------------- 2.1 Business Purchases. On the Closing Date, BUYER shall purchase from SELLER, ------------------ and SELLER shall sell, transfer, assign and convey to BUYER: 2.1.1 the Contract Assembly Business, such purchase and sale to include the transfer to BUYER of the Purchased Assets (as such term is defined in Section 2.2 hereof) and the assumption by BUYER of the Assumed Liabilities (as such term is defined in Section 2.4 hereof), and 2.1.2 all of the outstanding securities of DTS. 2.2 Purchased Assets. The purchase of the Assembly Business shall include the ---------------- transfer to BUYER of the following assets: 2.2.1 Inventory: all the Inventory located at the Facility; --------- 2.2.2 Equipment: the machinery and equipment of the Contract Assembly --------- Business as of the Closing Date and listed on Schedule 2.2.2 (the "Assembly Equipment"); 2.2.3 Land: the real property owned by SELLER more particularly described ---- in Schedule 2.2.3 hereof (the "Land"), together with all buildings and other real property improvements situated on the Land; 2 2.2.4 Know-How: the trade secrets, tradenames, know-how and other -------- intellectual property and proprietary information of SELLER related to the Contract Assembly Business; 2.2.5 any and all cash and bank accounts of SELLER and its subsidiary and affiliated companies; 2.2.6 accounts and notes receivable (other than intercompany receivables) (for purposes of this Subsection 2.2.6, accounts and notes receivable shall mean those receivables applicable to services performed and/or product shipped by SELLER including DTS at any time prior to 12:01 a.m. on the Closing Date, and are referred to herein as the "Receivables"); 2.2.7 except for the suppliers contracts referred to in Section 2.3.3, all claims and rights under all agreements, contracts, licenses, leases, franchises, instruments, documents, purchase and sale orders and other executory commitments, and all permits, consents, and certificates of any regulatory, administrative or other governmental agency or body; 2.2.8 all rights under express or implied warranties from suppliers of SELLER; 2.2.9 all leasehold interests of SELLER listed on Schedule 2.2.9 hereto; 2.2.10 all other assets of the Business not specifically referred to in this Section 2.2, other than the Excluded Assets; and 2.2.11 all THREE HUNDRED FIFTY THOUSAND shares of the issued and outstanding shares of Common Stock of DTS. (collectively the "Purchased Assets"; provided, however, that the Purchased Assets shall not include the Excluded Assets as such term is defined in Section 2.3 hereof). BUYER shall take delivery and possession of the Purchased Assets upon the Closing Date. 2.3 Excluded Assets. Notwithstanding any other provision of this Agreement, --------------- SELLER shall not transfer to Buyer any of the following: 2.3.1 any and all intercompany accounts receivables and payables of SELLER and its subsidiary and affiliated companies; 2.3.2 all insurance policies of SELLER pertaining to the Purchased Assets and all rights of SELLER of every nature and description under or arising out of such insurance policies; 3 2.3.3 all losses, carryovers and rights to receive refunds from suppliers or with respect to any and all taxes of SELLER including DTS of every nature and description, including interest payable with respect thereto; 2.3.4 the books and records of account and all supporting vouchers, invoices and other records, and records and materials relating to any or all taxes of SELLER including DTS (provided that, following the Closing, SELLER shall grant BUYER access thereto during business hours on reasonable notice). If an asset of the Contract Assembly Business is not specifically listed as an Excluded Asset under Section 2.3 of this Agreement, it shall be deemed a Purchased Asset and shall be conveyed to Buyer pursuant to this Agreement. 2.4 Obligations. ----------- 2.4.1 Assumed Liabilities. ------------------- 2.4.1.1 Definition. The Buyer covenants and agrees that it shall ---------- only assume those liabilities of Alphatec USA, Inc. (excluding DTS) that are specifically listed on Schedule 2.4.1.1 (the "Assumed Liabilities"). Alphatec USA, Inc. (excluding DTS) covenants to and agrees with BUYER that all other liabilities and obligations of Alphatec USA, Inc. (excluding DTS) shall remain the sole obligation of Alphatec USA, Inc. and BUYER shall not be responsible for any other liabilities and obligations of Alphatec USA, Inc. (excluding DTS) or any of its parents or other affiliates. 2.4.1.2 Unfilled Orders. Any orders for assembly or testing by --------------- SELLER received or communicated in the ordinary course of business that had not been completed or shipped prior to 12:01 a.m. of the Closing Date, as listed on Schedule 2.4.1.2, shall be transferred to BUYER at the Closing and BUYER shall be responsible for filling such orders and shall be entitled to the revenues generated therefrom (including advance payments). 2.4.1.3 Assignment and Assumption Agreement. On the Closing Date, ----------------------------------- SELLER and BUYER shall execute an assignment and assumption agreement, substantially in the form of Exhibit 2.4.1.3 attached hereto (the "Assignment and Assumption Agreement"), as evidence to third parties of SELLER's assignment and transfer to BUYER of all of SELLER's right, title and interest to the Purchased Assets, and BUYER's assumption and agreement to thereafter fully and timely perform and discharge in accordance with their terms, the Assumed Liabilities. 2.4.2 Liabilities and Obligations. For the purposes of this Section 2.4, --------------------------- the term "liabilities and obligations" means all liabilities, obligations, indebtedness, 4 losses, damages, deficiencies, or responsibilities, fixed or unfixed, now existing or hereafter arising, known or unknown, secured or unsecured, accrued, absolute, contingent or otherwise, whether caused by any action or failure to act, whether arising out of contract or tort (including negligence) or from any other cause. 2.5 Bill of Sale. On the Closing Date, SELLER shall execute a bill of sale, ------------ substantially in the form of Exhibit 2.5 hereto, conveying the Purchased Assets to BUYER ("Bill of Sale"). 2.6 Land. On the Closing Date, SELLER shall execute a deed, substantially in ---- the form of Exhibit 2.6 attached hereto, conveying the Land to BUYER (the "Deed"). 2.7 Stock. On the Closing Date, SELLER shall deliver a stock certificate for ----- 350,000 shares of DTS Common Stock, duly endorsed to BUYER, representing all of the issued and outstanding shares of DTS. 2.8 Personnel; Employee Meetings. From and after the date hereof, ---------------------------- representatives of BUYER shall be entitled to hold an initial meeting with the employees of Seller upon reasonable notice to SELLER to explain and answer questions, policies and benefits of employment under BUYER. Thereafter, until the Closing, SELLER shall cooperate with BUYER in communicating to the employees any additional information concerning employment under BUYER that the employees may seek, or which BUYER may desire to provide, and during normal working hours shall allow such additional meetings by representatives of BUYER with employees as BUYER may request. SELLER shall be entitled to have one or more representatives attend all such meetings. ARTICLE 3 PURCHASE PRICE -------------- 3.1 Price. Subject to the terms of this Agreement, as consideration for the ----- Purchased Assets, BUYER shall pay SELLER THIRTY MILLION DOLLARS ($30,000,000) (the "Purchase Price"). 3.2 Allocation. The Purchase Price shall be allocated as mutually agreed upon ---------- by BUYER and SELLER as set forth in Exhibit 3.2 attached hereto. Following the date hereof, the parties may modify Exhibit 3.2 by mutual written agreement. BUYER and SELLER agree to prepare their respective federal, state, local and foreign tax returns in a manner consistent with such allocation and Section 9.12. 5 3.3 Method of Payment. The Purchase Price shall be paid in immediately ----------------- available funds on the Closing Date. 3.4 Taxes. BUYER shall pay all sales, use, transfer, registration, stamp, or ----- other similar taxes or duties (collectively "Transfer Taxes") arising out of or incurred in connection with the transfers of Purchased Assets pursuant to this Agreement. Notwithstanding the foregoing, BUYER shall have no liability to SELLER with respect to any income taxes or any other taxes measured by the affairs of SELLER or SELLER's affiliates. ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Of SELLER. SELLER (which includes DTS) hereby represents and warrants to --------- BUYER as follows and agrees with BUYER that the following representations and warranties shall be true and correct on the Closing Date: 4.1.1 SELLER Organization. SELLER has been duly incorporated, and is ------------------- validly existing as a corporation in good standing under the laws of the State of California and has the corporate power to carry on its business as now conducted and has full power and authority under such laws to execute, deliver and perform this Agreement. Alphatec USA, Inc. owns all of the shares of capital stock of DTS, free and clear of all liens. The SELLER does not have any subsidiaries, other than DTS. SELLER is not required to be qualified in any other jurisdiction and all of the assets of the Business are located in California. 4.1.2 Corporate Authority. SELLER has full power and authority to enter ------------------- into this Agreement and the related agreements, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby, including, without limitation, the execution and delivery of this Agreement, general conveyances, bills of sale, assignments, and other documents and instruments evidencing the conveyance of the Purchased Assets or delivered in accordance with this Agreement and agreements related hereto. No other proceedings on the part of SELLER or any affiliate are necessary to authorize this Agreement and the related agreements or to consummate the transactions contemplated hereby and thereby, except as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"). All corporate actions have been taken by SELLER and each affiliated party that are necessary for the due authorization, execution and delivery of this Agreement and the performance of the obligations of SELLER hereunder. This Agreement constitutes the legal, valid, and binding obligation of SELLER, enforceable against SELLER in accordance with its terms, subject 6 to any equitable principles limiting the right to obtain specific performance of certain obligations of SELLER hereunder. Except as provided in Schedule 4.1.2 hereto, the execution and delivery of this Agreement and such other agreements and instruments and the consummation of the transactions contemplated hereby and thereby do not and will not violate any law, regulation, rule, injunction or court order, or the provisions of SELLER's Articles of Incorporation or By-Laws, or of any note, indenture, mortgage, lease, license agreement or other agreement or instrument to which SELLER or any affiliated party is party or by which SELLER or any affiliated party is bound or of which SELLER or any affiliated party is maker, or result in the creation of any lien, charge or encumbrance upon the Purchased Assets or any asset of DTS to be sold hereunder. 4.1.3 Land. Alphatec USA, Inc. is the owner of the Land in fee simple, ---- except for (i) easements that are a matter of public record, (ii) liens for taxes not yet due and payable and listed on Schedule 4.1.3, and (iii) any items listed on Schedule 4.1.3 attached hereto. 4.1.4 Consents. Except as provided in Schedule 4.1.4, attached hereto, no -------- consent, approval, waiver, license, authorization or declaration of, or filing or registration with, any person, firm, corporation or other entity, including, without limitation, any lender, mortgagee, governmental authority, bureau or agency is required in connection with the execution, delivery and performance by SELLER of this Agreement or the consummation of the transactions contemplated hereby, except for HSR. 4.1.5 Litigation. Other than complaints and threats of litigation ---------- received from time to time from customers of SELLER, each of which is listed on Schedule 4.1.5, and as otherwise specifically provided in Schedule 4.1.5 hereto, to the best of the knowledge of the officers of SELLER, SELLER is not in violation of, or in default with respect to, any order, judgment or decree affecting the Business or the Purchased Assets that would materially impair the ability of BUYER to conduct the Business following the Closing Date, nor is it required to take remedial action in order to avoid such violation or default. There is no claim, investigation, litigation, action, suit, or proceeding, administrative or judicial, pending or threatened against SELLER or any officer or director of SELLER, or involving the Purchased Assets or assets of DTS, at law or in equity, before any federal, state, local, or foreign court, or regulatory agency, or other governmental authority, including, without limitation, any unfair labor practice or grievance proceedings or otherwise. SELLER has not received any complaints from any of its customers or suppliers within the last six months, which complaints could reasonably be expected individually or in the aggregate, to have a potential adverse effect on the Business, Purchased Assets, prospects, operations, employee relations, rights or condition of the SELLER. 7 4.1.6 Leases. Schedule 4.1.6 contains a complete and correct list of all ------ material leases under which SELLER is a party used in connection with the Business. For purposes of this Section 4.1.6 a "material" lease is a lease which provides for the payment of annual rent of $50,000 or more. SELLER has made, or will make, available to BUYER a complete and correct copy of each lease set forth in Schedule 4.1.6 and each such lease is in full force and effect. All rents and additional rents due to date on each such lease have been paid except as disclosed in Schedule 4.1.6 and, in the case of the lease of real property, the lessee has had quiet enjoyment of the premises since the commencement of the original term of such lease. 4.1.7 Employee Benefit Plans. Schedule 4.1.7 contains a true and complete ---------------------- list of each plan contract, program and arrangement evidencing an employee benefit plan maintained, contributed to, or required to be contributed to, by SELLER (and any other entity that is under common control or affiliated with SELLER (an "ERISA Affiliate") within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1984, as amended ("ERISA") and the rules and regulations promulgated thereunder and/or Sections 414(b), (c), (m) or (l) of the Internal Revenue Code of 1986, as amended the ("Code"), and the rules and regulations promulgated thereunder) for the benefit of any employee, director or agent employed, or retained with respect to the Contract Assembly Business in the United States ("Plan Beneficiaries"), whether or not any of the foregoing is funded, whether or not required by law, whether formal or informal, whether or not subject to ERISA, and whether or not legally binding (collectively, the "Benefit Plans"). SELLER has no formal plan or commitment, whether legally binding or not, to create any additional plan with respect to the Business or modify or change any existing Benefit Plan that would affect any Plan Beneficiary, except as required by applicable law, including the Tax Reform Act of 1986, as amended ("TRA"). SELLER has delivered to BUYER (i) true and complete copies of all documents embodying or relating to the Benefit Plans, all amendments to the Benefit Plans, and any trust or other funding arrangement, and (ii) a copy of the most recent summary plan description relating to each such Benefit Plan. 4.1.8 Absence of Certain Changes and Events. Since December 31, 1996, ------------------------------------- there has not been any material adverse change in the financial condition, results of operation, assets, liabilities, business, or prospects of SELLER or any occurrence, circumstance, or combination thereof which reasonably could be expected to result in any such material adverse change; 4.1.9 Undisclosed Liabilities. There are no debts, liabilities or ----------------------- obligations with respect to SELLER or to which the Purchased Assets or assets of DTS are subject, liquidated, unliquidated, accrued, absolute, contingent, or otherwise, 8 that are not specifically identified in Schedule 2.4.1.1 or have been retained by SELLER. 4.1.10 Inventory; Accounts Receivable. All Inventory of Alphatec USA, ------------------------------ Inc. and all items to be delivered to Alphatec USA, Inc. or have been retained by SELLER for Inventory after the Closing that are subject to purchase commitments outstanding at the Closing, consist of items that are or upon delivery will be good and merchantable and of a quality and quantity presently usable and saleable in the ordinary course of business. All of the Receivables are good and fully collectible in the ordinary course of business and there are no claims, setoffs or counterclaims in existence with respect thereto. 4.1.11 Properties. SELLER has good, valid and marketable title to all ---------- property and Purchased Assets and assets of DTS, tangible and intangible, purported to be owned by it, including the property and Purchased Assets and assets of DTS reflected on the SELLER Financial Statements (as defined in Section 4.1.27 herein). All such property and Purchased Assets and assets of DTS purported to be owned by SELLER are free and clear of all mortgages, liens, charges, security interests or other encumbrances of any nature whatsoever. All property and Purchased Assets and assets of DTS, including machinery and equipment, owned, leased or otherwise used by the SELLER are in good operating condition and repair, reasonable wear and tear excepted, and are suitable and adequate for use in the ordinary course of business and conform in all material respects to all applicable laws. All leases are binding, valid and enforceable in accordance with their terms subject to the effect, if any, of (i) applicable bankruptcy and other similar laws affecting the rights of creditors generally, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies, and there are no current defaults or events which have occurred with which the giving of notice or lapse of time or both would constitute a material default under any lease. After the Closing, BUYER will be entitled to the continued use and possession of the leased property by it, for the terms specified in such leases and for the purposes for which such property is used. There is no pending or threatened condemnation or similar proceeding affecting any of the real property owned or leased by SELLER. 4.1.12 Taxes. ----- 4.1.12.1 All Taxes (as hereinafter defined) due or payable by SELLER, and all interest and penalties thereon, whether disputed or not, other than Taxes which are not yet due and payable, have been paid in full. All Tax returns, statements, reports, forms and other documents required to be filed in connection therewith have been duly and timely filed (and no extension of any filing date applicable thereto has been requested or granted) and were 9 correct and complete in all respects. All deposits required by law to be made by SELLER with respect to employees' with holding taxes have been duly made. SELLER is not delinquent in the payment of any Tax, assessment or governmental charge or deposit, and SELLER does not have any Tax deficiency or claim currently pending, outstanding or asserted against it, and there is no basis for any such Tax deficiency or claim. There is no audit currently pending regarding any Taxes and SELLER has not extended the period in which any Tax could be assessed or collected. 4.1.12.2 No Tax is required to be withheld pursuant to Section 1445 of the Internal Revenue Code as a result of the transfers contemplated by this Agreement, and SELLER is not a person other than a United States person within the meaning of the Code. There are no liens for Taxes upon the Purchased Assets and assets of DTS except liens for current immaterial amounts of Taxes not yet due. There is no contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or independent contractor or former employee or independent contractor of SELLER that, individually or collectively, could give rise to the payment by SELLER of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. None of the assets (including the Purchased Assets) of SELLER (i) is property that is required to be treated as owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (ii) directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code or (iii) is "tax exempt use property" within the meaning of Section 168(h) of the Code. The transactions contemplated herein are not subject to the tax withholding provisions of Code Section 3406, or of Subchapter A of Chapter 3 of the Code or of any other provision of law in any jurisdiction. 4.1.12.3 No governmental entity (a "Taxing Authority") responsible for the imposition of any Tax (domestic or foreign) has asserted jurisdiction to impose any Taxes upon SELLER. 4.1.12.4 There is no contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or independent contractor or former employee or independent contractor of SELLER that, individually or collectively, could give rise to the payment by SELLER of any 10 amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. None of the assets (including the Purchased Assets) of SELLER (i) is property this is required to be treated as owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (ii) directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code or (iii) is "tax exempt use property" within the meaning of Section 168(h) of the Code. The transactions contemplated herein are not subject to the tax withholding provisions of Code Section 3406, or of Subchapter A of Chapter 3 of the Code or of any other provision of law in any jurisdiction. The SELLER is not and has never been a member of a group permitted or required to file consolidated Tax returns and is not party to any agreement relating to the payment or sharing of liability for Taxes. SELLER has not filed a consent under Section 341(f) of the Code. 4.1.12.5 For purposes of this Agreement, "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Taxing Authority responsible for the imposition of any such tax (domestic or foreign), (ii) any liability for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any Taxable period and (iii) any liability for the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other person. 4.1.13 Compliance with Laws. SELLER has complied and is in compliance with -------------------- all applicable foreign, federal, state, and local laws, statutes, licensing requirements, rules, and regulations, and judicial or administrative decisions applicable to the Business where the failure to so comply could have a material adverse effect on the results of operations or financial condition of SELLER, the Business or the Purchased Assets. SELLER has been granted all licenses, permits (temporary and otherwise), authorizations, and approvals from foreign, federal, state, and local government regulatory bodies necessary to carry on the 11 Business as currently conducted, all of which are currently valid and in full force and effect. All such licenses, permits, authorizations, and approvals shall be transferred to BUYER effective as of the Closing, and shall be valid and in full force and effect to the same extent as if SELLER were continuing operation of the Business. To the best of SELLER's knowledge, there is no order issued, investigation, or proceeding pending or threatened, or notice served with respect to any violation of any law, ordinance, order, writ, decree, rule, or regulation issued by any federal, state, local, or foreign court or governmental agency or instrumentality applicable to the Business. 4.1.14 [Intentionally Omitted]. 4.1.15 Contracts and Commitments. ------------------------- 4.1.15.1 Set forth on Schedule 4.1.15.1 is a list of all outstanding contracts, whether or not in writing, to which SELLER is a party or to which any of the Purchased Assets or DTS assets are subject that may: (i) involve obligations (contingent or otherwise) of, or payments to, SELLER in excess of $25,000; (ii) involve agreements (written or unwritten) with suppliers and customers of SELLER; (iii) involve the license of any proprietary rights to or from SELLER; (iv) contain provisions restricting and/or affecting the development, manufacture, or distribution of the SELLER's products or services; (v) relate to any aspect of the Business of SELLER in which any other person who was or is an officer, director, or employee of SELLER (or any person, firm, partnership, trust, or corporation affiliated with any such persons or any family members of such persons) have a material interest; or (vi) involve agreements (written or unwritten) on which the Business is materially dependent. 4.1.15.2 SELLER has performed all of its obligations under the terms of each such contract, and is not in default thereunder. No event or omission has occurred which but for the giving of notice or lapse of time or both would constitute a default by any party thereto under any such contract, where such default by any party could have an adverse impact on the results of operations or financial condition or prospects of SELLER, the Business or the Purchased Assets. Each such contract is valid and binding on all parties thereto and in full force and effect. SELLER has received no notice of default, cancellation, or termination in connection with any such contract. 12 4.1.16 Assets. The Purchased Assets include all intellectual property, ------ inventory and all other property in which SELLER has any right, title and interest. The Purchased Assets include all the assets necessary to operate the Business in the same manner as the Business was operated by SELLER prior to the Closing. The Purchased Assets are suitable for the purpose or purposes for which they are being used, are in good operating condition and in reasonable repair, and free from any known defects, except such minor defects as do not interfere with the continued use thereof. Each tangible Purchased Asset has been serviced and maintained in accordance with customary industry practices. Subject to normal wear and tear, such plants, facilities, machinery, and equip ment are capable of and are producing sound and merchantable products. 4.1.17 [Intentionally Omitted]. 4.1.18 No Conflict or Default. Neither the execution and delivery of this ---------------------- Agreement or the related agreements, nor compliance with the terms and provisions hereof and thereof, including without limitation, the consummation of the transactions contemplated hereby and thereby, will violate any statute, regulation, or ordinance of any governmental authority, or conflict with or result in the breach of any term, condition, or provision of the Articles of Incorporation or Bylaws of SELLER, as presently in effect, or of any agreement, deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or instrument to which SELLER is a party or by which it or any of the Purchased Assets or assets of DTS are or may be bound, or constitute a default (or an event which, with the lapse of time or the giving of notice, or both, would constitute a default) thereunder. 4.1.19 Labor Relations. --------------- 4.1.19.1 With respect to the Business, SELLER has complied with Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor Standards Act, as amended, the Occupational Safety and Health Act of 1970, as amended, all applicable federal, state, and local laws, rules, and regulations relating to employment, and all applicable laws, rules and regulations governing payment of minimum wages and overtime rates, and the withholding and payment of taxes from compensation of employees. 4.1.19.2 There are no labor controversies pending or threatened between SELLER and any of its employees. 4.1.19.3 SELLER has never entered into a collective bargaining agreement or other labor union contract relating to the Business and applicable to the employees. 13 4.1.19.4 There are no written employment or separation agreements, or oral employment or separation agreements other than those establishing an "at-will" employment relationship between SELLER and any of the employees, except as set forth in Schedule 4.1.19.4. 4.1.20 Environmental Matters. SELLER: (i) has obtained all applicable --------------------- permits, licenses and other authorizations which are required under foreign, federal, state or local laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into ambient air, surface water, ground water, or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes by SELLER (or its agents); (ii) is in compliance with all terms and conditions of such required permits, licenses and authorization, and also is in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgement, notice or demand letter issued, entered, promulgated or approved thereunder; (iii) is not aware of nor has received notice of any event, condition, circumstance, activity, practice, incident, action or plan which is reasonably likely to interfere with or prevent continued compliance or which would give rise to any common law or statutory liability, or otherwise form the basis of any claim, action, suit or proceeding, based on or resulting from SELLER's (or any of its agents') manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling, or the emission, discharge, or release into the environment, of any pollutant, contaminant, or hazardous or toxic material waste; (iv) has taken all actions necessary under applicable requirements of Federal, state or local laws, rules or regulations to register any products or materials required to be registered by SELLER (or any of its agents) thereunder; and (v) is not aware of any contaminated soil or groundwater at any of the properties owned or operated, leased or previously owned or leased by SELLER. SELLER has disclosed to BUYER in writing (i) all permits relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into ambient air, surface water, ground water, or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes by SELLER (or its agents) its holds as of the date hereof, and (ii) all documents relating to tests previously conducted or to be conducted in the future for potential contamination at any of SELLER's facilities, whether owned or leased, including soil and water tests. 14 4.1.21 Miscellaneous. ------------- 4.1.21.1 SELLER is (and following the Closing shall remain) solvent, generally able to pay its debts as they become due and in a position where SELLER has reasonably sufficient working capital compared to SELLER's business plans, needs, and expectations. In making this representation, SELLER acknowledges that it is using such terms and financial standards in every sense in which such terms and standards are used in the Bankruptcy Code (Title 11 of the United States Code) and in the Uniform Fraudulent Transfer Act and Uniform Fraudulent Conveyance Act, as in effect in each applicable jurisdiction. 4.1.21.2 The consideration received by SELLER at the Closing is reasonably equivalent to the value of the Purchased Assets and the obligations of SELLER to BUYER in this Transaction. BUYER has received no notice, knowledge or reason for inquiry from SELLER (or, to the best of SELLER's knowledge and belief, anyone else) of any information, fact, condition, event or matter to contrary to such representations or otherwise inconsistent with BUYER's good faith belief that BUYER is paying in the ordinary and normal course of business a fair and reasonable price for such Purchased Assets and obligations. Without limiting the generality of the foregoing, SELLER acknowledges that the risk factors affecting the pricing of the Purchased Assets were independent of SELLER's financial condition and circumstances, and BUYER did not unduly or unfairly take advantage of SELLER's desire to sell the Purchased Assets. In all respects, BUYER has conducted itself in good faith and consistent with commercially reasonable standards for buyers in regularly conducted and commercially reasonable sales. 4.1.22 Proprietary Rights. ------------------ 4.1.22.1 SELLER owns all right, title and interest in and to or is exclusively licensed or is otherwise entitled to exercise, without restriction, all rights to all patents, trademarks, trade names, service marks, copyrights, mask works, trade secrets and other intellectual property rights, and any applications or registrations therefor, and all inventions, mask work layouts, net lists, source code, object code, schematics, technical drawings, technology, know-how, processes, formulas, algorithms, computer software programs, documentation, and all other tangible and intangible information or material in any form, used or currently proposed to be used in the Business or which form part of the Purchased 15 Assets, without any conflict with or infringement of the rights of others and free and clear of any liens, encumbrances or security interests (collectively, the "Intellectual Property Rights") and has the right to use, sell, license, assign, transfer, convey or dispose thereof or the products, processes and materials covered thereby. 4.1.22.2 No person has asserted or threatened to assert any claims with respect to the Intellectual Property Rights (i) contesting the right of SELLER to use, exercise, sell, license, transfer or dispose of any of the Intellectual Property Rights or any products, processes or materials covered thereby or (ii) challenging the ownership, validity or enforceability of any of the Intellectual Property Rights. 4.1.23 Certain Payments. In connection with the Business, SELLER has ---------------- not and no person directly or indirectly on behalf of it has made or received any payment that was not legal to make or receive. 4.1.24 Books and Records. The books and records of SELLER to which ----------------- BUYER and its accountants and attorneys have been given access are the true books and records of SELLER and truly and fairly reflect the underlying facts and transactions in all material respects. 4.1.25 Complete Disclosure. The copies of all instruments, agreements, ------------------- other documents and written information delivered by SELLER to BUYER or its accountants or counsel are and will be complete and correct in all material respects as of the date of delivery thereof. No representations or warranties made by SELLER in this Agreement, nor any document, written information, statement, financial statement, certificate or exhibit prepared and furnished or to be prepared and furnished by them or its representatives to BUYER pursuant hereto or the related agreements in connection with the transactions contemplated hereby or thereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading. 4.1.26 Customers and Suppliers. DTS is not aware nor has any reason to ------------------------ believe that any of DTS' ten largest customers during the twelve months ended July 31, 1997 (determined on the basis of both revenues and bookings during such period) has terminated, or intends to materially reduce or terminate, the amount of its business with DTS, and DTS has no reason to believe that such termination or alteration would occur as a result of the consummation of the transactions contemplated by this Agreement or the related agreements. 16 4.1.27 Financial Statements. SELLER has furnished to BUYER a complete -------------------- and accurate copy of its audited consolidated balance sheet as of December 31, 1994, December 31, 1995 and December 31, 1996 and its audited consolidated statement of operations, cash flow and shareholders' equity for each of its fiscal years ended December 31, 1994, 1995, and 1996 (collectively, the "SELLER Audited Financial Statements"). The SELLER Audited Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and fairly present the consolidated financial position of SELLER as and at the dates thereof and SELLER's consolidated results of operations and cash flows for the periods then ended. The notes to the SELLER Audited Financial Statements as at and for each such period set forth in reasonable detail SELLER's accounting policies, principles and methods. SELLER has furnished to BUYER a complete and accurate copy of Alphatec USA, Inc.'s (including DTS) and DTS's on a stand alone basis, their respective unaudited balance sheet as of June 30, 1997 and their respective unaudited statement of operations, cash flow and shareholders' equity for the six months ended June 30, 1997 and has furnished to BUYER a balance sheet and statement of operations for Alphatec USA, Inc. (excluding DTS) as of July 31, 1997 (collectively, the "SELLER Unaudited Financial Statements" and collectively with the SELLER Audited Financial Statements, the "SELLER Financial Statements"). The Company's revenue recognition policies comply with GAAP and no current or former customer has the right to return any products to the Company or has any right of set off or counterclaim against the Company. The SELLER Financial Statements have been prepared in accordance with GAAP consistently applied, except for the absence of footnotes, and fairly present the financial position of SELLER and each such entity individually and collectively as and at the dates thereof and SELLER's and each such entity's consolidated results of operations and cash flows for the periods then ended. 4.2 Of BUYER. BUYER hereby represents and warrants to SELLER as follows and -------- agrees with SELLER that the following representations and warranties shall be true and correct on the Closing Date: 4.2.1 BUYER Organization. At the Closing date BUYER will be duly ------------------ incorporated and will be validly existing as a corporation in good standing under the laws of the State of California, will have the corporate power to carry on its business as now conducted and will have full power and authority under such laws to execute, deliver and perform this Agreement. 4.2.2 Corporate Authority. On or prior to the Closing Date, all corporate ------------------- actions will have been taken by BUYER that are necessary to the due authorization or ratification of the execution and delivery of this Agreement and the performance of the BUYER hereunder. This Agreement constitutes the legal, 17 valid and binding obligation of BUYER, enforceable against BUYER in accordance with its terms, subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally from time to time in effect, and subject to any equitable principles limiting the right to obtain specific performance of certain obligations of BUYER hereunder. Except as required by BUYER's lenders, the entering into of this Agreement and the consummation of the transactions contemplated hereby do not and will not violate any law, regulation, rule, injunction or court order, or the provisions of BUYER'S Articles of Incorporation or By- Laws, or of any note, indenture, mortgage, lease license agreement or other agreement or instrument to which BUYER is a party or by which any of them is bound or of which any of them is maker. 4.2.3 Consents. Except for any filing that may be required under HSR or -------- as required by BUYER'S lenders, no consent, approval, waiver, license, authorization or declaration of, or filing or registration with, any person, firm, corporation or other entity, including, without limitation, any lender, mortgagee, governmental authority, bureau or agency is required in connection with the execution, delivery and performance by BUYER of this Agreement or the consummation of the transaction contemplated hereby or thereby, except under the HSR Act. ARTICLE 5 CLOSING/PREPARATION FOR CLOSING ------------------------------- 5.1 Closing Date. Subject to Article 6 hereof, the closing of the transactions ------------ contemplated by this Agreement (the "Closing") shall be held at the offices of SELLER at the LEASED PREMISES at 11:00 a.m. on the Closing Date, or at such other time as may be mutually agreed to by the parties, unless the date for the Closing is extended by mutual agreement of the parties (the "Closing Date"). 5.2 From the date of this Agreement until the Closing Date: 5.2.1 BUYER'S Access to Premises and Information. In order that BUYER may ------------------------------------------ have full opportunity to make such investigation as it shall desire concerning the Business and the Purchased Assets, SELLER shall make available management personnel familiar with the conduct of the Business and the Purchased Assets and BUYER and its counsel, accountants and other representatives shall be afforded access during normal business hours to the properties, books, accounts, records, contracts and other documents of SELLER relating the Business and the Purchased Assets and the Assumed Obligations, wherever located and shall be permitted to make abstracts from and copies of 18 such books and records and documents. Prior to the Closing and if, for any reason the transactions contemplated by this Agreement are not consummated, thereafter until September 30, 2002, BUYER agrees that it will not disclose to any third person (other than its advisers or investors or lenders in respect of this transaction) or use for its own benefit any nonpublic confidential information relating to the Business that SELLER may have acquired during the course of its investigation and examination of the Business, whether acquired prior to or after the execution of this Agreement; provided, however, that nothing herein shall prohibit disclosure of -------- ------- information (i) generally known to the public, or which becomes generally known to the public other than through a violation of this Agreement, (ii) in the possession of BUYER, or (iii) coming into the possession of BUYER will promptly return or destroy and cause its representatives to return or destroy any property, books, records or papers of SELLER and all abstracts and copies thereof which any of them may have in its possession. Because the breach or attempted or threatened breach of the obligations under this Section 5.2.1 will result in immediate and irreparable injury to SELLER for which SELLER will not have an adequate remedy at law, SELLER shall be entitled, in addition to all other remedies, to a decree of specific performance of this covenant and to a temporary and permanent injunction enjoining such breach, without posting bond or furnishing similar security. 5.2.2 Conduct of Business in Ordinary Course. SELLER shall cause the -------------------------------------- Business to be operated in the ordinary course, consistent with past practice, except as may be consented to in writing by BUYER. 5.2.3 Consents. SELLER shall use its best efforts to obtain all consents -------- of and authorizations by third parties and to make all filings with and give all notices to third parties that may be necessary or required in order to consummate the sale of the Purchased Assets, and shall take such additional actions as BUYER may request to cooperate so that the transactions contemplated by this Agreement may be expeditiously consummated. 5.2.4 Other Discussions. From the date hereof until the Closing, SELLER ----------------- shall not, nor shall any of its representatives or affiliates on its behalf, discuss, communicate or negotiate with any other party, concerning the possible disposition of the Business or the Purchased Assets or the assets of DTS or of SELLER. If SELLER or any such representatives receives any inquiries from another party relating to any proposed disposition of the Business or the Purchased Assets following the date hereof, SELLER shall promptly (a) advise such party that SELLER is not entitled to enter into any such discussions or negotiations and (b) notify BUYER in writing of such inquiry. SELLER understands that BUYER is relying on this covenant in entering into this 19 Agreement and that BUYER is expending significant funds in order to purchase the Purchased Assets. 5.2.5 Bulk Transfer Laws. SELLER shall comply with the California Uniform ------------------ Commercial Code - Bulk Transfers and any other applicable state bulk transfer laws (collectively, the "Bulk Sales Provisions"), if required, prior to the Closing and shall provide BUYER with written documentation of such compliance. If SELLER cannot timely comply with such bulk sales laws requirements BUYER hereby agrees to waive compliance with such laws and SELLER agrees to indemnify and hold BUYER's Indemnitees (as defined) harmless which they may suffer or incur by virtue of such non-compliance. Such indemnification shall survive the Closing and shall not be subject to the limitations on the amount of indemnification or duration provided in Article 8 hereof. 5.2.6 Purchase or Retirement of Bank Debt. Prior to Closing, the BUYER ----------------------------------- shall have the right, in its sole discretion, to purchase or retire up to all of the debt of SELLER owed to Silicon Valley Bank, Comerica/California and Comerica/International. Any and all amounts so purchased or retired by BUYER reduce the Purchase Price on a dollar-for-dollar basis. SELLER agrees to cooperate and enter into any agreements necessary to give effect to the foregoing covenant. 5.2.7 Exhibits and Schedules to Agreement. BUYER and SELLER shall each ----------------------------------- deliver to the other their respective Exhibits and Schedules contemplated by this Agreement within eight days after executing this Agreement. SELLER's Exhibits and Schedules must be in a form reasonably satisfactory to BUYER, or BUYER shall have the right to terminate this Agreement without liability or obligation. ARTICLE 6 CONDITIONS TO CLOSING --------------------- 6.1 BUYER. The obligations of BUYER to close shall be subject to the ----- satisfaction, or the waiver in writing by BUYER, on or prior to the Closing Date, of all of the following conditions: 6.1.1 Deed. BUYER shall have received the Deed, executed by SELLER. ---- 6.1.2 Bill of Sale. BUYER shall have received the Bill of Sale, executed ------------ by SELLER. 20 6.1.3 Assignment and Assumption. BUYER shall have received the Assignment ------------------------- and Assumption Agreement, executed by SELLER. 6.1.4 Representations and Warranties. The representations and warranties ------------------------------ of SELLER contained in this Agreement shall be correct in all respects on and as of the Closing Date with the same force and effect as though such representations and warranties were made at the Closing; and each and all of the covenants to be performed by SELLER on or before the Closing Date pursuant to the terms hereof shall have been duly performed. 6.1.5 No Liens. The Purchase Assets, the assets of DTS and the Business -------- shall be delivered to BUYER free and clear of all material liens, encumbrances, claims and the like. 6.1.6 Performance of Agreement. All covenants, conditions, and other ------------------------ obligations under this Agreement and the related agreements which are to be performed or complied with by the SELLER, including Board of Directors and stockholder approval, shall have been fully performed and complied with at or prior to the Closing. 6.1.7 No Material Adverse Change. There shall have been no material -------------------------- adverse change in the financial condition, business, or properties of SELLER which materially and adversely affects the conduct of the Business as presently being conducted or the financial condition, business, or properties of SELLER since June 30, 1997. 6.1.8 Absence of Governmental or Other Objection. There shall be no ------------------------------------------ pending or threatened lawsuit challenging the transaction by any body or agency of the federal, state, or local government or by any third party, and the consummation of the transaction shall not have been enjoined by a court of competent jurisdiction as of the Closing and any applicable waiting period under any applicable federal law shall have expired. 6.1.9 Evidence of Title. BUYER shall have received evidence, at or prior ----------------- to the Closing, satisfactory to it of SELLER's title to all of the Purchased Assets and right to fully convey all Purchased Assets free and clear of any lien, encumbrances or restrictions on transfer. 6.1.10 HSR Act. Any waiting period (and any extension thereof) applicable ------- to the consummation of the sale of Purchased Assets under HSR shall have expired or been earlier terminated. 21 6.1.11 FIRPTA. BUYER shall have received a properly executed Foreign ------ Investment and Real Property Tax Act of 1980 ("FIRPTA") Notification Letter, in form and substance satisfactory to BUYER. 6.1.12 Assets. On the date of Closing, SELLER shall have at least ------ $5,000,000 of fully and readily collectible accounts receivable and cash and cash equivalents on hand and shall provide to BUYER a Closing Date balance sheet indicating such amount. 6.1.13 Evidence of Debt Extinguishment. BUYER shall have received ------------------------------- satisfactory written evidence that all intercompany accounts between SELLER and parent and SELLER and Alphatec Electronics Corporation have been properly eliminated and that any net intercompany receivables owing to Alphatec and DTS by their corporate parent or affiliate shall be properly recorded. 6.1.14 BUYER Board Approval. The Board of Directors of BUYER shall have -------------------- approved the transactions contemplated by this Agreement. 6.1.15 Environmental Reports. BUYER shall have received environmental --------------------- reports prepared by a firm reasonably acceptable to BUYER, such reports to be in form and substance acceptable to BUYER. The costs and expenses of such reports and the associated investigation and testing shall be borne by SELLER. 6.1.16 Employment Agreements. Each of Sassan Raissi, Mike Sarvian, Tom --------------------- Knecht and Del Gilliam shall have executed and delivered new employment and non-competition agreements with DTS (each an "Employment Agreement"). The terms of each Employment Agreement shall provide, among other things, that (i) such agreement supersedes and replaces all prior agreements between such employee and DTS with respect to employment and compensation matters and (ii) such employee releases and discharges DTS and ISE with respect to any claims with respect to compensation, including, without limitation, salary, bonuses, profit sharing and vacation accruals. 6.2 SELLER. The obligations of SELLER to be performed at the Closing shall be ------ subject to the satisfaction, or the waiver in writing by SELLER, on or prior to the Closing Date of all of the following conditions: 6.2.1 Payment. SELLER shall have received payment of the Purchase Price ------- specified in Section 3.1. 6.2.2 Assignment and Assumption. SELLER shall have received the ------------------------- Assignment and Assumption Agreement, executed by BUYER. 22 6.2.3 Representations and Warranties. The representations and warranties ------------------------------ of BUYER contained in this Agreement shall be correct in all material respects on and as of the Closing Date with the same force and effect as though such representations and warranties were made at the Closing Date, and each and all of the covenants to be performed by BUYER on or before the Closing Date pursuant to the terms hereof shall have been duly performed. ARTICLE 7 COVENANTS 7.1 Additional Documentation. At any time and from time to time after the ------------------------ Closing Date, at BUYER's reasonable request and without further monetary consideration, SELLER will execute and deliver such other instruments of conveyance and transfer as BUYER reasonably may require more effectively to convey to, transfer to, and vest in BUYER, or to put BUYER in possession of, any or all of the assets and properties intended to be transferred, conveyed or assigned to BUYER pursuant to the provisions of this Agreement. 7.2 Assumption of Obligations. To the extent that any of the commitments, ------------------------- leases, purchase orders and contracts of the Business are not assignable without the consent of another party and are "Assumed Liabilities," SELLER and BUYER each agree to use reasonable efforts to obtain such consent to the assignment hereof to BUYER. If such consent shall not be obtained for any such commitments, leases, purchase orders or contracts, SELLER and BUYER shall make suitable arrangements, without cost to SELLER, whereby BUYER may nevertheless enjoy the benefits and rights of SELLER, and perform the obligations of SELLER, thereunder. ARTICLE 8 INDEMNIFICATION --------------- 8.1 SELLER'S Indemnification. ------------------------ 8.1.1 SELLER agrees to indemnify and hold harmless BUYER, its affiliates and its officers, directors, employees and agents, successors and assigns (each a BUYER's Indemnitee" and collectively the "BUYER's Indemnitees") from any and all damages (including punitive damages), loses, expenses (including, without limitation, court costs, arbitration fees and attorneys' fees and expenses of investigation and all payments made pursuant to any agreement or legal requirement to indemnify, hold harmless or exonerate any person), claims (including amounts paid in settlement), demands, suits, causes of action, 23 proceedings, judgments, fines, penalties and other liabilities or obligations of any nature (including costs relating to the enforcement of this Article 8, contingent or non-contingent, liquidated or unliquidated, direct or indirect) (collectively, "Losses"), incurred or sustained by or asserted against any of the BUYER's Indemnitees with respect to or arising out of: (i) the failure or breach of any of the SELLER's representations and warranties made in Section 4.1 hereof to be true and correct in all respects as of the Closing Date; (ii) the SELLER's failure or refusal or inability to pay for all liabilities and obligations of SELLER, other than the Assumed Liabilities that BUYER has agreed to assume pursuant to Section 2.4 of this Agreement; and (iii) the breach of or failure by SELLER to observe or perform any obligation, covenant or agreement of SELLER under this Agreement; provided, however, that no -------- ------- BUYER's Indemnitee shall be entitled to indemnification for Losses under the provisions of this Section 8.1 unless and until the aggregate amount of all Losses of the BUYER's Indemnitees as a group under Section 8.1 shall have exceeded $100,000 in the aggregate, in which event the BUYER's Indemnitees in the aggregate shall be entitled to such indemnification only for all Losses in excess of such amount. The indemnification obligations of SELLER for a breach of its representations and warranties under this Section 8.1 shall survive the Closing for a period of three (3) years after the Closing. 8.1.2 Notwithstanding any investigation conducted at any time with regard thereto by or on behalf of any party to this Agreement, all representations, warranties, obligations, covenants, and agreements of SELLER shall survive the execution, delivery, and performance of this Agreement, unless otherwise specifically set forth in this Agreement to the contrary. No investigation made by or on behalf of BUYER with respect to SELLER shall be deemed to affect BUYER's reliance on the representations, warranties, covenants and agreements made by SELLER contained in this Agreement and shall not be a waiver of BUYER's rights to indemnity as herein provided for the breach or inaccuracy of or failure to perform or comply with any of SELLER's representations, warranties, covenants or agreements under this Agreement. All representations and warranties of each party set forth in this Agreement shall be deemed to have been made again by such party at and as of the Closing. Nothing in this Agreement shall be construed as limiting in any way the remedies that may be available to a party in the event of fraud relating to the representations, warranties, agreements or covenants made by any other party in this Agreement. SELLER shall have liabilities and obligations for Losses with respect to claims submitted or notice of claims provided during the time period of survivability of the specific representation, warranty, covenant or agreement as set forth herein. Notwithstanding the expiration date of the representations, warranties, covenants and agreements set forth herein, if BUYER shall notify SELLER with respect to the submission of a claim during the time period of survivability of such representation, warranty, covenant or agreement, 24 SELLER's liability or obligation for Losses shall continue in full force and effect until settled to the other party's satisfaction with respect to those claims timely made. 8.2 BUYER's Indemnification. BUYER agrees to indemnify and hold harmless ----------------------- SELLER, its affiliates and its officers, directors, employees and agents, successors and assigns (each a SELLER's "Indemnitee" and collectively, "SELLER's Indemnitees") from all Losses incurred or sustained by or asserted against any of SELLER's Indemnitees with respect to or arising out of: (i) the failure of the BUYER's representations to be true and correct in all material respects as of the Closing Date, provided, however, that -------- ------- SELLER's Indemnitees shall be entitled to indemnification for Losses under this Section 8.2: (i) only if and when, and to the extent that, such Losses exceed $100,000 in the aggregate, in which event the BUYER's indemnitees in the aggregate shall be entitled to such indemnification only for all Losses in excess of such amount; (ii) the Assumed Liabilities; and (iii) the breach of or failure to observe or perform any obligation of BUYER required under this Agreement and the agreements contemplated hereby. The indemnification obligations of BUYER pursuant to this Section 8.2 shall survive the Closing as follows: With respect to clause (i), for three years thereafter, and with respect to clauses (ii) and (iii), until such time as the applicable statute of limitation has expired. 8.3 Notice and Defense. Any party or parties seeking indemnification under ------------------ this Article 8 (collectively, the "Indemnitee") shall, on each occasion that indemnification is sought, give prompt written notice within the prescribed survival period for such indemnification, of any claim, suit or demand that the Indemnitee believes will or may give rise to indemnification hereunder to BUYER, on behalf of all BUYER's Indemnitees, on the one hand, or to SELLER, on behalf of all SELLER's Indemnitees, on the other hand (the person to whom such notice of claim is given being referred to herein as the "Indemnitor"). Except as hereinafter provided, the Indemnitor shall be obligated to defend and to direct the defense against such claim, suit or demand, in its name or in the name of the Indemnitee at the Indemnitor's expense and with counsel of the Indemnitor's own choosing and, so long as the Indemnitor is conducting such defense, the Indemnitee shall not without the Indemnitor's written consent settle or compromise or by affirmative action extend the statue of limitations with respect to, and the Indemnitor shall have the right to settle or compromise, any such claim, suit or demand; provided, however, that the -------- ------- Indemnitor shall not, without the Indemnitee's written consent, settle or compromise any claim or consent to any entry of judgment that does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee of a release from all liability in respect of such claim, in form and substance reasonably satisfactory to the Indemnitee. The Indemnitee shall, at the Indemnitor's expense, cooperate in the defense of any such claim, suit or demand. If the Indemnitor, within a reasonable time after notice of a claim, fails to defend the Indemnitee, the Indemnitee shall be entitled to undertake the defense of, and to compromise or settle such claim at the expense of and for the account and risk of the 25 Indemnitor, utilizing counsel of the Indemnitee's own choosing. No right or remedy conferred in this Article 8 is intended to be exclusive of any right or remedy available, now or hereafter, at law or in equity or otherwise, to the parties hereto. ARTICLE 9 MISCELLANEOUS ------------- 9.1 Cost. All costs and expenses, including attorneys' fees, incident to this ---- Agreement and the transactions contemplated herein shall be paid by the party who incurred the same, whether or not the transactions contemplated herein or therein are consummated. The parties hereto respectively represent and warrant that they have not dealt in any manner with a broker, agent or finder as regards the transaction set forth in this Agreement, except the BUYER has retained two agents. 9.2 No Third-Party Benefit. The agreements contained herein are solely for the ---------------------- benefit of the parties hereto. No party, including employees, other than such corporations and natural person and their respective permitted assigns, shall be entitled to reply on this Agreement for any purpose. 9.3 Headings. The titles of the Articles and sections of this Agreement are -------- for convenience of reference only and are not to be considered in construing this Agreement. 9.4 Entire Agreement. This Agreement and any documents specifically referred ---------------- to herein constitute the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and preliminary agreements. 9.5 Modification/Waiver. SELLER and BUYER may by subsequent written agreement, ------------------- with each party acting at its sole and absolute discretion: (i) extend the time for the performance of any of the obligations or other acts of the parties here; (ii) waive any inaccuracies in the representations contained in this Agreement; (iii) waive compliance with or modify any of the covenants contained in this Agreement; (iv) waive or modify performance of any of the obligations of any of the parties hereto; and (v) otherwise amend this Agreement. Any agreement on the part of the party for any such extension, modification, waiver or amendment shall be validly and sufficiently authorized for the purpose of this Agreement if authorized by proper officers of such party. 9.6 Representations/Warranties. There are no representations, warranties or -------------------------- obligations of any kind made in connection with the transactions contemplated hereby other than those expressed in this Agreement. It is expressly understood and agreed that BUYER 26 and SELLER, and their respective affiliates, officers and/or agents, have not made any warranty or agreement, express or implied, except as are herein expressly incorporated, as to the tax consequences of this transaction or the tax consequences of any transaction pursuant to or arising out of this Agreement. 9.7 Assignment. No party hereto may assign its rights or delegate its ---------- responsibilities under this Agreement without the prior written consent of the other party hereto. The terms of this Agreement shall, however, be binding and legally enforceable against all successors and assigns, by law or otherwise, including upon dissolution or merger. 9.8 Remedies of BUYER. SELLER agree that the Purchased Assets are unique and ----------------- not otherwise readily available to BUYER. Accordingly, SELLER acknowledges that, in addition to all other remedies to which BUYER is entitled, BUYER shall have the right to enforce the terms of this Agreement by a decree of specific performance. 9.9 Notices. All notices, requests, demands and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given when delivered in person to the respective address listed below, or when faxed to the respective address listed below, or two (2) business days after mailed by certified mail, postage prepaid, return receipt requested to the address listed below: If to BUYER: ISE LABS, INC. 2095 Ringwood Avenue San Jose, CA 95131 with a copy to BUYER's counsel: Warren Lazarow, Esq. Brobeck, Phleger & Harrison LLP 2200 Geng Road Palo Alto, CA 94403 If to SELLER: ALPHATEC USA, INC. 3600 Peterson Way Santa Clara, CA 95054 Fax: (408) 567-1111 Attention: President 9.10 Attorneys' Fees. If any action at law or in equity is necessary to --------------- enforce or interpret the terms of this Agreement or to protect the rights obtained hereunder the prevailing 27 party shall be entitled to its reasonable attorneys' fees, costs, and disbursements in addition to any other relief to which it may be entitled. 9.11 Cooperation and Records Retention. SELLER and BUYER shall (i) each provide --------------------------------- the other with such assistance as may reasonably be requested by them in connection with the preparation of any Tax return, statement, report, form or other document (hereinafter collectively a "Tax Return"), or in connection with any audit or other examination by any taxing authority or any judicial or administrative proceedings relating to liability for Taxes, (ii) each retain and provide the other, with any records or other information which may be relevant to any such Tax Return, audit or examination, proceeding or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax Return of the other for any period. Without limiting the generality of the foregoing, SELLER and BUYER shall retain, until the applicable statute of limitations (including any extensions) have expired, copies of all Tax Returns, supporting work schedules and other records or information which may be relevant to such Tax Returns for all tax periods or portions thereof ending before or including the Closing and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same. BUYER shall keep the original copies of the records at its facilities in California and elsewhere, if applicable, and, at SELLER's expense, shall provide copies of the Records to SELLER upon SELLER's request. SELLER shall provide BUYER with access to all of SELLER's books and records if BUYER requests them from time to time. 9.12 Section 338(h)(10) Election. --------------------------- 9.12.1 SELLER shall, at the request of BUYER, join with BUYER in making a timely election under Section 338(h)(10) of the Code and any corresponding elections under state and local tax laws (collectively, the "Election") with respect to the acquisition of the DTS shares. BUYER and SELLER shall cooperate with each other to take all actions necessary and appropriate (including filing such forms, returns, elections, schedules and other documents as may be required) to effect and preserve a timely Election in accordance with Section 338(h)(10) of the Code or any successor provisions (and all corresponding state and local tax laws). BUYER and SELLER shall report the acquisition of the DTS shares pursuant to this Agreement consistent with the Election. 9.12.2 In connection with the Election, within 90 days after Closing, BUYER shall provide to SELLER a schedule which sets forth the proposed allocation of the Purchase Price (and any deemed assumption of liabilities for Tax purposes) among the assets of DTS (the "Allocation Schedule"). Such allocations shall be made in accordance with Section 338(h)(10) of the Code and any applicable Treasury Regulations. The parties shall report the deemed sale of assets of 28 DTS pursuant to the Election in a manner consistent with the Allocation Schedule. 9.13 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California. The parties hereto consent and agree that the state and federal courts located within the State of California shall have exclusive jurisdiction over any dispute arising hereunder. 9.14 Equipment at Closing. SELLER shall furnish an equipment list to BUYER by -------------------- September 1, 1997. In the event that the equipment supplied at Closing is less than that set forth on the final equipment list at Closing, then BUYER shall be repaid the amount of the net book value of the equipment not supplied. 9.15 Purchase Price Escrow. At BUYER's option, the purchase price may be held --------------------- in escrow with instructions to the escrow agent to discharge in order, the following indebtedness, liability or obligations of Alphatec USA or DTS: (i) to the extent not purchased or retired by BUYER pursuant to Section 5.2.6, all debts of SELLER owed to Silicon Valley Bank, Comercia/California and Comerica/International, (ii) all accounts payable--trade (excluding any accounts payable to affiliates) of DTS as of the Closing Date for the transaction, (iii) all accounts payable--trade (excluding any accounts payable to affiliates), short term capital lease, short term equipment loan, long term capital lease and long term equipment loan (excluding long term loan from affiliated entities), of Alphatec USA as of the Closing Date for the transaction, as reflected on the audited non-consolidated balance sheet of Alphatec USA as of such date, and (iv) all amounts due and owing to DTS employees under their profit sharing agreements as of the Closing Date for the proposed transaction. 9.16 Employee Benefits. Prior to Closing, SELLER shall pay all accrued ----------------- salaries and bonuses (including profit sharing) and accrued vacation amounts owed to all service providers of SELLER (including DTS). 29 IN WITNESS WHEREOF, the parties hereto have caused their respective names to be hereunto subscribed as of the date and year first above written. ISE LABS, INC. By: /s/ Saeed Malik ----------------------------- Name: Saeed Malik ----------------------------- Title: President ----------------------------- ALPHATEC USA, INC. for itself and on behalf of Digital Testing Services, Inc. By: /s/ William H. Dana ----------------------------- Name: William H. Dana ----------------------------- Title: Vice President ----------------------------- By: /s/ R G Grammer ----------------------------- Name: R G Grammer ----------------------------- Title: President ----------------------------- Exhibit 2.1 The Registrant agrees to furnish supplementally a copy of any omitted Exhibits, Attachment and Schedules to the Commission upon request. EX-3.1 4 FORM OF SECOND AMENDED AND RESTATED ARTICLES EXHIBIT 3.1 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ISE LABS, INC. Saeed A. Malik and Warren T. Lazarow certify that: 1. They are the president and the secretary, respectively, of ISE LABS, INC., a California corporation. 2. The articles of incorporation of this corporation are amended and restated to read as follows: ARTICLE I. The name of the corporation is ISE LABS, INC. ARTICLE II. The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporations Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation Code. ARTICLE III. A. Classes of Stock. This corporation is authorized to issue two ---------------- classes of capital stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Fifty-Three Million (53,000,000) shares. Fifty Million (50,000,000) shares shall be Common Stock, par value $.001 per share, and Three Million (3,000,000) shares shall be Preferred Stock, par value $.001 per share. B. Rights, Preferences and Restrictions of Preferred Stock. The ------------------------------------------------------- Preferred Stock authorized by these Restated Articles of Incorporation may be issued from time to time in one or more series, without further shareholder approval. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any such series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights which have been or may be granted to the Preferred Stock or series thereof in Certificates of Determination or this corporation's Articles of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari ---- passu with (including, without limitation, inclusion in provisions with respect - ----- to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE IV. Effective when this corporation becomes a listed corporation within the meaning of Section 301.5 of the Corporations Code, shareholders of this corporation shall not be entitled to cumulate their votes at any election of directors of this corporation. ARTICLE V. This Article V shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the Corporations Code. The Board of Directors shall be and is divided into two classes, Class I and Class II. Such classes shall be as nearly equal in number of directors as possible. Each director shall serve for a term ending on the second annual meeting following the annual meeting at which such director was elected; provided, however, that (i) the directors first elected to Class I after this provision becomes effective shall serve for a term ending on the annual meeting next following the end of the calendar year after this provision becomes effective and (ii) the directors first elected to Class II shall serve for a term ending on the second annual meeting next following the end of the calendar year in which this provision becomes effective. The foregoing notwithstanding, each director shall serve until his successor shall have been duly elected and qualified, unless he or she shall resign, become disqualified, disabled or shall otherwise be removed. At each annual election, directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed. Notwithstanding the provision that the classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors each director then continuing to serve as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. If any newly created directorship may, consistently with the provision that the classes shall be as nearly equal in number of directors as possible, be allocated to any class, the Board shall allocate it to that ofthe available class whose term of office is due to expire at the earliest date following such allocation. ARTICLE VI. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders." * * * 3. The foregoing second amendment and restatement of the articles of incorporation has been duly approved by the board of directors. 4. The foregoing second amendment and restatement of the articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 17,500,000 shares of Common Stock. No shares of Preferred Stock have been issued and are outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was at least 80% to establish the provisions of Article V and at least 70% for all other provisions of this corporation's Second Amended and Restated Articles of Incorporation. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATE: May______, 1998. _______________________________ Saeed A. Malik, President _______________________________ Warren T. Lazarow, Secretary EX-3.2 5 FORM OF AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF ISE LABS, INC. ARTICLE I - OFFICES ------------------- Section 1. The principal executive offices of ISE LABS, INC. (the "Corporation") shall be at such place inside or outside the State of California as the Board of Directors may determine from time to time. Section 2. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate, or as the business of the Corporation may require. ARTICLE II - SHAREHOLDERS' MEETINGS ----------------------------------- Section 1. Annual Meetings. The annual meeting of the shareholders --------------- of the Corporation for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held at such place and at such time as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. If the annual meeting of the shareholders be not held as herein prescribed, the election of directors may be held at any meeting thereafter called pursuant to these Bylaws. Section 2. Special Meetings. Special meetings of the shareholders, ---------------- for any purpose whatsoever, unless otherwise prescribed by statute, may be called at any time by the Chairman of the Board, the President, or by the Board of Directors, or by one or more shareholders holding not less than ten percent (10%) of the voting power of the Corporation. Section 3. Place. All meetings of the shareholders shall be at any ----- place within or without the State of California designated either by the Board of Directors or by written consent of the holders of a majority of the shares entitled to vote thereat, given either before or after the meeting. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the Corporation. Section 4. Notice. Notice of meetings of the shareholders of the ------ Corporation shall be given in writing to each shareholder entitled to vote, either personally or by first-class mail (unless the Corporation has 500 or more shareholders determined as provided by the California Corporations Code on the record date for the meeting, in which case notice may be sent by third-class mail) or other means of written communication, charges prepaid, addressed to the shareholder at his address appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice. Notice of any such meeting of shareholders shall be sent to each shareholder entitled thereto not fewer than ten (10) (or, if sent by third-class mail, 30) nor more than 60 days before the meeting. Said notice shall state the place, date and hour of the meeting and (1) in the case of special meetings, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of annual meetings, those matters that the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to Section 601(f) of the California Corporations Code any proper matter may be presented at the meeting for shareholder action, and (3) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the mailing of the notice to be presented by management for election. Section 5. Adjourned Meetings. Any shareholders' meeting may be ------------------ adjourned from time to time by the vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy. Notice of any adjourned meeting need not be given unless a meeting is adjourned for forty- five (45) days or more from the date set for the original meeting. Section 6. Quorum. The presence in person or by proxy of the persons ------ entitled to vote a majority of the shares entitled to vote at any meeting constitutes a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but no other business may be transacted, except as provided above. Section 7. Consent to Shareholder Action. Any action that may be ----------------------------- taken at any meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that (1) unless the consents of all shareholders entitled to - -------- ------- vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given as required by the California Corporations Code, and (2) directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Section 8. Waiver of Notice. The transactions of any meeting of ---------------- shareholders, however called and noticed, and whenever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting, or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 9. Voting. The voting at all meetings of shareholders need ------ not be by ballot, but any qualified shareholder before the voting begins may demand a stock vote whereupon such stock vote shall be taken by ballot, each of which shall state the name of the shareholder voting and the number of shares voted by such shareholder, and if such ballot be cast by a proxy, it shall also state the name of such proxy. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person, or by proxy appointed in a writing subscribed by such shareholder and bearing a date not more than eleven (11) months prior to said meeting, unless the writing states that it is irrevocable and satisfies Section 705(e) of the California Corporations Code, in which event it is irrevocable for the period specified in said writing and said Section 705(e). Section 10. Record Dates. In the event the Board of Directors fixes ------------ a day for the determination of shareholders of record entitled to vote as provided in Section 1 of Article V of these Bylaws, then, subject to the provisions of the General Corporation Law of the State of California, only persons in whose name shares entitled to vote stand on the stock records of the Corporation at the close of business on such day shall be entitled to vote. If no record date is fixed: The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is given; and The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days. Section 11. Cumulative Voting for Election of Directors. Provided ------------------------------------------- the candidate's name has been placed in nomination prior to the voting and one or more shareholders has given notice at the meeting prior to the voting of the shareholder's intent to cumulate the shareholder's votes, every shareholder entitled to vote at any election for directors shall have the right to cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder shall think fit. The candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. This Section 11 of Article II shall not be effective when the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code, and thereafter shareholders shall no longer be entitled to cumulate their votes for candidates in an election of directors. ARTICLE III - BOARD OF DIRECTORS -------------------------------- Section 1. Powers. Subject to any limitations in the Second Amended ------ and Restated Articles of Incorporation or these Amended and Restated Bylaws and to any provision of the California Corporations Code requiring shareholder authorization or approval for a particular action, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by, or under the direction of, the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised, under the ultimate direction of the Board of Directors. Section 2. Number, Tenure and Qualifications. The number of --------------------------------- directors that shall constitute the whole Board of Directors shall be not fewer than four (4) nor more than seven (7), the exact number of directors to be fixed from time to time within such limit by a duly adopted resolution of the Board of Directors or shareholders. The exact number of directors presently authorized shall be five (5) until changed within the limits specified above by a duly adopted resolution of the Board of Directors or shareholders. Directors need not be shareholders. Prior to the date on which the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code, the Directors shall hold office until the next annual meeting of shareholders and until their respective successors are elected. If any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. When the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code, each Director shall hold office for the period corresponding to that director's class as set forth in the Corporation's Second Amended and Restated Articles of Incorporation. Section 3. Regular Meetings. A regular annual meeting of the Board ---------------- of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide for other regular meetings from time to time by resolution. Section 4. Special Meetings. Special meetings of the Board of ---------------- Directors may be called at any time by the Chairman of the Board, or the President or any Vice President, or the Secretary or any two (2) directors. Written notice of the time and place of all special meetings of the Board of Directors shall be delivered personally or by telephone or facsimile to each director at least forty-eight (48) hours before the meeting, or sent to each director by first-class mail, postage prepaid, at least four (4) days before the meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice to such director. Section 5. Place of Meetings. Meetings of the Board of Directors may ----------------- be held at any place within or without the State of California, which has been designated in the notice, or if not stated in the notice or there is no notice, the principal executive office of the Corporation or as designated by the resolution duly adopted by the Board of Directors. Section 6. Participation by Telephone. Members of the Board of -------------------------- Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 7. Quorum. A majority of the Board of Directors shall ------ constitute a quorum at all meetings. In the absence of a quorum a majority of the directors present may adjourn any meeting to another time and place. If a meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the reconvened meeting to the directors who were not present at the time of adjournment. Section 8. Action at Meeting. Every act or decision done or made by ----------------- a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. Waiver of Notice. The transactions of any meeting of the ---------------- Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. Action Without Meeting. Any action required or permitted ---------------------- to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 11. Removal. The Board of Directors may declare vacant the ------- office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; provided, however, that unless the entire Board of Directors is removed, no - -------- ------- individual director may be removed when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively (without regard to whether shares may otherwise be voted cumulatively) at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and either the number of directors elected at the most recent annual meeting of shareholders, or if greater, the number of directors for whom removal is being sought, were then being elected. In the event an office of a director is so declared vacant or in case the Board of Directors or any one or more directors be so removed, new directors may be elected at the same meeting. Section 12. Resignations. Any director may resign effective upon ------------ giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 13. Vacancies. Except for a vacancy created by the removal --------- of a director, all vacancies in the Board of Directors, whether caused by resignation, death or otherwise, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual, regular or special meeting of the shareholders. Vacancies created by the removal of a director may be filled only by approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. Section 14. Compensation. By resolution of the Board of Directors, ------------ an annual fee, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 15. Committees. The Board of Directors may, by resolution ---------- adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors in the management of the business and affairs of the Corporation, except with respect to (a) the approval of any action requiring shareholders' approval or approval of the outstanding shares, (b) the filling of vacancies on the Board of Directors or any committee, (c) the fixing of compensation of directors for serving on the Board of Directors or a committee, (d) the adoption, amendment or repeal of Bylaws, (e) the amendment or repeal of any resolution of the Board of Directors that by its express terms is not so amendable or repealable, (f) a distribution to shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors, and (g) the appointment of other committees of the Board of Directors or the members thereof. ARTICLE IV - OFFICERS --------------------- Section 1. Number and Term. The officers of the Corporation shall be --------------- a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer, all of which shall be chosen by the Board of Directors. In addition, the Board of Directors may appoint such other officers as may be deemed expedient for the proper conduct of the business of the Corporation, each of whom shall have such authority and perform such duties as the Board of Directors may from time to time determine. The officers to be appointed by the Board of Directors shall be chosen annually at the regular meeting of the Board of Directors held after the annual meeting of shareholders and shall serve at the pleasure of the Board of Directors. If officers are not chosen at such meeting of the Board of Directors, they shall be chosen as soon thereafter as shall be convenient. Each officer shall hold office until his successor shall have been duly chosen or until his removal or resignation. Section 2. Inability to Act. In the case of absence or inability to ---------------- act of any officer of the Corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. Section 3. Removal and Resignation. Any officer chosen by the Board ----------------------- of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all the members of the Board of Directors. Any officer chosen by the Board of Directors may resign at any time by giving written notice of said resignation to the Corporation. Unless a different time is specified therein, such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors. Section 4. Vacancies. A vacancy in any office because of any cause --------- may be filled by the Board of Directors for the unexpired portion of the term. Section 5. Chairman of the Board. The Chairman of the Board shall --------------------- preside at all meetings of the Board of Directors. Section 6. President. The President shall be the general manager and --------- chief executive officer of the Corporation, subject to the control of the Board of Directors, and as such shall preside at all meetings of shareholders, shall have general supervision of the affairs of the Corporation, shall sign or countersign or authorize another officer to sign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors, shall make reports to the Board of Directors and shareholders, and shall perform all such other duties as are incident to such office or are properly required by the Board of Directors. Section 7. Vice President. In the absence of the President, or in -------------- the event of such officer's death, disability or refusal to act, the Vice President, or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their selection, or in the absence of any such designation, then in the order of their selection, shall perform the duties of President, and when so acting, shall have all the powers and be subject to all restrictions upon the President. Each Vice President shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 8. Secretary. The Secretary shall see that notices for all --------- meetings are given in accordance with the provisions of these Bylaws and as required by law, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to such office, or as are properly required by the President or by the Board of Directors. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 9. Chief Financial Officer. The Chief Financial Officer may ----------------------- also be designated by the alternate title of "Treasurer." The Chief Financial Officer shall have custody of all moneys and securities of the Corporation and shall keep regular books of account. Such officer shall disburse the funds of the Corporation in payment of the just demands against the Corporation, or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of such officer, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation. Such officer shall perform all duties incident to such office or that are properly required by the President or by the Board of Directors. The Assistant Treasurer or the Assistant Treasurers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 10. Salaries. The salaries of the officers shall be fixed -------- from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the Corporation. Section 11. Officers Holding More than One Office. Any two or more ------------------------------------- offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 12. Approval of Loans to Officers. The Corporation may, upon ----------------------------- the approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the Corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the Corporation, (ii) the Corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the California Corporations Code) on the date of approval by the Board of Directors, and (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE V - MISCELLANEOUS ------------------------- Section 1. Record Date and Closing of Stock Books. The Board of -------------------------------------- Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty (60) nor less than ten (10) days prior to the date of the meeting or event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of a period of not more than sixty (60) days prior to the date of a shareholders' meeting, the date when the right to any dividend, distribution, or allotment of rights vests, or the effective date of any change, conversion or exchange of shares. Section 2. Certificates. Certificates of stock shall be issued in ------------ numerical order and each shareholder shall be entitled to a certificate signed in the name of the Corporation by the Chairman of the Board or the President or a Vice President, and the Chief Financial Officer, the Secretary or an Assistant Secretary, certifying to the number of shares owned by such shareholder. Any or all of the signatures on the certificate may be facsimile. Prior to the due presentment for registration of transfer in the stock transfer book of the Corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise hereunder by the laws of the State of California. Section 3. Representation of Shares in Other Corporations. Shares of ---------------------------------------------- other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the Corporation by the Chairman of the Board, the President or any Vice President and the Chief Financial Officer or the Secretary or an Assistant Secretary. Section 4. Fiscal Year. The fiscal year of Corporation shall end on ----------- the 31st day of October. Section 5. Annual Reports. The Annual Report to shareholders, -------------- described in the California Corporations Code, is expressly waived and dispensed with. Section 6. Amendments. Bylaws may be adopted, amended, or repealed ---------- by the vote or the written consent of shareholders entitled to exercise a majority of the voting power of the Corporation. Subject to the right of shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board of Directors, except that a Bylaw amendment thereof changing the authorized number of directors may be adopted by the Board of Directors only if these Bylaws permit an indefinite number of directors and the Bylaw or amendment thereof adopted by the Board of Directors changes the authorized number of directors within the limits specified in these Bylaws. Section 7. Indemnification of Corporate Agents. ------------------------------------ (a) The Corporation shall indemnify each of its agents against expenses, judgments, fines, settlements and other amounts, actually and reasonably incurred by such person by reason of such person's having been made or having threatened to be made a party to a proceeding to the fullest extent permissible under the provisions of Section 317 of the California Corporations Code. The terms "agent", "proceeding" and "expenses" made in this Section 7 shall have the same meaning as such terms in said Section 317. (b) Expenses reasonably incurred by an agent of the Corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he or she is or was an agent of the Corporation (or was serving at the Corporation's request as a director or officer of another corporation) shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized by relevant sections of the General Corporation Law of California. (c) Notwithstanding the foregoing, the Corporation shall not be required to advance such expenses to an agent who is party to an action, suit or proceeding brought by the Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by such agent, wrongful disclosure of confidential information, or any other willful and deliberate breach in bad faith of such agent's duty to the Corporation or its shareholders. EX-10.1 6 ASSIGNMENT AND ASSUMPTION OF LEASE Exhibit 10.1 ASSIGNMENT AND ASSUMPTION OF LEASE This Assignment and Assumption of Lease is made as of September 12, 1997, among R N D Funding Company, Inc., A Delaware Corporation, c/o Lincoln Property Company N.C., Inc. ("Landlord"), Alphatec Electronics Company Limited (Public), A Thailand Public Corporation ("Assignor"), and Digital Testing Services, Inc., A California Corporation ("Assignee"), who agree as follows: 1. Recitals. This Assignment and Assumption of Lease is made with -------- reference to the following facts and objectives: A. Kim Camp No. VII ("Kim Camp") and Assignor, as Lessee, entered into a written Lease Agreement dated March 23, 1995 (the "Lease"), in which Kim Camp leased to Assignor and Assignor leased from Kim Camp approximately 70,538 square feet of space at 3600 Peterson Way, Santa Clara, California ("Premises"), per Exhibit "A" attached. B. Kim Camp has assigned the Lease to Landlord. C. Assignor wishes to assign all its right, title and interest in the Lease to Assignee and Assignee wishes to accept said assignment. D. Landlord agrees to consent to the proposed assignment on the conditions set forth herein. 2. Effective Date of Assignment. The assignment contemplated herein ---------------------------- shall take effect on September 12, 1997, and Assignor shall give possession of the Premises to Assignee on that date. 3. Assignment and Assumption. Assignor assigns and transfers to Assignee ------------------------- all its right, title and interest in the Lease and to the Premises, and Assignee accepts the assignment and assumes and agrees to perform, from the date the assignment becomes effective, as a direct obligation to Lessor, all duties and obligations of Assignor under the Lease. 4. Landlord's Consent. Landlord consents to the assignment without ------------------ waiver of restrictions, if any, concerning further assignment. 5. Assignor's Liability. Assignor shall remain liable for the -------------------- performance of the provisions of the Lease. 6. Security Deposit. The parties agree that Assignor shall deposit the ---------------- sum of ($54,314.26), to be be applied subject to the provisions of the Lease. Assignor releases all claims to that sum, and the sum shall be held by Lessor for the benefit of Assignee, subject to the provisions of the Lease. 7. Indemnity. Assignor and Assignee, jointly and severally, agree to --------- indemnify and hold Lessor harmless and defend Lessor, with counsel satisfactory to Lessor, from any and all asserted, threatened or actual liabilities, losses, damages, suits, actions, and claims, of any nature whatsoever, incurred by Lessor as a result of, or arising from, or which is related to the matters set forth in this Agreement, including, without limitation, the assignment by Assignor of all of its right, title and interest in and to the Lease to Assignee and the assumption by Assignee of all duties and obligations of Assignor under the Lease. 8. Attorneys' Fees. If any party commences an action against any of the --------------- other parties arising out of or in connection with this Assignment and Assumption of Lease, the prevailing party or parties shall be entitled to recover from the losing party or parties reasonable attorneys' fees and costs of suit. 9. General Provisions. ------------------ A. Entire Agreement: No Modifications. This Agreement incorporates ----------------------------------- the entire understanding between the parties to the Agreement with respect to the subject matter of it. Any prior correspondence, memoranda, understandings, offers, negotiations and agreements, oral or written, are replaced in total by this Agreement. This Agreement may not be modified or amended except in writing, signed by the parties hereto. B. Time. Time is of the essence in the performance of the parties' ---- respective obligations set forth in this Agreement. C. Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the parties to this Agreement and their respective successors and assigns. D. Construction. This Agreement shall be governed by and construed ------------ under the laws of the State of California. The parties acknowledge that each party and its counsel, if any, have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Agreement or any amendments or exhibits to it or any document executed and delivered by either party in connection with this Agreement. All captions in this Agreement are for reference only and shall not be used in the interpretation of this Agreement or any related document. Whenever required by the context of this Agreement, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all such provisions shall remain in full force and effect. ASSIGNOR: . Alphatec Electronics Company Limited (Public) . a Thailand Public Corporation By: Date: 9/19/97 ------------------------------- ---------------- R.B. Mollerstuen Its: Acting C.E.O. ------------------------------- ASSIGNEE: . Digital Testing Services, Inc. . a California Corporation By: /s/ [ILLEGIBLE SIGNATURE] Date: Sept. 24, 1997 ------------------------------ ---------------- Its: V.P. ------------------------------- LANDLORD: . RND Funding Company, Inc. . a Delaware Corporation By: Lincoln Property Company Management Services, Inc., As Manager and Agent for Landlord By: /s/ [ILLEGIBLE SIGNATURE] ---------------------------------- Its: Vice President B. Time. Time is of the essence in the performance of the parties' ---- respective obligations set forth in this agreement. C. Successor and Assigns. This Agreement shall inure to the benefit of --------------------- and be binding upon the parties to this Agreement and their respective successors and assigns. D. Construction. This Agreement shall be governed by and construed ------------ under the laws of the State of California. The parties acknowledge that each party and its counsel, if any, have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Agreement or any amendments or exhibits to it or any document executed and delivered by either party in connection with this Agreement. All captions in this Agreement are for reference only and shall not be used in the interpretation of this Agreement or any related document. Whenever required by the context of this Agreement, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all such provisions shall remain in full force and effect. ASSIGNOR: . Alphatec Electronics Company Limited (Public) . By: Date: 9/19/97 ------------------------------ --------------- Its: Acting CEO ------------------------------ ASSIGNEE: . Digital Testing Services, Inc. By: Date: ------------------------------ --------------- Its: ------------------------------ [Word Processing will place appropriate Lessor reference from signature block here.] EX-10.2 7 LEASE AGREEMENT BETWEEN KIM AND ALPHATEC LEASE AGREEMENT BETWEEN KIM CAMP NO. VII AS LANDLORD AND ALPHATEC ELECTRONICS COMPANY LIMITED (PUBLIC) A THAILAND PUBLIC CORPORATION AS TENANT TABLE OF CONTENTS -----------------
Page ---- 1. Premises......................................... 1 2. Tenant Improvements; Condition of Premises....... 1 2.1 Construction of Tenant Improvements....... 1 2.2 Contractor; Construction.................. 1 2.3 Improvement Costs......................... 3 2.4 Delivery of Premises; As-is Condition..... 4 3. Term............................................. 5 3.1 Initial Lease Term........................ 5 3.2 Extended Terms............................ 6 4. Rent............................................. 7 4.1 Base Rent................................. 7 4.2 Rent for Extended Term.................... 8 5. [Intentionally Omitted].......................... 10 6. Operating Expenses and Taxes..................... 10 6.1 Payment by Tenant......................... 10 6.2 Definitions............................... 12 7. Utilities........................................ 14 8. Late Charges..................................... 15 9. Use of Premises; Compliance with Laws............ 15 9.1 General................................... 15 9.2 Hazardous Materials....................... 17 9.3 Signage................................... 20 9.4 Reasonableness of Restrictions............ 20 10. Alterations; Condition on Termination............ 21 11. Repairs and Maintenance.......................... 22 11.1 Tenant's Obligations...................... 22 11.2 Landlord's Obligations.................... 23 12. Insurance........................................ 24 12.1 Tenant's Insurance........................ 24 12.2 Landlord's Insurance...................... 25 12.3 Waiver of Subrogation..................... 25 13. Limitation of Liability and Indemnity............ 26 14. Assignment and Subletting........................ 28 14.1 In General................................ 28 14.2 Transfers of Interests in Tenant.......... 29 14.3 Permitted Transfers....................... 29 14.4 Excess Rents.............................. 29 15. Ad Valorem Taxes................................. 30 16. Lender Requirements.............................. 30 16.1 Subordination............................. 30
16.2 Attornment................................ 31 16.3 Approval by Lender........................ 31 17. Right of Entry................................... 31 18. Estoppel Certificate............................. 32 19. Tenant's Default................................. 33 20. Remedies for Tenant's Default.................... 34 20.1 Termination............................... 34 20.2 Continuance of Lease...................... 36 20.3 Reletting Premises........................ 36 20.4 Right to Cure Tenant's Default............ 37 21. Surrender of Premises............................ 37 22. Landlord's Default............................... 38 23. Parking.......................................... 38 24. Sale of Premises................................. 38 25. Waiver........................................... 38 26. Casualty Damage.................................. 39 27. Condemnation..................................... 41 28. General Provisions............................... 42 28.1 Time...................................... 42 28.2 Successors and Assigns.................... 42 28.3 Recordation............................... 42 28.4 Landlord's Personal Liability............. 42 28.5 Separability.............................. 42 28.6 Choice of Law............................. 42 28.7 Attorneys' Fees........................... 42 28.8 Interest.................................. 43 28.9 Notices................................... 43 28.10 Authorization............................. 43 28.11 Prior Agreements.......................... 44 28.12 Quiet Enjoyment........................... 44 28.13 Brokers................................... 44
ii LEASE AGREEMENT --------------- DATE: March 23, 1995 LANDLORD: KIM CAMP NO. VII, a California general partnership 50 West San Fernando Street, Suite 320 San Jose, CA 95113 TENANT: ALPHATEC ELECTRONICS COMPANY LIMITED (PUBLIC) a Thailand public corporation 1245 Oakmead Parkway, Suite 200 Sunnyvale, CA 94086 After Commencement Date: 3600 Peterson Way Santa Clara, CA 1. Premises. Landlord hereby leases to Tenant, upon the terms and -------- conditions contained in this lease ("Lease"), those certain premises (the "Premises") consisting of the ("Land") and the "Building" located at 3600 Peterson Way, Santa Clara, California, which Premises are shown on the map attached hereto as Exhibit "A." The Building contains approximately 70,538 square feet. 2. Tenant Improvements; Condition of Premises. ------------------------------------------ 2.1 Development of Plans and Specifications. On or before April 11, --------------------------------------- 1995, Landlord shall cause to be prepared and submitted to Tenant working drawings and related specifications (the "Plans and Specifications") for the interior improvements (the "Tenant Improvements") depicted in the floor plan attached hereto as Exhibit "B". Provided that Landlord has submitted the Plans and Specifications to Tenant by the date set forth in the preceding sentence, Tenant shall review and approve the Plans and Specifications no later than 5:00 p.m. April 14, 1995. 2.2 Contractor; Construction. Upon review and approval of the Plans ------------------------ and Specifications by Tenant, Landlord shall submit the same for bidding purposes to Devcon Construction ("Devcon") and 1 one other contractor selected by Tenant ("Tenant's Contractor"), which submission shall be with instructions that such contractors must provide full written bids for the construction of the Tenant Improvements to Landlord no later than 5:00 p.m., April 18, 1995. Landlord shall select, for the construction of the Tenant Improvements, the contractor which has submitted the lowest responsive bid; provided, however, Landlord shall only be required to select Tenant's Contractor to the extent such contractor has the requisite level of back-ground and experience, is able to provide full performance and payment bonding for the Tenant Improvements (whether or not bonds are actually obtained), and otherwise has the financial capability to carry out the subject construction; provided further, however, in the event Tenant's Contractor has submitted the lowest responsive bid (and meets the requirements set forth above), Landlord may nevertheless select Devcon if either Devcon agrees to lower its bid to that submitted by Tenant's Contractor or Landlord otherwise agrees to increase the Improvement Allowance (as defined in Section 2.3 below) to include the excess of Devcon's bid over the bid of Tenant's Contractor. The contractor selected, as provided above, shall be retained by Landlord and the actual construction for the Tenant Improvements shall be carried out under the direction and supervision of Landlord. Landlord shall use its reasonable efforts to cause the Tenant Improvements to be Substantially Completed by July 1, 1995. "Substantially Completed" shall mean (a) the Tenant Improvements have been completed in accordance with the Plans and Specifications approved by Landlord, except for minor deviations and Tenant's punchlist items and (b) a certificate of occupancy has been issued for the Premises by the appropriate governmental authority. 2 Tenant shall have the right to have its employees and/or contractors enter the Premises prior to the Substantial Completion of the Tenant Improvements for the purposes of installing Tenant's data and telecommunications cabling and related fixtures and equipment, provided that prior to such entry Tenant shall submit to Landlord evidence of the liability insurance required pursuant Section 12.1 below. Any entry by Tenant pursuant to the preceding sentence shall be subject to the provisions of Section 13.1 below. During the course of construction of the Tenant Improvements, Landlord shall obtain the prior consent of Tenant to any changes to, or deviations from, the Plans and Specifications (as approved by both Landlord and Tenant), which changes or deviations would, in the aggregate, result in an overall increase in the total amount of the Improvements Costs. 2.3 Improvement Costs. All of the costs, expenses, and applicable fees ----------------- to be incurred in connection with the design and construction of the Tenant Improvements ("Improvement Costs") shall be advanced by Landlord. Landlord shall advance funds for the Improvements Costs up to One Million Four Hundred Ten Thousand Seven Hundred Sixty Dollars ($1,410,760) as the "Improvement Allowance". Any Improvements Costs incurred by Landlord in excess of the Improvement Allowance (but only to the extent such excess does not exceed Three Hundred Fifty-two Thousand Six Hundred Ninety Dollars ($352,690) (the "Additional Allowance") shall be amortized over the initial Lease Term (together with interest thereon at the rate of eleven percent (11%) per annum) and shall be payable by Tenant, as Additional Rent under this Lease, in equal monthly installments over the initial Lease Term with each payment of monthly Base Rent payable by Tenant under this Lease. Any Improvement Costs incurred by Landlord in connection with the 3 Tenant Improvements in excess of the Improvement Allowance and the Additional Allowance shall be paid for by Tenant, which payment shall be due and payable within ten (10) days following written demand therefor by Landlord. 2.4 Delivery of Premises: "As Is" Condition. Landlord shall not be in --------------------------------------- default hereunder and shall not be liable to Tenant for any damage or loss incurred by Tenant by reason of Landlord's failure, for whatever reason, to cause the Premises to be delivered (or the Tenant Improvements Substantially Completed) by any particular date, nor shall this Lease be void nor voidable on account thereof; provided, however, in the event the Tenant Improvements have not been Substantially Completed on or before January 31, 1996 ("Outside Completion Date") and such delay is not a result of a Tenant Delay (as defined in Section 3.1 below), Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by providing Landlord with written notice thereof on or before the date which is ten (10) days following the Outside Completion Date: Tenant shall accept the Premises on the Commencement Date (as defined below) in its "As Is" condition, subject to the following: (a) The Tenant Improvements shall have been constructed in accordance with the Plans and Specifications approved by Landlord; (b) The Premises shall be in compliance with all applicable governmental ordinances, rules, codes, or regulations which relate to the Building (collectively, "General Building Regulations"); and, (c) The Building shall comply with the Americans with Disabilities Act ("ADA"). 4 All costs and expenses incurred in placing the base Building shell in compliance with any General Building Regulations and/or the ADA shall be borne by Landlord and shall not be deducted from the Improvement Allowance or, if applicable, included within Additional Allowance. All other costs and expenses relating to compliance with General Building Regulations and/or the ADA (including, without limitation, any such compliance which is required in connection with the Tenant Improvements) may be deducted from the Improvement Allowance and, if applicable, included within Additional Allowance. 3. Term. ---- 3.1 Initial Lease Term; Early Occupancy. The term of this Lease (the ----------------------------------- "Lease Term") shall commence on the Commencement Date (defined below) and shall end on the date that is five (5) years thereafter, which Lease Term is subject to extension as provided in Section 3.2 below. The Commencement Date shall be the date which is sixty (60) days following the earlier of the date (a) upon which the Tenant Improvements are Substantially Completed, or (b) upon which the Tenant Improvements would have been Substantially Completed, but for the occurrence of any Tenant Delays; provided, however, in no event shall the Commencement Date be earlier than September 1, 1995. "Tenant Delay(s)" shall mean delays in the design and/or construction of the Tenant Improvements caused by (i) Tenant's failure to review and approve the Plans and Specifications within the times set forth in Section 2.1 above, (ii) errors or defects in the floor plan of the Tenant Improvements (to the extent prepared by Tenant or Tenant's consultants), (iii) requests by Tenant for change orders or other modifications to the Tenant Improvements, and/or (iv) any other act or omission on the part of Tenant, or its agents, employees, contractor's, or 5 consultants. The events described in (ii) through (iv) above shall only constitute Tenant Delays to the extent such events result in an actual delay in the overall substantial completion of the Tenant Improvements. Tenant may take occupancy of the Premises at such time as the Tenant Improvements are Substantially Completed. The date of such occupancy is hereinafter referred to as the "Occupancy Date". Tenant's entry and occupancy of the Premises on the Occupancy Date shall be subject to all the terms, covenants, conditions and provisions of this Lease, including, but not limited to, the maintenance of insurance as provided in Section 12.1, but excepting therefrom the payment by Tenant of monthly Base Rent, as described in Section 4.1 below. As of the Commencement Date, all terms, covenants, conditions and provisions of the Lease shall apply. At such time as the Commencement Date is ascertainable, Landlord shall provide to Tenant written notice thereof. 3.2 Extended Term. The Landlord hereby grants to Tenant one option to ------------- extend the Lease Term (the "Option") upon the following terms and conditions: (a) The option shall give Tenant the right to extend the Lease Term for one (1) additional five (5) year period (the "Extended Term"); (b) Tenant shall give Landlord written notice of its exercise of the Option no later than six (6) months before the date the Lease Term would end but for said exercise; (c) Tenant shall not have the right to exercise the Option if at the time of exercise Tenant is in material default under this Lease. The period of exercise for the Option shall not be extended for any period for which Tenant is 6 unable to exercise the Option by reason of Tenant's material default; (d) All terms and conditions of this Lease shall apply during the Extended Term except that Base Rent shall be determined as provided in Section 4.2 below; and, (e) Once Tenant delivers notice of its exercise of the Option, Tenant may not withdraw such exercise, and such notice of exercise shall operate to automatically extend the Lease Term; provided, however, if Tenant is in material default on the date an Extended Term is to begin, this Lease, at Landlord's election shall not be extended pursuant to the provisions of this Section 3.2, but shall terminate on the last day of the Lease Term. The term "Lease Term" shall mean and refer to the initial term of the Lease, as described in Section 3.1 above, together with the Extended Term which has been put into effect by reason of an exercise of the Option by Tenant pursuant to this Section 3.2. 4. Rent. ---- 4.1 Base Rent; Additional Rent. -------------------------- 4.1.1 Base Rent. Tenant agrees to pay Landlord, without --------- prior notice, demand, or right of deduction and/or offset monthly "Base Rent" in the amounts set forth in Exhibit "C" attached hereto, which Base Rent shall be due and payable at Landlord's address shown above on the first day of each calendar month throughout the Lease Term. Base Rent for any period during the Lease Term which is for less than one (1) month shall be prorated based on a thirty (30) day month. 4.1.2 Actual Rent. In addition to Base Rent, Tenant shall ----------- pay, as "Additional Rent," Tenant's Percentage Share of Operating Expenses and Taxes, utility costs as referred to in Section 7 below, that portion of any Improvement Costs described 7 in the last sentence of Section 2.3, late charges and interest as provided for in this Lease, and all other items to be paid hereunder to Landlord. The term "Rent(s)" whenever used herein refers to Base Rent and Additional Rent. 4.1.3 Rent Deposit. Upon execution of this Lease, Tenant ------------ shall pay to Landlord the sum of Fifty Thousand Seven Hundred Eighty-seven Dollars and Thirty-six Cents ($50,787.36) as a prepayment towards Base Rent for the first month of the Lease Term. 4.2 Rent for Extended Term. Base Rent for the Extended Term shall ---------------------- be an amount equal to ninety-five percent (95%) of the fair market rental value of the Premises in relation to market conditions at the time of the extension; provided, however, in no event shall the Base Rent for the Extended Term be less than Fifty-two Thousand Nine Hundred Three Dollars and Fifty Cents(i.e. $52,903.50). The fair market rental value of the Premises shall be determined by and as follows: 4.2.1 Mutual Agreement. After timely receipt by Landlord of ---------------- Tenant's notice of exercise of the Option, Landlord and Tenant shall have a period of thirty (30) days in which to agree on Base Rent for the Extended Term; provided, however, if Tenant's notice of exercise of the Option is given prior to the 48th month of the Lease Term, then the thirty (30) day period referenced herein shall commence to run on the first day of the 53rd month of the Lease Term and if Tenant's notice of exercise of the Option is given after the 48th month of the Lease Term, then the thirty (30) day period referenced herein shall commence to run as of the date of such notice. If Landlord and Tenant agree on Base Rent during the thirty (30) day, they shall immediately execute an amendment to this Lease stating Base Rent for the Extended Term. If Landlord 8 and Tenant are unable to so agree on Base Rent, then Base Rent for the Extended Term shall be calculated by utilizing the fair market rental value of the Premises determined as provided in Section 4.2.2 below. 4.2.2 Appraisal. Within ten (10) days after the expiration --------- of the thirty (30) day period described in Section 4.2.1 above, each party, at its cost and by giving notice to the other party, shall appoint M.A.I. real estate appraiser, with at least five (5) years full-time commercial appraisal experience in Santa Clara County, to appraise and set the fair market rental value of the Premises. If a party does not appoint an appraiser within five (5) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the fair market rental value of the Premises. The cost of such sole appraiser shall be borne equally by the parties. The two appraisers appointed by the parties shall meet promptly and attempt to set the fair-market rental value of the Premises. If they are unable to agree within twenty (20) days after the last appraiser has been appointed, then the two appraisers shall attempt to select a third appraiser meeting the qualifications stated in this Section 4.2.2 within ten (10) days after the last day the two appraisers are given to set the fair market rental value of the Premises. If they are unable to agree on the third appraiser, either of the parties to this Lease, by giving ten (10) days notice to the other party, may apply to the presiding judge of the Superior Court of Santa Clara County for the selection of a third appraiser who meets the qualifications stated above. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be instructed to 9 select which of the two appraisals submitted by the parties' respective appraisers more closely represents the fair market rental value for the Premises, which selection shall be the fair market rental value of the Premises. In establishing the fair market rental value, the appraiser or appraisers shall consider (on a triple net basis) the reasonable market rental value for the Premises (which shall include considerations of (a) rental rates for comparable space with comparable tenant improvements, (b) cost of living increases or other rental adjustments, (c) the relative strength of the tenants, and (d) the size of the space without regard to the existence of this Lease. 5. [Intentionally Omitted]. 6. Operating Expenses and Taxes. ---------------------------- 6.1 Payment by Tenant. Pursuant to this Section 6, Tenant shall pay to ----------------- Landlord Tenant's Percentage Share of Operating Expenses and Taxes. (a) Operating Expenses. Landlord shall determine or estimate the ------------------ amount of Tenant's Percentage Share of Operating Expenses for the calendar year in which the Occupancy Date occurs. Beginning on the Commencement Date, one- twelfth (1/12) of the amount estimated by Landlord to be Tenant's Percentage Share of Operating Expenses shall be due and payable by Tenant to Landlord, as Additional Rent, on the first day of each calendar month remaining in the calendar year. Thereafter, Landlord may estimate such increases to Tenant's Percentage Share of Operating Expenses as of the beginning of each calendar year and may require Tenant to pay one-twelfth (1/12) of such estimated amount as Additional Rent hereunder as of the first day of each calendar month. 10 In the event that during the course of any calendar year Operating Expenses have increased by more than five percent (5%) over the amount of Operating Expenses estimated by Landlord at the commencement of that calendar year, Landlord may recalculate the amount of the monthly estimated payments to be paid by Tenant in order to take into account any such increases and, following notice from Landlord of any such increase, Tenant shall pay the full amount of the recalculated payments on a monthly basis for the remainder of the subject calendar year. In making the aforesaid recalculation, Landlord may include amounts necessary to reimburse Landlord for any increased Operating Expenses applicable to that portion of the subject calendar year which was prior to the date of Landlord's notice. Not later than ninety (90) days following any calendar year (including the year following the year in which this Lease terminates), Landlord shall furnish Tenant with a true and correct accounting of the actual Operating Expenses incurred by Landlord in the preceding calendar year, and within thirty (30) days of Landlord's delivery of such accounting, Tenant shall pay to Landlord the amount of any underpayment by Tenant of Tenant's Percentage Share of Operating Expenses. Notwithstanding the foregoing, failure by Landlord to give such accounting shall not constitute a waiver by Landlord of its right to collect Tenant's Percentage Share of Operating Expenses or any underpayment by Tenant thereof. Landlord shall credit the amount of any overpayment by Tenant toward the next estimated installment(s) of Tenant's Percentage Share of Operating Expenses or, where the term of the Lease has expired or been terminated (other than due to a default by Tenant), shall refund the amount of overpayment to Tenant within 11 thirty (30) days without obligation upon Tenant to demand such refund from Landlord. (b) Taxes. Tenant shall pay to Tenant's Percentage Share of ----- Taxes within ten (10) days following the written demand by Landlord therefor, which demand shall be accompanied by a copy of the tax bill reflecting the Taxes for which Landlord is seeking payment and shall be made by Landlord no earlier than thirty (30) days prior to the due date of such Taxes. If any Taxes cover any period of time either prior to the Occupancy Date or after the expiration of the Lease Term, Tenant's Percentage Share of Taxes shall be prorated to cover only the period of time following the Occupancy Date or prior to the expiration of the Lease Term, as applicable. 6.2 Definitions. "Tenant's Percentage Share" shall be one hundred ----------- percent (100%). "Operating Expenses" are defined as all reasonable costs and expenses paid or incurred by Landlord in connection with the ownership, maintenance, repair, management, and operation of the Premises, the Building, and the Land, which reasonable costs and expenses shall include, without limit, the following: (a) Landlord's reasonable costs and expenses in carrying out repairs and maintenance pursuant to Section 11.2(b), (c), and (d) below; (b) Landlord's cost of fire, extended coverage (including rental loss insurance) and other insurance for the Building and the Land; (c) Landlord's reasonable cost of modifications to the Building occasioned by any rules, laws or regulations effective subsequent to the Occupancy Date; 12 (d) Landlord's reasonable cost of the fire sprinkler monitoring system; (e) a management fee of Twenty Thousand ($20,000) per year for each year during the initial five years of the Lease Term (and, if applicable, a management fee in a reasonable and customary amount for each year during the Extended Term; and, (f) the amortized portion of any capital expenditures incurred by Landlord with respect to the Building, including, without limitation, expenditures for modifications to Building occasioned by any rules, laws or regulations made effective subsequent to the Occupancy Date; provided, however, capital expenditures made with respect to the structure of the Building shall not be included within Operating Expenses. In any calendar year Operating Expenses shall include no more than Two Thousand Dollars ($2,000) for costs and expenses related to routine maintenance and repair of the roof of the Building; provided, however, if any roof related expense constitutes a capital expenditure, then Tenant shall pay a portion thereof as provided in (f) above. "Amortized portion" of any capital expenditure to be paid by Tenant shall mean Tenant's Percentage Share of the following: the amount of the expenditure amortized (on a monthly basis) over the useful life of the item to which the expenditure is applicable. Tenant's Percentage Share of such amortized amount shall be payable in each month after such expenditure is incurred until the earlier of (i) the expiration of the Lease Term, or (ii) the end of the useful life of the item to which the expenditure is applicable. "Taxes" are defined as all real property taxes applicable to the Land, the Building, and the Premises. The term "real 13 property taxes" shall include any form of assessment (general, special, ordinary or extraordinary), commercial rental tax, improvement bond or bonds, license fee, license tax, rental tax, levy, penalty imposed by any authority having the direct or indirect power of tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement district thereof, as against any legal or equitable interest of Landlord in the Land, the Building, and/or the Premises, as against Landlord's right to rent or to other income therefrom, or as against Landlord's business of leasing the Premises or the occupancy of Tenant, or any other tax, fee, or excise, however described including any value added tax, or any tax imposed in substitution, partially or totally, of any tax previously included within the definition of real property taxes, or any additional tax, the nature of which was previously included within the definition of real property tax. The term "real property taxes" shall not include any income of franchise taxes imposed on Landlord. In addition, in the event of any increase in real property taxes resulting from a reassessments of the Land and/or the Building due to any sale, transfer, refinancing, or other change in ownership of the Building or the Land during the initial Lease Term, then fifty percent (50%) of the increase in real property taxes resulting therefrom shall not be included as part of "real property taxes" for purposes of determining Tenant's Percentage Share of Taxes. 7. Utilities. Tenant shall be solely responsible for paying the cost of --------- all water, gas, heat, electricity, telephone, garbage and other utilities used on the Premises. Tenant shall pay directly to the utility provider the cost of all such utilities. 14 8. Late Charges. Tenant acknowledges that late payment by Tenant to ------------ Landlord of Base Rent, Tenant's Percentage Share of Operating Expenses and Taxes or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrances or notes secured by any encumbrance covering the Premises. Therefore, if any installment of Base Rent or other sum due from Tenant is not received by Landlord when due, then, within ten (10) days following the date said Base Rent or other sum is due, Tenant shall pay to Landlord, without additional invoice or demand, an additional sum equal to ten percent (10%) of such overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. The accrual and/or acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of Landlord's other rights and remedies. 9. Use of Premises; Compliance with Laws. ------------------------------------- 9.1 General. The Premises are to be used for testing, research and ------- development, related semiconductor testing and such other uses which are incidental thereto (collectively, "Tenant's Operations"). Any other use of the Premises shall only be made upon the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall not do anything or permit anything to be done in or about the Premises nor keep or bring anything or permit anything to be kept or brought therein which will in any way increase the existing rate of or affect any policy 15 of fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy. Tenant shall not use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not damage or deface or otherwise commit or suffer to be committed any waste in or upon the Premises. Tenant shall honor the terms of all recorded covenants, conditions and restrictions relating to the Land. Tenant shall honor the terms of any reasonable rules and regulations established by Landlord during the Lease Term which relate to the Premises and/or the Building. In connection with Tenant's use of the Premises, Tenant shall, at its sole cost and expense, do the following: (a) Apply for, obtain and maintain throughout the Lease Term any and all permits, licenses and other governmental approvals which are required in connection with Tenant's Operations; (b) Comply with any and all laws, rules, regulations or ordinances (collectively, "Law") of and governmental authority which govern Tenant's Operations; (c) Adopt such measures as are, from time to time, necessary or required in order to prevent injury, or damage to persons or properties, in or around the Premises as a result of any activities related to Tenant's Operations; and, (d) Subject to Article 10 below, carry out any and all alterations and improvements to the Premises which may be necessary in order to comply with the Laws, except that Tenant shall not be responsible for (nor shall Operating Expenses include) any alterations or improvements to the Premises which may be necessary in order to comply with any Laws which (i) are effective prior to 16 the Occupancy Date, and (ii) do not relate to specifically to Tenant's Operations or any other specific use of the Premises by Tenant; provided, however, subject to Landlord's obligations as set forth in Section 2.4 above, with respect to the ADA, Tenant shall carry out those alterations and improvements to the Premises which may be necessary in order to comply with the provisions of Titles I and IV of the ADA and Titles II and III of the ADA as Titles II and III of the ADA relate to any construction, alterations, renovations and/or repairs made to the Premises by or at the direction of Tenant. Any work to the Premises by Tenant to comply with the ADA shall be carried out in accordance with, and subject to, Section 10 below. 9.2 Hazardous Materials. ------------------- 9.2.1 Prohibition. Tenant and Tenant's agents, contractors, ----------- subcontractors, and employees shall not use, store, release or dispose of (collectively "Release(s)"), or allow a Release of, any Hazardous Materials (defined below) in or about the Premises, except that Tenant may, subject to the terms of this Lease, use and store in the Premises any Permitted Materials (defined below). Tenant shall, at its sole cost and expense, comply with any and all laws, rules, regulations or ordinances of any governmental authority which govern the use, handling or storage of any Hazardous Materials in or about the Premises. All provisions of this Lease relating to Tenant's obligations with respect to Hazardous Materials, including, without limitation, the obligations set forth in this Section 9.2, in Section 11.1 (regarding maintenance of the Premises) and Section 13 (regarding Tenant's indemnity of Landlord with respect to Hazardous Materials), shall survive the termination or earlier expiration of this Lease. 17 9.2.3 Definitions. As used in this Lease, the term "Hazardous ----------- Materials" includes, without limitation, any material or substance which is (i) defined as a "hazardous waste," "extremely hazardous waste" or "restricted hazardous waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as a "hazardous material," "hazardous substance," or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory), (iv) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum and any petroleum by-products, (vi) asbestos, (vii) urea formaldehyde foam insulation, (viii) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (ix) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. (S)1317), (x) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq. (42 U.S.C. (S)6903), (xi) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq. (42 U.S.C."(S) 9601), or (xii) determined to be, or defined as, under any federal, state or local 18 governmental authority as hazardous, toxic, or dangerous to persons, animals or the environment. As used in this Lease, the term "Permitted Materials" shall mean and refer to those Hazardous Substances which are (a) customarily used by Tenant in the conduct of Tenant's Operations, (b) designated by Tenant to Landlord in writing prior to use, and (c) reasonably approved, in advance of its use, by Landlord. As to any Hazardous Materials which are "Permitted Materials," Tenant shall comply with any reasonable requirements imposed by Landlord to confirm that Tenant's use of such materials are, or will be, in compliance with all applicable rules, laws and regulations, and will not otherwise not pose a threat of contamination or unlawful release in or about the Premises. 9.2.4 Landlord's Representation. Landlord hereby represents to ------------------------- Tenant that Landlord has no actual knowledge of the existence of any Hazardous Materials on or within the Land, Building and/or Premises. Tenant acknowledges that Landlord has not conducted any investigation, examination or study of the Land, Building or Premises in connection with the representation made herein. The term "actual knowledge" shall mean and refer to the knowledge of Kimball W. Small, David K. Small and Steven P. Belomy. 9.2.5 Landlord's Indemnity. Landlord hereby agrees to indemnify, -------------------- defend and hold Tenant harmless from and against any and all claims, liabilities, damages, costs or expenses arising in connection with the presence or Release of Hazardous Materials on or within the Land, the Building and/or the Premises, except to the extent that the presence of the Hazardous Materials in question (a) arose after the Occupancy Date, (b) was due to the actions of Tenant, its agents, invitees, contractors, subcontractors and/or employees or any failure by Tenant to take 19 any actions that Tenant is required to take either pursuant to the terms of this Lease or by any law, rule, regulation or ordinance, or (c) the Tenant's use or occupancy of the Premises; provided, however, in no event shall Landlord have any obligation to indemnify, defend or hold Tenant harmless from and against any of such claims, liabilities, damages, costs or expenses that (i) are covered by any insurance that is either actually maintained or required to be maintained by Tenant pursuant to the terms of this Lease (whether it be in the form of worker's compensation, business interruption, general liability, casualty or otherwise), or (ii) relate to loss of profits, loss of income or other business or consequential damages suffered or incurred by Tenant. 9.3 Signage. Tenant shall be entitled to place its name and logo ------- ("Tenant's Sign") on the two monument signs on the exterior of the Premises and/or on the exterior of the Building, subject to the following: (a) The design of Tenant's Sign shall be subject to Landlord's prior reasonable approval; (b) Tenant's Sign shall comply with all appropriate sign ordinances of the City of Santa Clara; and (c) All costs and expenses in connection with Tenant's Sign shall be borne by Tenant. 9.4 Reasonableness of Restrictions. Landlord and Tenant hereby ------------------------------ acknowledge and agree that the use restrictions set forth in this Section 9 shall be deemed reasonable in all respects and under all circumstances. Landlord and Tenant further acknowledge and agree that, notwithstanding any other provision of this Lease to the contrary, (a) in the event Tenant requests Landlord's consent to a proposed assignment or subletting pursuant to Section 14 hereof, Landlord shall be deemed reasonable in withholding its consent to 20 such assignment or subletting if the proposed assignee or subtenant intends to use the Premises for any purpose other than as set forth in Section 9.1 above, and (b) in the event of a default by Tenant, the enforcement of the use restrictions set forth herein shall be deemed reasonable for the purpose of computing the rental loss that could have been reasonably avoided by Landlord pursuant to California Civil Coded Section 1951.2. 10. Alterations; Condition on Termination. Tenant shall not install any ------------------------------------ signs, fixtures or improvements ("Alterations") to the Premises, the cost of which is Ten Thousand Dollars ($10,000) or more, without the prior written consent of Landlord. At such time as Landlord is granting its consent to any proposed Alterations, Landlord shall indicate whether such Alterations will be required to be removed upon a termination of this Lease. Tenant shall obtain all governmental permits, licenses and other consents, and shall comply with all governmental rules, laws, regulations and requirements, which are applicable to any Alterations and/or additions constructed on the Premises by Tenant, all at Tenant's sole cost and expense. Tenant shall keep the Premises, the Building and the Land free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant. During the Lease Term, all Alterations placed or constructed on the Premises by Tenant shall be deemed the property of Tenant. During the Lease Term, Tenant may remove any such Alterations without the prior consent of Landlord, provided that Tenant shall pay all costs and expenses relating to damage caused by such removal. Upon the termination of this Lease, Tenant shall cause all its equipment and trade fixtures to be removed from the Premises and shall repair any damage to the Premises resulting therefrom at its sole cost and expense. With respect to any 21 Alterations (including any Alterations not requiring the prior written consent of Landlord) not removed by Tenant prior to the termination of this Lease and provided that Landlord has not indicated otherwise, Landlord expressly reserves the right to require Tenant to remove any or all of such Alterations upon the termination of this Lease, and Tenant shall promptly remove any Alterations that Landlord so requires to be removed and repair any damage to the Premises resulting from such removal, all at Tenant's sole cost and expense. All Alterations not required, pursuant to this Section 10, to be removed shall become the property of Landlord upon the termination of this Lease. Upon termination of this Lease, Tenant shall (a) repair any damage caused by the installation or removal of any Alterations placed or constructed on the Premises by Tenant, (b) assure that the Premises, the Building and/or the Land are free and clear of all Hazardous Materials used or stored by Tenant, or Tenant's agents, employees, contractors, subcontractors, licensees, customers or invitees, during the Lease Term, and (c) assure that the Premises are in good condition and in good working order (except as to any casualty damage and where, pursuant thereto, this Lease has been terminated pursuant to Section 27 below), reasonable and normal wear and tear excepted. 11. Repairs and Maintenance. ----------------------- 11.1 Tenant's Obligations. Tenant shall, at Tenant's sole cost and -------------------- expense, do the following: (a) maintain the interior portions of the Premises in good, clean and safe condition and repair; (b) maintain all phone, network, and other communications cabling on, about or within the Premises; 22 (c) maintain those exterior portions of the Premises which are not otherwise the responsibility of Landlord as set forth in Section 11.2 below in good, clean and safe condition and repair; (d) repair any damage to the Premises, the Building or Land caused by any act or omission of Tenant or its employees, agents, invitees, licensees or contractors; and (e) conduct all maintenance, clean-ups and repair required in connection with Tenant's or Tenant's agents, employees, contractors, subcontractors, licensees, customers or invitees use and/or storage of Hazardous Materials on or about the Premises, the Building and/or the Land. Tenant shall have no right to install any device on the roof of the Premises or the Building, or make any penetrations of the roof, without the express prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, Tenant shall be directly liable to Landlord for any and all damages, costs, expenses, and other charges (including, without limitation, additional maintenance expenses) incurred by Landlord as a result of any such installations or penetrations, which damages, costs, expenses, and other charges shall be due and payable by Tenant to Landlord, as Additional Rent, within ten (10) days following demand. 11.2 Landlords Obligations. Landlord shall do the following: (a) repair and maintain in good condition the structural portions of the Building and the Premises (including, without limit, Building foundations, structural walls, and the roof structure); 23 (b) repair and maintain in good condition the roof membrane and other roof components; (c) repair and maintain in good condition all heating and HVAC systems servicing the Premises and the Building; and, (d) maintain in good condition all landscaping, parking areas and exterior grounds, and any underground plumbing and electrical systems or connections. All costs advanced by Landlord in connection with the performance of Landlord's obligations in this Section 11.2 shall be subject to repayment by Tenant to Landlord as part of Tenant's Percentage Share of Operating Expenses, except those costs advanced by Landlord in connection with the work described in 11.2(a). 12. Insurance. --------- 12.1 Tenant's Insurance. Tenant shall at all times during the Lease ------------------ Term, and at its sole cost and expense, maintain general commercial liability insurance (together with a broad form comprehensive general liability endorsement) against liability for bodily injury and property damage. The aforesaid liability insurance shall also contain an endorsement naming Landlord, and Landlord's partners, employees, agents and assignees, as "additional insureds," which endorsement shall cover the aforesaid additional insureds for all acts and omissions of said parties in or about the Premises. The aforesaid insurance shall be in an amount of not less than Two Million Dollars ($2,000,000) per occurrence and not less than Five Million Dollars ($5,000,000) in the aggregate. In no event shall the limits of said policy be considered as limiting the liability of Tenant under this Lease. 24 Tenant shall also at all times maintain standard "all risk" casualty insurance on the Tenant Improvements; and upon all of Tenant's equipment, furnishings and fixtures, The aforesaid insurance shall be with companies licensed to do business with the Insurance Commissioner of the State of California. A certificate of such insurance shall be delivered to Landlord prior to the Occupancy Date and, thereafter, on each anniversary date of the Commencement Date. The certificate for Tenant's liability insurance shall certify that the policy names Landlord and the other aforesaid persons and entities as "additional insureds" and that the policy shall not be canceled or altered without thirty (30} days prior written notice to Landlord. 12.2 Landlord's Insurance. During the Lease Term, Landlord shall -------------------- maintain standard "all risk" casualty insurance on the Building and the Premises, which coverage shall be in an amount not less than the full replacement cost of the Building, exclusive of architectural and engineering fees, excavations, footings, and foundations, and the Tenant Improvements. The policy to be maintained by Landlord, as set forth herein, shall provide that such policy shall not be canceled or altered without thirty (30) days prior written notice to Tenant. 12.3 Waiver of Subrogation. Notwithstanding any other provision of --------------------- this Lease, Landlord and Tenant each hereby waive any right of recovery against the other and the authorized representatives of the other for any loss or damage that is of the type required to be covered by any policy of insurance required under Section 12.1 or 12.2 above. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. If any insurance 25 policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waivers of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of thirty (30) days after receiving such notice either to replace the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charge, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. 13. Limitation of Liability and Indemnity. ------------------------------------- 13.1 By Tenant. Tenant agrees to save, defend and hold Landlord --------- harmless and indemnify Landlord, and Landlord's partners, employees, agents, and contractors, against all liabilities, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation) by reason of injury to person or property, from whatever cause, while in or on the Premises, or in any way connected with the Premises, with the improvements or with the personal property therein, including any liability for injury to person or property of Tenant, its agents or employees or third party persons; provided, however, Landlord shall be liable only for property damage and bodily injury resulting from the negligent acts or omissions of Landlord, or any of its partners, employees, agents or contractors. 26 Tenant's obligations under this Section 13.1 shall include the obligation to indemnify, hold harmless, and defend Landlord, and its partners, agents and employees, from and against any and all claims, losses, liabilities, costs and expenses arising out of or in connection with (a) any injury or damage resulting from Tenant's use of the Premises in connection with Tenant's Operations, and (b) any Release of any Hazardous Materials in or about the Premises, the Building and/or the Land, to the extent the Release is caused or permitted by Tenant, or any of its agents, employees, contractors, subcontractors and/or invitees. Tenant's indemnity obligations under this Section 13.1 shall survive termination of this Lease. Landlord, and Landlord's partners, employees, agents, and contractors, shall not be liable to Tenant for any damage to Tenant or Tenant's property, nor for any injury to or loss of Tenant's business nor for any damage or injury to any person from any cause; provided, however, Landlord shall be liable for, and shall indemnify, defend and hold Tenant harmless from and against any claims arising in connection with, property damage and bodily injury resulting from the willful misconduct or negligent acts or omissions of Landlord, or any of its partners, employees, agents, or contractors, but only to the extent any such property damage and bodily injury is not covered by either the insurance required to be maintained by Tenant under this Lease or by any other insurance actually maintained by Tenant. 13.2 By Landlord. Landlord agrees to save, defend and hold Tenant ----------- harmless and indemnify Tenant and Tenant's partners, employees, agents, and contractors, against all liabilities, charges and expenses (including reasonable attorneys' fees, costs of court and expenses necessary in the prosecution or defense of 27 any litigation) arising by reason of injury to person or property, from the negligent acts or omissions of Landlord, or any of its partners, employees, agents or contractors, but only to the extent any such liabilities, charges, and other items are not covered by either the insurance required to be maintained by Tenant under this Lease or by any other insurance actually maintained by Tenant; provided, however, Landlord shall in no event be liable to Tenant for any damage to or loss of Tenant's business nor for any other form of consequential damages. 14. Assignment and Subletting. ------------------------- 14.1 In General. Tenant shall not, either voluntarily or by operation ---------- of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the Premises or any part thereof, or any right or privilege appurtenant thereto, without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall give Landlord at least thirty (30) days written notice of its desire to assign or sublet all or some of the Premises. Any such assignment, sublease or the like which is approved by Landlord must be pursuant to a written agreement in a form acceptable to Landlord. Each permitted assignee, transferee, or sublessee shall assume and be deemed to have assumed this Lease (or the appropriate part hereof) and shall be and remain jointly and severally liable with Tenant for the payment of Rents and for the due performance of and compliance with all the terms, covenants, conditions and agreements to be performed or complied with by Tenant herein (including, but not limited to, the provisions of this Section 14). 14.2 Transfers of Interests in Tenant. Except as provided in Section 14.3 -------------------------------- below, any dissolution, consolidation or other reorganization of the corporation which comprises Tenant, any sale, 28 transfer, or distribution (or cumulative sales, transfers, or distributions) of substantially all of the assets of Tenant, or any sale or other transfer of a majority of the shareholder interests in Tenant shall be deemed an assignment of this Lease requiring the prior written consent of Landlord pursuant to Section 14.1 above. 14.3 Permitted Transfers. Notwithstanding Sections 14.1 and 14.2 ------------------- above, Tenant may assign this Lease to a limited partnership, corporation or other entity with which it may merge or consolidate, or to a purchaser of two- thirds (i.e. 66.66%) or more of Tenant's assets, or to any parent, subsidiary, or other limited partnership, corporation or other entity to which Tenant is affiliated, or to any entity resulting from a reorganization of Tenant, provided that each of the following shall be complied with: (a) the assignee shall execute an instrument reasonably satisfactory to Landlord assuming all of Tenant's obligations under this Lease; (b) Tenant shall give Landlord prior written notice of the subject transfer; and (c) Tenant shall provide to Landlord sufficient evidence (as reasonably determined by Landlord) that the net worth of the assignee is equal to or greater than the net worth of Tenant as of the Commencement Date or as of the date of transfer, whichever is higher. Any permitted assignment pursuant to this Section 14.3, or any other assignment otherwise permitted pursuant to this Lease, shall not release Tenant from any liability under this Lease. 14.4 Excess Rents. Any Excess Rents (defined below) payable pursuant ------------ to any assignment or subletting shall be paid to Landlord and Tenant shall have no right thereto or interest therein. Landlord shall have the right to impose terms and 29 conditions on its consent to any assignment or subletting to assure the accounting and payment to Landlord of Excess Rents. "Excess Rents" shall mean any and all rents, payments, charges and other considerations to be received by Tenant upon an assignment or subletting of all or any portion of the Premises which are in excess of the Rents payable by Tenant to Landlord under this Lease after the recovery by Tenant of reasonable amounts for brokerage commissions, legal expenses, and tenant improvement costs, to the extent such items have been incurred by Tenant in connection with the subject assignment or sublease. 15. Ad Valorem Taxes. Tenant shall pay before delinquent all taxes ---------------- assessed against the personal property of Tenant and all taxes attributable to any leasehold improvements installed by Tenant. 16. Lender Requirements. ------------------- 16.1 Subordination. This Lease is subordinate to any and all ------------- mortgages and/or deeds of trust ("Encumbrances") now of record against the Land and/or the Building. Tenant shall, upon the request of Landlord, execute any instrument reasonably necessary or desirable to (a) acknowledge the subordination of this Lease to any existing mortgages or deeds of trust, or (b) subordinate this Lease and all of Tenant's rights hereunder to any and all Encumbrances hereafter recorded against the Land and/or the Building; provided, however, Tenant may require as a condition to any subordination in (b) above that the holder of any future Encumbrances agree to not disturb (a "non- disturbance agreement") Tenant's possession of the Premises in the event such holder acquires the Premises pursuant to foreclosure or otherwise. Landlord shall, within thirty (30) days following the date hereof, submit a written request to all present holders of any Encumbrances 30 that such parties provide a non-disturbance agreement to and for the benefit of Tenant. Tenant hereby acknowledges that there is no assurance that such present holders will honor such request and that, if the request is denied, this Lease will continue unaffected. 16.2 Attornment. In the event any proceedings are brought for ---------- foreclosure or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall, at the option of such purchaser, attorn to the purchaser upon any such foreclosure or sale and shall recognize such purchaser as the Landlord under this Lease, provided such purchaser agrees in writing to assume all obligations of Landlord under this Lease accruing following such sale or purchase and provides a copy of such agreement to Tenant. 16.3 Approval by Lender. Tenant acknowledges that any future holder ------------------ of an Encumbrance may retain the right to approve the terms and provisions of this Lease. Tenant agrees that, in the event such holder shall require any modification of this Lease in order to protect its security interest in the Premises, including, without limitation, modification of the provisions relating to damage to or condemnation of the Premises, Tenant shall execute the appropriate amendments to this Lease, provided, however, no modification of this Lease shall (a) change the size, location or dimension of the Premises, (b) increase the Rents payable by Tenant hereunder, (c) result in unreimbursable expenses to Tenant, or (d) reduce Tenant's rights or protections set forth herein. If Tenant fails to execute any such amendment, Landlord may, at Landlord's discretion, terminate this Lease. 17. Right to Entry. Tenant grants Landlord or its agents the right to -------------- enter the Premises at all reasonable times during normal 31 business hours for purposes of inspection, exhibition, repair or alteration; provided, however, Landlord shall give Tenant at least one (1) business day prior notice (except in the event of emergency) of Landlord's intent to enter the Premises. Landlord shall have the right to use any and all means Landlord deems necessary to enter the Premises in an emergency. Landlord shall also have the right to place "for rent" signs of a reasonable size on the outside of the Premises at a reasonable location during the last six (6) months of the Lease Term, provided that such signs shall include the words "Do Not Disturb Tenant". Tenant hereby waives any claim for damages or for any injury or inconvenience to or interference with Tenant's business, or any other loss occasioned thereby; provided, however, Landlord shall be liable for property damage and bodily injury resulting from the negligent acts or omissions of Landlord or Landlord's authorized representatives (except where Landlord is released from liability for negligence in Section 12.3 above). 18. Estoppel Certificate. Each party shall execute and deliver to the -------------------- other party, upon not less than fifteen (15) days prior written notice, a statement in writing certifying (a) that this Lease is unmodified and is in full force and effect (or, if modified, stating the nature of such modification), (b) the date to which Rent and other charges are paid in advance, if any, (c) that there are not, to such party's knowledge, any uncured defaults on the part of the other party or specifying such defaults as they are claimed, and (d) such other information as a prospective purchaser, encumbrancer, assignee or subletter of the Premises may reasonably require. Any such statement may be conclusively relied upon by any prospective purchaser, encumbrancer, assignee or subletter of the Premises, as applicable. A party's failure to deliver such 32 statement within such time shall be conclusive upon such party that (i) this Lease is in full force and effect without modification except as may be represented by the other party, (ii) there are no uncured defaults in the other party's performance, and (iii) not more than one month's Rent has been paid in advance. 19. Tenant's Default. The occurrence of any one or more of the following ---------------- events shall constitute a default and breach of this Lease by Tenant: (a) The failure by Tenant to make any payment of Rent or any other payment required hereunder within five (5) days from the date the same is due and payable; (b) The failure of Tenant to observe, perform or comply with any of the conditions or provisions of this Lease for a period, unless a longer period is otherwise provided herein, of thirty (30) days after written notice, or if such default cannot be cured within that time, then such additional time as may be reasonably necessary if within such thirty (30) days Tenant has commenced and is diligently pursuing such activities as are necessary to cure the default; and (c) Tenant becomes the subject of any bankruptcy, reorganization or insolvency proceeding, whether voluntary or involuntary, and, in the case of an involuntary bankruptcy proceeding, Tenant fails to cause the same to be dismissed within sixty (60) days following that date of the filing of such bank- ruptcy. Any notice from Landlord to Tenant described in this Section 19 shall, in the sole discretion of Landlord, constitute a three (3) day notice pursuant to California Code of Civil Procedure section 1161 or any successor statute. With respect to any "default" by Tenant referenced in this Lease, the term "default" as 33 used in such context shall mean any of the events described in subsections (a), (b) and/or (c) of this Section 19. 20. Remedies for Tenant's Default. Upon any default by Tenant, Landlord --------------------------- shall have the following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: 20.1 Termination. Upon any default by Tenant, Landlord shall have the ----------- right (but not the obligation) to terminate this Lease and Tenant's right to possession of the Premises. If Landlord has given Tenant any written notice pursuant to Section 19 above, then Landlord shall not be required to give Tenant any additional notice terminating this Lease. Upon termination of this Lease, Landlord shall have the right to recover from Tenant: (a) The worth at the time of award of the unpaid Rents which had been earned at the time of termination; (b) The worth at the time of award of the amount by which the Rents which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award (computed by discounting at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent) of the amount by which the Rents for the balance of the Lease Term after the time of award exceed the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) Any other amounts necessary to compensate Landlord for all detriment proximately caused by the default by Tenant or which in the ordinary course of events would likely result, including without limitation the following: 34 (i) Expenses in retaking possession of the Premises; (ii) Expenses for cleaning, repairing or restoring the Premises, except for normal wear and tear; (iii) Any unamortized real estate brokerage commission paid in connection with this Lease; (iv) Expenses for removing, transporting, and storing any of Tenant's property left at the Premises (although Landlord shall have no obligation to remove, transport, or store any such property); (v) Expenses of reletting the Premises, including without limitation, brokerage commissions and attorneys' fees; and (vi) Attorneys' fees and court costs. The "worth at the time of award" of the amounts referred to in subparagraphs (a) and (b) of this Section 20.1 is computed by allowing interest at an annual rate equal to the greater of: ten percent (10%); or five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the default by Tenant, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended, not to exceed the maximum rate allowable by law. The computation of the rental loss that could be or could have been avoided by Landlord pursuant to California Civil Code Section 1951.2 shall take into account the use restrictions set forth in Section 9 above except to the extent Tenant proves under all circumstances that the enforcement of the such restrictions would be unreasonable. 35 20.2 Continuance of Lease. Upon a default by Tenant and unless and -------------------- until Landlord elects to terminate this Lease pursuant to Section 20.1 above, this Lease shall continue in effect after the default by Tenant, and Landlord may enforce all rights and remedies under this Lease, including, without limitation, the right to recover payment of Rents as they become due. Neither efforts by Landlord to mitigate damages caused by a default by Tenant nor the acceptance of any Rents shall constitute a waiver by Landlord of any of Landlord's rights or remedies, including the rights and remedies specified in this Section 20. It is intended that the remedy set forth in this Section 20.2 is to provide Landlord the rights set forth in California Civil Code Section 1951.4. The use restrictions set forth in Section 9 above shall apply to Landlord's rights under this Section 20.2 except to the extent Tenant proves under all circumstances that the enforcement of such restrictions would be unreasonable. 20.3 Reletting Premises. Upon a default by Tenant, Landlord may, at ------------------ Landlord's election, re-enter the Premises and, without terminating this Lease, and at any time and from time to time, relet the Premises or any part or parts thereof for the account and in the name of Tenant or otherwise. Landlord may, at Landlord's election, eject Tenant or any of Tenant's subtenants, assignees or other person claiming any right in or through this Lease. Tenant shall nevertheless pay to Landlord on the due dates specified in this Lease all sums required to be paid by Tenant under this Lease, plus Landlord's expenses, less the proceeds of any sublease or reletting. Notwithstanding any prior reletting without termination, Landlord may later elect to terminate this Lease because of a default by Tenant. 36 20.4 Right to Cure Tenant's Default. In the event Tenant fails to ------------------------------ cure a default described under Section 19(b) within a period of thirty (30) days after written notice (unless a longer period of time is otherwise provided herein), Landlord may, in addition to all other rights and remedies under this Lease, to which Landlord may resort cumulatively or in the alternative, cure such default and demand reimbursement by Tenant of the cost actually incurred by Landlord in curing such default by Tenant, with interest thereon from the date such cost is incurred by Landlord until payment. All amounts due and payable to Landlord under this Section 20.4 shall constitute Rent under this Lease. The cure by Landlord of any default shall in no way be deemed a waiver or release of Tenant from any obligation under this Lease. 21. Surrender of Premises. Upon termination of the Lease or expiration of --------------------- the term hereof, if Tenant retains possession of the Premises without Landlord's written consent first had and obtained, then Tenant's possession shall be deemed a tenancy at sufferance, and Landlord may bring an action for possession or detainer at any time thereafter. If Tenant holds possession of the Premises after the term of this Lease with Landlord's consent, Tenant shall become a tenant from month to month upon the terms and conditions as provided in this Lease except that Base Rent shall equal one hundred twenty-five percent (125%) of the Base Rent due during the last year of the Lease Term, payable in advance on or before the first day of each month. All options, if any, granted under the terms of this Lease shall be deemed terminated and be of no effect during said month to month tenancy. Tenant shall continue in possession until such tenancy shall be terminated by either Landlord or Tenant giving written notice of termination to the 37 other party at least thirty (30) days prior to the effective date of termination. 22. Landlord's Default. Upon any default by Landlord under this Lease, ------------------ Tenant shall provide Landlord with written notice of such default and a reasonable time period in which to cure such default. 23. Parking. Tenant shall have the right during the Lease Term to use, on ------- an exclusive basis, one hundred percent (100%) of the parking spaces located within the parking facilities situated within the Common Areas. 24. Sale of Premises. In the event of any sale of the Premises by ---------------- Landlord, Landlord shall be, without any further act or acknowledgment on the part of Landlord or Tenant, entirely released from all liability under any and all of its covenants and obligations contained in or derived from this Lease or arising out of any act, occurrence or omission occurring after the consummation of such sale. The purchaser at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of Landlord under this Lease. 25. Waiver. No delay or omission in the exercise of any right or remedy of ------ either party on any default by the other party shall impair such a right or remedy or be construed as a waiver. The subsequent acceptance of Rents by Landlord or payments by Tenant after breach by the payee of any covenant or term of this Lease shall not be deemed a waiver of such breach, other than a waiver of timely payment for the particular payment involved, and shall not prevent the aggrieved party from maintaining any action 38 based on such breach (including an unlawful detainer action, if applicable). No payment by a party or receipt by the other party of a lesser amount than the Rent and other sums due hereunder shall be deemed to be other than on account of the earliest Rent or other sums due, nor shall any endorsement or statement on any check or accompanying any check or payment be deemed an accord and satisfaction. A party may accept such check or payment without prejudice to its right to recover the balance of such Rent or other sum or pursue any other remedy provided in this Lease. The waiver by a party of any breach of any term of this Lease shall not be deemed a waiver of such term or of any subsequent breach thereof. 26. Casualty Damage. If the Premises or any part thereof shall be damaged --------------- by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building or the Premises shall be damaged by fire or other casualty (a) such that more than thirty percent (30%) reconstruction of the Building or the Premises is required, as determined by Landlord, or (b) regardless of the extent of damage, such damage is either uninsured or the insurance proceeds are unavailable or insufficient for Landlord to restore the Building or the Premises, Landlord may elect to either terminate this Lease or restore the Building or the Premises. In all other cases, Landlord shall promptly commence reconstruction repair subject to this Section 26. If Landlord elects to terminate the Lease, the estate created hereby shall terminate forty- five (45) days following the date of damage, and Base Rent due hereunder shall be abated as of the date of such damage. If Landlord elects to repair and restore the Building or the Premises, then Landlord shall proceed with reasonable diligence to restore the Building or the Premises (except Landlord shall not be responsible for delays outside of its control) to substantially 39 the same condition existing immediately prior to the casualty. If Landlord is required to make any repairs or restorations pursuant to this Section 26, Landlord shall not be required to spend for such repairs or restoration an amount in excess of the insurance proceeds actually received by Landlord as a result of the casualty. If Landlord elects to repair or restore the Building or the Premises, then Tenant, within thirty (30) days after the date the damage occurred, may request in writing from Landlord an estimate of the time required to repair or restore the Building or the Premises. Landlord shall notify Tenant of Landlord's reasonable estimate of the time for restoration or repair. If Landlord estimates that the Premises or the Building cannot be restored within one hundred and eighty (180) days from the date that the damage occurred, then Tenant shall have five (5) business days from receipt of Landlord's estimate in which to terminate this Lease, which termination shall be effective as of the date the damage occurred. Landlord shall not be liable for any inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of use of any part of the Premises by Tenant or loss of Tenant's personal property resulting in any way from such damage or the restoration thereof, except that, during any restoration, Landlord shall allow Tenant a fair diminution of Base Rent during the time and to the extent the Premises are unfit for occupancy. In no event shall Landlord be required to rebuild, repair or replace any part of the Tenant Improvements or Tenant's furniture, furnishings or fixtures and equipment except to the extent that Landlord actually receives insurance proceeds with respect to the damage of such property (Tenant acknowledges that Landlord is under no obligation to maintain insurance covering such property and that neither Landlord nor any of its representatives have made any representations or 40 warranties to Tenant that Landlord intends to maintain any insurance covering such property). Tenant hereby waives the provisions of Sections 1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code. Landlord or Tenant shall have the right to terminate this Lease if (a) the damage to the Premises occurs during the last year of the term of this Lease, and (b) it is estimated by Landlord that the necessary repairs will take more than ninety (90) days from the date of the damage. 27. Condemnation. If twenty-five percent (25%) or more of the Land ------------ or fifteen percent (15%) or more of the Premises is taken for any public or quasi-public purpose of any lawful governmental power or authority, by exercise of the right of appropriation, reverse condemnation, condemnation or eminent domain, or sold to prevent such taking, Tenant or Landlord may, at its sole option, terminate this Lease as of the effective date of such taking. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of any award without deduction for any estate of interest of Tenant; provided, Tenant shall be entitled to any portion of an award separately designated as compensation to Tenant for moving expenses and/or loss of goodwill. If less than twenty-five percent (25%) of the Land and/or less than fifteen percent (15%) of the Premises is taken, Landlord shall, if necessary, promptly proceed to restore the Premises to substantially its same condition prior to such partial taking, allowing for the reasonable effects of such taking, and a proportionate allowance shall be made to Tenant for the Rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of such taking and 41 restoration. Notwithstanding the foregoing, Landlord shall not be required to expend funds in connection with the restoration of the Premises in excess of compensation actually received by Landlord from the condemning authority. 28. General Provisions. ------------------ 28.1 Time. Time is of the essence in this Lease and with respect to ---- each and all of its provisions in which performance is a factor. 28.2 Successors and Assigns. The covenants and conditions herein ---------------------- contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors and assigns of the parties hereto. 28.3 Recordation. Tenant shall not record this Lease or a short form ----------- memorandum hereof without the prior written consent of Landlord. 28.4 Landlord's Personal Liability. The liability of Landlord to ----------------------------- Tenant for any default by Landlord under the terms of this Lease shall be limited to the interest of Landlord in the Building, and Tenant agrees to look solely to Landlord's interest in the Building for the recovery of any judgment, it being intended that Landlord (nor any of its partners) shall not be personally liable for any judgment or deficiency. 28.5 Separability. Any provisions of this Lease which shall prove to ------------ be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. 28.6 Choice of Law. This Lease shall be governed by the laws of the ------------- State of California. 28.7 Attorneys' Fees. In the event any legal action is brought to --------------- enforce or interpret the provisions of this Lease, the 42 prevailing party therein shall be entitled to recover all costs and expenses including reasonable attorneys' fees. 28.8 Interest. Any installment of Base Rent or any other sum due from -------- Tenant under this Lease which is received by Landlord after thirty (30) days from when the same is due shall bear interest from said thirtieth (30th) day until paid at an annual rate equal to the greater of; (a) ten percent (10%); or (b) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco as of the twenty-fifth (25th) day of the month immediately preceding the due date on advances to member banks under Sections 13 and 13 (a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended, not to exceed the maximum rate allowable by law. The accrual and/or acceptance of any interest shall not constitute a waiver of Tenant's default with respect to any overdue amount, nor prevent Landlord from exercising any of Landlord's other rights or remedies. 28.9 Notices. All notices and demands required to be sent to Landlord ------- or Tenant under the terms of this Lease shall be personally delivered or sent by certified or registered mail to the addresses indicated above or to such other addresses as the parties may from time to time designate by notice. The parties agree that any notice required pursuant to California Civil Code Section 1946 or California Code of Civil Procedures Sections 1161 and 1161a may be served in this manner, and if so served, shall constitute proper service of process under said statutory provisions. 28.10 Authorization. The person signing this Lease on behalf of ------------- Tenant hereby represents and warrants to Landlord the following: (a) That the Tenant, by duly passed resolution of the board of directors of the corporation which comprises 43 Tenant, is authorized to enter into this Lease and to incur and perform all the obligations of Tenant hereunder; (b) That the person signing this Lease on behalf of Tenant has been authorized by the corporation which comprises Tenant to execute this Lease on behalf of such corporation and deliver the same to Landlord. In the event of any breach of the representations and warranties set forth above, then, in addition to any and all other rights and remedies which Landlord may have against the person signing this Lease and the corporation which comprises Tenant, the person(s) signing this Lease on behalf of Landlord shall be personally liable for each and every obligation of Tenant set forth in this Lease. 28.11 Prior Agreements. This Lease contains all of the agreements of ---------------- the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understandings pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors-in-interest. 28.12 Quiet Enjoyment. If Tenant timely pays the Rents and other --------------- amounts provided in this Lease, and observes and performs all the covenants, terms, and conditions of this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises for the Lease Term without interruption by Landlord or any person or persons claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease. 28.13 Brokers. The parties hereto acknowledge that Landlord is ------- represented by CPS and that Tenant is represented by 44 Colliers Parrish International. Each party represents and warrants to the other that no other brokers, finders, or agents have been employed or otherwise retained by that party. Landlord shall be obligated to pay the commission of both CPS and Colliers Parrish International pursuant to a separate agreement. IN WITNESS WHEREOF, this Lease is executed on the date and year first above written. LANDLORD KIM CAMP NO. VII, a California general partnership By: Kimball Small Partners, L.P., a California limited partnership By: Kimball Small Corporation, a California corporation, its general partner By: /s/ Kimball W. Small -------------------------- Kimball W Small Its president TENANT: ALPHATEC ELECTRONICS COMPANY LIMITED (PUBLIC) a Thailand public corporation By /s/ Charn Uswachoke ---------------------------- Charn Uswachoke Its Chief Executive Officer 45 EXHIBIT "A" BUILDING FLOOR PLAN WITH CROSS-HATCHED PREMISES [BUILDING FLOOR PLAN APPEARS HERE] 46 EXHIBIT "C" BASE RENT SCHEDULE Months Base - ------ ---- Rent - ---- Months 1-20 $50,787.36 Months 21-40 $54,314.26 Months 41-60 $57,841.16 47 EX-10.3 8 TENANCY AGREEMENT BETWEEN HING SENG AND ISE Exhibit 10.3 Dated 25th day of April 1996 HING SENG PLASTIC FACTORY LIMITED and ISE LABS (HK) LIMITED -------------------------------- TENANCY AGREEMENT of Unit C, 22nd Floor, Southeast Industrial Building, Nos.611-619 Castle Peak Road, Tsuen Wan, New Territories. -------------------------------- -------------------------------- Registered in the Land Registry by Memorial No. 6622208 on 25 May 1996 P. Land Registrar -------------------------------- [SIGNATURE APPEARS HERE] AN AGREEMENT made this 25th day of April One thousand nine hundred and ninety-six PARTIES - ------- BETWEEN the parties described in Part 1 of the Schedule. WHEREBY IT IS AGREED as follows :- LETTING - ------- 1. The Landlord lets and the Tenant takes ALL THOSE the premises described in Part 2 of the Schedule (hereinafter referred to as "the said premises") which premises form part of the development described in Part 2 of the schedule (hereinafter referred to as "the said development") which development is erected on the land described in Part 2 of the Schedule (hereinafter referred to as "the said land") Together with the Landlord's fixtures and fittings (including those described in Part 4 of the Schedule) in the said premises (hereinafter referred to as "the said fixtures") and together with the use in common with the Landlord and all others having the like right of the common areas and of the equipment serving the said premises or intended for the common use of the owners or occupiers of the said building or the said land for the term (hereinafter referred to as "the said term") and at the rent (hereinafter referred to as "the said rent") described in Part 3 of the Schedule. TENANT'S AGREEMENTS - ------------------- 2. The Tenant to the intent that the obligation shall continue throughout the said term hereby agrees with the Landlord as follows:- [HONG KONG STAMP DUTY PAID APPEARS HERE] [DUPLICATE OR COUNTERPART STAMP APPEARS HERE] (a) Rent management charge and rates -------------------------------- (i) To pay the said rent as provided in Part 3 of the Schedule. (ii) To pay the monthly management charge payable in respect of the said premises by the Landlord in its capacity as owner of the said premises under the Deed of Mutual Covenant but excluding any part or element of such charge with represents payment of or a contribution to payment of costs expenses or other outgoings of a capital or non-recurring nature or which represents a contribution to a sinking fund or a contingency fund. (iii) To pay the rates and all other outgoings and impositions of an annual or recurring and non-capital nature assessed in respect of the said premises by the government of Hong Kong. (b) Utilities --------- To pay and discharge all charges for telephone services, gas, electricity and water consumed by the Tenant in the said premises. (c) Repair ------ To keep all the interior of the said premises including the floor coverings and the finishes to interior walls, ceilings, windows and doors in the said premises and, if and to the extent the same are damaged by the act or neglect of the Tenant, the said fixtures in good, clean and tenantable repair and condition (fair wear and tear, any damage or destruction of the sort referred to in sub-clause 4(i), any damage, defect or want of repair which subsists at the commencement of the said term or which is of a latent, inherent or structural nature all excepted) and to deliver 2 up the same to the Landlord at the ending of the said term in such repair and condition. (d) Installations ------------- Not without the previous written consent of the Landlord to erect or install any wall, partitioning or other such erection in the said premises. (e) Injury to premises ------------------ Not to cut or deface any door, window, structural wall, beam or structural member of the said premises nor any of the plumbing or sanitary apparatus or installations installed therein Provided that without breach of this Sub-Clause or any other provision of this Agreement the Tenant may after consultation with the Landlord carry out such works to the said premises and the fixtures and fittings therein as the Tenant reasonably considers necessary for the purpose of fitting-out the said premises to the standard required by the Tenant. (f) Drains ------ To pay the Landlord on demand all reasonable costs properly incurred by the Landlord in cleansing or clearing any of the drains or water pipes in the said premises choked or stopped up owing to the improper use of the same by the Tenant. (g) Protection of interior ---------------------- To take reasonable precautions to protect the interior of the said premises against damage by storm, typhoon or other adverse weather condition. 3 (h) Nuisance -------- Not to do in the said premises any act which constitutes a nuisance to the Landlord or to the owners of other premises in the said development or in buildings in the neighborhood of the said development. (i) Crown Lease and insurance ------------------------- Not to do in the said premises any act which is not expressly or by implication permitted or contemplated by this Agreement and which constitutes a breach of any of the negative or restrictive terms and conditions of the Crown grant under which the said land is held from the Crown nor to do in the said premises any act which is not expressly or by implication permitted or contemplated by this Agreement whereby any insurance effected by the Landlord on the said premises against loss or damage by fire for the time being in force is rendered void or voidable or whereby the premium thereon is increased Provided that the Tenant shall have no liability under this Sub-Clause unless prior to the commission of any breach by the Tenant of the provisions of this Sub-Clause the Landlord has supplied the Tenant a copy of the fire policy or policies in force at the time of the breach. (j) Combustible or hazardous goods ------------------------------ Not to keep or store or permit or suffer to be kept or stored in the said premises any arms ammunition gunpowder saltpetre kerosene or other explosive or combustible or hazardous goods in contravention of the Dangerous Goods Ordinance Cap.295. 4 (k) Use --- (i) To use the Premises as provided in Part 4 of the Schedule hereto; and in the event of the permitted user as stated in Part 4 of the Schedule being non-domestic, at the Tenant's expense to obtain all licenses or permits necessary for carrying on the Tenant's business on the Premises and which under any Ordinance the Tenant as lessee has the obligation to obtain. (ii) Not to use the said premises or any part thereof or permit or suffer the same to be used for any illegal or immoral purpose nor to carry on or permit or suffer to be carried on therein or on any part thereof any offensive, noisome, noxious, noisy or dangerous trade, business manufacture or occupation whatsoever. (iii) Not to permit any person other than staff of the Tenant who occasionally have to do overtime work in relation to the Tenant's business to remain in the said premises overnight without the written permission of the Landlord such permission only to be given to enable the Tenant to post watchmen to look after the contents of the said premises which shall not be used as sleeping quarters or as domestic premises within the meaning of any Landlord and Tenant (Consolidation) Ordinance or any amendments thereto or substitution therefor for the time being in force. (l) Signs ----- Not to affix or display or permit or suffer to be affixed or displayed on the exterior of the said premises any signboard, sign, poster, picture or other such thing whether illuminated or not; 5 (m) Common areas ------------ Not to encumber or obstruct or permit to be encumbered or obstructed with any of the Tenant's boxes, packaging or other things any of the common areas and not to leave any of the Tenant's rubbish in the common areas except those parts of the common areas designated for such purpose. (n) Ordinances and Deed of Mutual Covenant -------------------------------------- Not to do in the said premises any act which is not expressly or by implication permitted or contemplated by this Agreement and which constitutes a breach of any ordinance relating to the use of the said premises by the Tenant nor to do in the said premises any act which is not expressly or by implication permitted or contemplated by this Agreement which constitutes a breach of the restrictive or negative covenants which affect the said premises in the Deed of Mutual Covenant. (o) Alienation ---------- Not to assign, sub-let, underlet, mortgage or charge the said premises. (p) Entry ----- To permit the Landlord and all persons bearing the written authority of the Landlord at all reasonable times and upon prior appointment having been made with the Tenant to enter and view the state of the said premises and, during the last three months immediately preceding the expiration of the said term to show the said premises to prospective tenants or purchasers of the said premises provided that in exercising its rights under this Sub-Clause the Landlord shall cause and shall ensure that all persons entering the said premises pursuant to this Sub-Clause cause the least possible inconvenience to the occupier of the said premises 6 and shall forthwith make good any damage, injury or loss caused by or as a consequence of entry on to the said premises, to the Tenant, the occupier of the said premises, the said premises or any thing in or affixed to the said premiums. (q) Yield up -------- At the ending of the said term quietly to yield up the said premises in a condition consistent with performance by the Tenant of its obligations under Sub-Clause [2(e)] - LANDLORD'S AGREEMENTS - --------------------- 3. The Landlord hereby agrees with the Tenant as follows:- (a) Payments -------- To promptly pay the Crown Rent, Property Tax and all expenses of a capital or non-recurring nature attributable to or payable in respect of the said premises. (b) Quiet enjoyment --------------- That the Tenant paying the rent hereby reserved and observing and performing its obligations under this Agreement shall peaceably hold and enjoy the said premises the said fixtures and the rights granted in Clause 1 without any interruption by the Landlord or any person claiming under or in trust for the Landlord or by virtue or title paramount. (c) Deed of Mutual Covenant ----------------------- To exercise and enforce its rights under the Deed of Mutual Covenant against each and every other person who is bound by such Deed of Mutual Covenant. 7 (d) Repair ------ To the extent that the same is not the obligation of the Tenant under Sub-Clause [2(e)] to keep the said premises and the said fixtures and the equipment serving the said premises in good, clean and tenantable repair and condition. (e) Building -------- To use its reasonable endeavours keep or procure that there is kept in good, clean and tenantable repair and condition the equipment, the said development and the common areas. FURTHER PROVISIONS - ------------------ 4. IT IS HEREBY FURTHER AGREED that the parties will be obliged and bound by, and will have rights and powers in accordance with the following provisions:- (a) Re-entry -------- If the said rent or any part thereof shall be unpaid for 15 days after service of a written notice calling upon the Tenant to make payment of the same or if the Tenant shall fail to observe and perform any of its obligations under this Agreement or if the Tenant shall become bankrupt or shall go into insolvent liquidation or make any composition with its creditors or shall suffer any successful prosecution in respect of the non-payment of any money due from it to the Hong Kong Government in respect of the said premises then and in any such case it shall be lawful for the Landlord at any time thereafter to re-enter on the said premises or any part thereof in the name of the whole whereupon this Agreement shall determine but without prejudice to any right or claim of either party in respect of any antecedent breach of this Agreement or to the right 8 of the Tenant to the return of the said deposit in accordance with clause 6. (b) Notice sufficient ----------------- A notice served by the Landlord on the Tenant in manner hereinafter mentioned to the effect that the Landlord thereby exercises the power of re-entry herein contained shall be a full and sufficient exercise of such power without actual physical re-entry on the part of the Landlord. (c) No waiver --------- Acceptance of the said rent by the Landlord shall not be deemed to operate as a waiver by the Landlord of any right to proceed against the Tenant in respect of any consistent breach of the Tenant's obligations under this Agreement. (d) Indemnity --------- The Tenant shall indemnify the Landlord from and against all proceedings taken against the Landlord by any person in respect of any damage or injury caused to such person by the overflow from the said premises of water the origin of which is in the said premises or the escape from the said premises of fumes, smoke, fire or other substance or thing the origin of which is in the said premises owing in any case to the negligence of the Tenant. (e) Premises -------- The Landlord warrants to the Tenant that the said premises are authorised for use and occupation as provided for under this Agreement. 9 (f) Acts of servants ---------------- For the purpose of this Agreement any act, default, negligence or omission of any visitor, servant or agent of the Tenant or of the Landlord shall be deemed to be the act, default, negligence or omission of the Tenant or (as the case may be) the Landlord. (g) Distraint --------- For the purposes of Part III of the Landlord and Tenant (Consolidation) Ordinance, (Chapter 7) and of this Agreement, the said rent shall be and be deemed to be in arrear if not paid in advance at the times provided for payment thereof. (h) Notices ------- Any notice required to be served under this Agreement shall be in writing and shall, if to be served on the Tenant, be sufficiently served if addressed to the Tenant and sent by prepaid registered post to or delivered at the Tenant's registered office in Hong Kong and, if to be served on the Landlord shall be sufficiently served if addressed to the Landlord and sent by prepaid registered post to or delivered at the Landlord's registered office in Hong Kong. (i) Rent cesser ----------- If at any time or times the said premises or any part thereof are inaccessible, or if at any time or times the said premises or any part thereof are destroyed or damaged owing to fire water storm wind typhoon defective construction white ants earthquake subsidence of the ground or any other cause whatsoever so as to render the said premises or any part thereof unfit for habitation or use, or if at any time or times any order is made or served under 10 the Buildings Ordinance in respect of the said premises or any part thereof, or if at any time or times the said premises or any part thereof are for any reason unfit, unsuitable or unsafe for habitation or use (which events are hereinafter referred to as "the calamity") then the rent hereby reserved and all other sums payable by the Tenant under this Agreement shall immediately be suspended and cease to be payable until (as the circumstances may require) the said premises and every part thereof (or is) are rendered accessible, or are reinstated so as to be fit for habitation and use, or are fit, suitable and safe for habitation and use or are free of any such order Provided that should the said premises and every part thereof not (as the circumstances may require) have been rendered accessible, reinstated so as to be fit for habitation and use, become fit suitable and safe for habitation and use or free of any such order in the meantime either the Landlord or the Tenant may at any time after one month from the calamity give to the other of them notice in writing to determine this Agreement and thereupon the same and everything herein contained shall determine as from the date of the calamity but without prejudice to the rights and remedies of either party against the other in respect of any antecedent claim or breach of this Agreement or of the Tenant in respect of its right to the return of its deposit in accordance with Clause 6 hereof. (j) Stamp Duty and costs -------------------- Each party shall bear its own legal costs and disbursements and other expenses of or incidental to the preparation and completion of this Agreement but the stamp duty on this Agreement and its duplicate shall be borne by the parties hereto in equal shares. KEY MONEY - --------- 5. The Tenant declares that for the grant of the said term no key 11 money or premium or other such consideration other than the consideration referred to in this Agreement has been paid or will be payable by the Tenant to the Landlord or to any person. TENANT'S DEPOSIT - ---------------- 6. (a) The Tenant shall on the signing of this Agreement deposit with the Landlord the sum specified in Part 3 of the Schedule (in this Agreement referred to as "the said deposit"). The said deposit shall be held by the Landlord free of interest to the Tenant with power for the Landlord to deduct from the said deposit the amount of any monetary loss the Landlord suffers because of any breach by the Tenant of its obligations under this Agreement but subject to this the said deposit shall be returned to the Tenant within fourteen days after the ending of the said term and the delivery of vacant possession of the said premises. (b) In the event of any transfer of the Landlord's interest in the said premises, the Landlord shall at its own cost obtain upon such transfer from the person to whom such transfer is made a legally binding undertaking in favour of the Tenant to observe and perform the obligations of the Landlord under this Agreement including the obligations of the Landlord under this Clause 6 and upon such undertaking being obtained and supplied to the Tenant the Landlord shall transfer the said deposit to the person giving the undertaking. (c) The Landlord hereby acknowledges receipt from the Tenant of the said deposit. DELIVERY OF VACANT POSSESSION/REINSTATEMENT BY THE TENANT - --------------------------------------------------------- 7. It is hereby expressly agreed that at the expiration of the said term or at any time when the Tenant shall deliver up vacant possession of the said premises to the Landlord the Tenant shall at the same time if so required by the Landlord forthwith remove 12 all fixtures, additions, fittings and improvements affixed, installed or made by the Tenant at or to the said premises and make good any damage caused to the said premises by such removal. OPTION TO RENEW - --------------- 8. (a) Option ------ If the Tenant shall be desirous of renewing the tenancy created by this Agreement for a further term of two (2) years from the expiration of the said term and shall not less than three months before the expiration of the said term give to the Landlord notice in writing of such desire then the Landlord will let the said premises to the Tenant for a further term of two (2) years from the day immediately following the expiry of the said term at the New Rent and subject to this and save and except for this provision for renewal on the same terms and conditions as this Agreement. (b) Rent ---- For the purposes of this Clause, the New Rent means the calendar monthly rent at which the Premises might reasonably be expected to be let in the open market on the day immediately following the expiry of the said term ("the New Term Date") by a willing landlord to a willing tenant without a premium but with vacant possession and subject to the provisions of this Agreement (other than the amount of the said rent and the provisions of this Clause) for a term of two (2) years commencing on the New Term Date with there being disregarded any goodwill attached to the Premises by reason of the carrying on there of business by the Tenant and the fact that the Tenant has been in occupation of the said premises. 13 (c) Referral of disputes -------------------- The Landlord and the Tenant shall endeavour to agree the New Rent but if it has not been agreed by the day one month before the New Term Date the question of the New Rent may at any time thereafter be referred by the Landlord or the Tenant to the determination of a referee acting as an expert. (d) Referee ------- (i) The referee (who is to have substantial recent experience of the letting of property such as the said premises and in their vicinity) may be agreed on by the Landlord and the Tenant or if not agreed on by them within two weeks from the nomination in writing of a referee by one part to the other is to be appointed on the application of either party by the President for the time being of the Royal Institution of Chartered Surveyors (Hong Kong Branch). (ii) If the referee relinquishes his appointment or dies or if it becomes apparent that he will be unable or unwilling to complete his duties the Landlord and the Tenant may agree upon or either of them may apply to the President for a substitute in his place which procedure may be repeated as many times as necessary. (iii) If the President is unable or unwilling to make an appointment at the time of application the appointment may be made by the Vice-President or next senior officer of the Institution then able and willing to make it or if no such officer is available by such officer of such professional body as the Landlord designates. (iv) The referee shall afford the Landlord and the Tenant the opportunity to make representations subject to such 14 reasonable time and other limits as he may prescribe and he shall have regard to any such representations but not be bound by them. (v) The fees and expenses of the referee including the cost of his appointment shall be borne as the referee may direct. (e) Shortfall --------- If the New Rent has not been agreed or determined by the New Term Date the Tenant shall continue to pay the said rent in accordance with this Agreement and following the New Rent being agreed or determined:- (i) if there shall be any shortfall between the said rent paid as aforesaid and the New Rent for the period from the New Term Date and the date on which the New Rent is agreed or determined then the Tenant shall pay to the Landlord the amount of such shortfall; or (ii) if there shall be any excess between the said rent paid as aforesaid and the New Rent for the period from the New Term Date and the date on which the New Rent is agreed or determined then the Landlord shall pay to the Tenant the amount of such excess. INTERPRETATION DEFINITIONS - -------------------------- 9. In this Agreement unless otherwise specified:- (a) any reference to a Clause, Sub-Clause or Schedule is a reference to a clause, sub-clause or schedule of or to this Agreement; (b) headings have been inserted for ease of reference only and shall not affect construction or interpretation; 15 (c) words importing the singular include the plural and vice versa and words of one gender include all the other genders; (d) "the ending of the said term" means the coming to an end of the said term in any way including expiration, termination, surrender and forfeiture; (e) "the Landlord" means the person named in this Agreement as the Landlord and the person for the time being entitled to the reversion immediately expectant on the ending of the said term; (f) "the common areas" means those parts of the said development and the said land intended for the common use of the owners or occupiers of the said development or the said land; (g) "the Deed of Mutual Covenant" means the Deed of Mutual Covenant registered in the Land Registry by Memorial No.3037693 and includes such Deed as amended, modified or extended and includes any instrument including any sub-deed of mutual covenant or management agreement (including the Sub-Deed of Mutual Covenant registered in the Land Registry by Memorial No.5461236) made under or pursuant to it; (h) "the equipment" means the plant, machinery, apparatus, lifts, systems, services, facilities, conduits and conductive media of or benefiting the said development or the said land; (i) a reference to a specific ordinance includes such ordinance as amended, modified, consolidated, extended or re-enacted and includes any subsidiary legislation, regulations, orders and instruments for the time being made under or pursuant it or deriving validity from it; (j) where a party consists of two or more persons the obligations of such persons shall be joint and several. 16 AS WITNESS the hands of the parties hereto the day and year first above written. 17 THE SCHEDULE ------------ Part 1 ------ (PARTIES) Landlord : Hing Seng Plastic Factory Limited whose registered office is situate at Unit E, 8th Floor, Southeast Industrial Building, Castle Peak Road, Tsuen Wan, New Territories ("the Landlord"). TENANT : ISE LABS (HK) Limited of Unit C, 22nd Floor, Southeast Industrial Building, Castle Peak Road, Tsuen Wan, New Territories ("the Tenant"). Part 2 ------ (PREMISES, BUILDING, LAND) THE SAID PREMISES: Unit C, 22nd Floor, Southeast Industrial Building, Nos.611-619 Castle Peak Road, Tsuen Wan, New Territories. THE SAID DEVELOPMENT: Southeast Industrial Building, Nos.611-619 Castle Peak Road, Tsuen Wan, New Territories. THE SAID LAND: Section A of Tsun Wan Inland Lot No.17 and the Extension thereto; Section A of Tsun Wan Marine Lot No.7. Part 3 ------ (TERM, RENT, DEPOSIT) THE SAID TERM : For the term of three (3) years commencing on 1st May 1996 and expiring on 30th April 1999. THE SAID RENT : HK$23,984.00 per month payable monthly (and so in proportion for any period less than a month) in advance on the 1st day of each month during the said term. 18 THE SAID DEPOSIT: HK$47,968.00 Part 4 ------ (PERMITTED USE) The Tenant shall have the right to use the said premises for non-domestic purposes. SIGNED by NG LUI YUEN, its ) Director, ) [SEAL OF HING SENG PLASTIC FACTORY ------------------------ LIMITED APPEARS HERE] for and on behalf of the Landlord ) in the presence of:- ) Name: LEUNG KIN WING Clerk to Messrs. Wat & Co., Solicitors, Hong Kong. Address: 16th Floor, Fung House, 19 & 20 Connaught Road Central, Hong Kong. Signature: I hereby verify the signature of Leung Kin Wing:- JOHN NG HOI SANG Solicitor, Hong Kong SIGNED by: Larry Sannes ) /s/ Larry Sannes ) for and on behalf of the ) Tenant in the presence of:- ) Name: Philip Ng Address: 1-7F. Southeast Industrial Bldg. 611-619 Castle Peak Road, Tsuen Wan. Signature: /s/ Philip Ng 19 EX-10.4 9 LOAN AND SECURITY AGREEMENT EXHIBIT 10.4 ISE LABS, INC. DIGITAL TESTING SERVICES, INC. ISE TECHNOLOGY, INC. LOAN AND SECURITY AGREEMENT TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION.................................... 1 1.1 Definitions.................................................. 1 1.2 Accounting Terms............................................. 7 2. LOAN AND TERMS OF PAYMENT....................................... 7 2.1 Revolving Advances........................................... 7 2.2 Payments and Calculations.................................... 9 2.3 Crediting Payments........................................... 9 2.4 Fees......................................................... 10 2.5 Additional Costs............................................. 10 2.6 Term......................................................... 10 2.7 ISE as Agent................................................. 10 3. CONDITIONS OF ADVANCES.......................................... 11 3.1 Conditions Precedent to Initial Advance...................... 11 3.2 Conditions Precedent to all Advances......................... 12 4. CREATION OF SECURITY INTEREST................................... 12 4.1 Grant of Security Interest................................... 12 4.2 Delivery of Additional Documentation Required................ 12 4.3 Right to Inspect............................................. 12 4.4 Stock Pledge................................................. 12 4.5 Pledge of Purchased Loans.................................... 13 5. REPRESENTATIONS AND WARRANTIES.................................. 14 5.1 Due Organization and Qualification........................... 14 5.2 Due Authorization; No Conflict............................... 14 5.3 No Prior Encumbrances........................................ 14 5.4 Bona Fide Eligible Accounts.................................. 14 5.5 Merchantable Inventory....................................... 14 5.6 DTS Shares................................................... 14 5.7 Name; Location of Chief Executive Office..................... 15 5.8 Litigation................................................... 15 5.9 No Material Adverse Change in Financial Statements........... 15 5.10 Solvency..................................................... 15 5.11 Regulatory Compliance........................................ 15 5.12 Environmental Condition...................................... 15 5.13 Taxes........................................................ 15 5.14 Subsidiaries................................................. 16 5.15 Government Consents.......................................... 16 5.16 Sanwa Loans.................................................. 16 5.17 Business Sales Agreement..................................... 16 5.18 Full Disclosure.............................................. 16 6. AFFIRMATIVE COVENANTS........................................... 16 6.1 Good Standing................................................ 16 6.2 Government Compliance........................................ 16 6.3 Financial Statements, Reports, Certificates.................. 16 6.4 Inventory; Returns........................................... 17 6.5 Taxes........................................................ 17
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.......................................................... 6.6 Insurance.................................................... 17 6.7 Principal Depository......................................... 18 6.8 Quick Ratio.................................................. 18 6.9 Debt Service Coverage........................................ 18 6.10 Debt-Tangible Net Worth Ratio................................ 18 6.11 Tangible Net Worth........................................... 18 6.12 Unrestricted Cash............................................ 18 6.13 Domestic Assets.............................................. 18 6.14 Registration of Intellectual Property Rights................. 19 6.15 San Jose Refinance........................................... 19 6.16 Further Assurances........................................... 19 7. NEGATIVE COVENANTS.............................................. 19 7.1 Dispositions................................................. 19 7.2 Change in Business........................................... 19 7.3 Mergers or Acquisitions...................................... 19 7.4 Indebtedness................................................. 19 7.5 Encumbrances................................................. 20 7.6 Distributions................................................ 20 7.7 Investments.................................................. 20 7.8 Transactions with Affiliates................................. 20 7.9 Subordinated Debt............................................ 20 7.10 Inventory.................................................... 20 7.11 Compliance................................................... 20 7.12 Capital Expenditures......................................... 20 8. EVENTS OF DEFAULT............................................... 20 8.1 Payment Default.............................................. 20 8.2 Covenant Default............................................. 21 8.3 Material Adverse Change...................................... 21 8.4 Attachment................................................... 21 8.5 Insolvency................................................... 21 8.6 Other Agreements............................................. 21 8.7 Subordinated Debt............................................ 22 8.8 Judgments.................................................... 22 8.9 Misrepresentations........................................... 22 9. BANK'S RIGHTS AND REMEDIES...................................... 22 9.1 Rights and Remedies.......................................... 22 9.2 Power of Attorney............................................ 23 9.3 Accounts Collection.......................................... 23 9.4 Bank Expenses................................................ 24 9.5 Remedies Cumulative.......................................... 24 10. WAIVERS; INDEMNIFICATION........................................ 24 10.1 Demand; Protest.............................................. 24 10.2 Bank's Liability for Collateral.............................. 24 10.3 Indemnification.............................................. 24 10.4 Subrogation and Similar Rights............................... 24 10.5 Waivers of Notice............................................ 25 10.6 Subrogation Defenses......................................... 25 10.7 Right to Settle, Release..................................... 25 10.8 Primary Obligation........................................... 25 10.9 Subordination................................................ 26
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10.10 Enforcement of Rights........................................ 26 11. NOTICES......................................................... 26 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...................... 27 13. GENERAL PROVISIONS.............................................. 27 13.1 Successors and Assigns....................................... 27 13.2 Time of Essence.............................................. 27 13.3 Severability of Provisions................................... 27 13.4 Amendments in Writing, Integration........................... 27 13.5 Counterparts................................................. 27 13.6 Survival..................................................... 27 13.7 Confidentiality.............................................. 27
iii This LOAN AND SECURITY AGREEMENT is entered into as of October 2, 1997, by and among COMERICA BANK-CALIFORNIA ("Bank"), ISE LABS, INC. ("ISE"), a California corporation, ISE TECHNOLOGY, INC. ("ISE TECH"), a California corporation, and DIGITAL TESTING SERVICES, INC. ("DTS"), a California corporation (ISE, ISE TECH and DTS are referred to individually, as a "Borrower," and, collectively, as the "Borrowers"). RECITALS -------- ISE desires to purchase certain assets of Alphatec USA, Inc., including all of the outstanding stock of DTS. Prior to the date hereof, ISE borrowed certain funds from Sanwa Bank California to finance certain acquisitions of assets, including equipment and loans made to Alphatec USA, Inc. Borrowers have asked Bank for credit facilities to refinance certain of those loans, to provide working capital to Borrowers, and to provide funds to complete the purchase of certain assets of Alphatec USA, Inc. This Agreement sets forth the terms on which Bank will advance credit to Borrowers, and Borrowers will repay the amounts owing to Bank. AGREEMENT --------- The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION ---------------------------- 1.1 Definitions. As used in this Agreement, the following terms ----------- shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to a Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by such Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by such Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means one or more of a Revolving Advance, the Equipment Acquisition Advance, the Manteca Term Advance, or the Equipment Refinance Advance. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Alphatec" means Alphatec USA, Inc. "Applicable Margin" has the meaning specified on Attachment 1 ------------ hereto. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, whether or not suit is brought. "Borrower's Books" means all of a Borrower's books and records including: ledgers; records concerning such Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" has the meaning set forth in Section 2.1 hereof. 1 "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Business Sales Agreement" means that certain Business Sales Agreement, dated as of August 21, 1997, between Borrower and Alphatec USA, Inc. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property of each Borrower described on Exhibit A attached hereto. - --------- "Committed Line" means Eight Million Dollars ($8,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of a Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of such Borrower or any Subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of a Borrower's business that comply in all material respects with all of Borrowers' material representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised -------- from time to time by Bank in Bank's reasonable judgment and upon advance notification thereof to Borrowers in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; provided that Accounts owing to ISE that are aged up to one hundred twenty (120) days of invoice date shall be permitted through December 31, 1997; (b) Accounts with respect to an account debtor, twenty- five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; 2 (c) Accounts with respect to which the account debtor is an officer, employee, or agent of a Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States unless Borrower has complied with the Federal Assignment of Claims Act to Bank's reasonable satisfaction with respect to such Accounts; (g) Accounts with respect to which a Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to such Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to such Borrower; (h) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total then-outstanding obligations to a Borrower exceed twenty percent (20%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except that the concentration limit shall be thirty percent (30%) of Accounts owing to a Borrower by each of C-Cube Microsystems, Qualcomm, Xilinx, ESS Technologies, LSI Logic, S3 and Cirrus Logic; and (i) Accounts with respect to which the account debtor (i) disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or (ii) is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business, and (j) Accounts the collection of which Bank reasonably determines to be doubtful. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which a Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, whether on- or off- balance sheet, and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which a Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of such 3 Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by a Borrower, and any other agreement entered into between a Borrower or the Borrowers and Bank in connection with this Agreement, all as amended or extended from time to time. "Manteca Facility" means the facility in Manteca, California, including the Land, as those terms are defined in the Business Sales Agreement. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of a Borrower and its Subsidiaries taken as a whole or (ii) the ability of a Borrower to repay the Obligations or otherwise perform its material obligations under the Loan Documents. "Maturity Date" means September 30, 2002. "Negotiable Collateral" means all of a Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by a Borrower or Borrowers pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding. "Periodic Payments" means all installments or similar recurring payments that a Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between a Borrower or the Borrowers and Bank. "Permitted Indebtedness" means: (a) Indebtedness of a Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) After the date hereof, the incurrence of capital leases in an amount not to exceed Five Million Dollars ($5,000,000) in any fiscal year prior to the receipt of proceeds from the Manteca Sale and Ten Million Dollars ($10,000,000) in any fiscal year after receipt of proceeds from the Manteca Sale; 4 (d) Subordinated Debt; (e) Indebtedness to trade creditors incurred in the ordinary course of business; and (f) Refinancings of any of the foregoing, provided the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; (c) Liens (i) upon or in any equipment acquired, leased or held by a Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so -------- acquired and improvements thereon, and the proceeds of such equipment; (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal -------- or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Purchased Loans" means those assets purchased by ISE Labs, Inc. under (i) the Loan Purchase Agreement by and between Comerica Bank as Seller and ISE Labs, Inc. as Purchaser, dated as of September 9, 1997, and (ii) the Loan Purchase Agreement by and among Silicon Valley Bank and Comerica Bank-California as Sellers and ISE Labs, Inc. as Purchaser, dated as of September 11, 1997, including, but not limited to those agreements referenced on the Estoppel Certificate executed in connection with this Agreement. 5 "Quick Assets" means, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of a Borrower determined in accordance with GAAP. "Responsible Officer" means any of the Chief Executive Officer, the Chief Financial Officer, if any, or the Controller of a Borrower. "Revolving Advance" means a cash advance under Section 2.1. "Revolving Maturity Date" means September 30, 1998. "Revolving Facility" means the facility under which Borrowers may request Bank to issue cash advances pursuant to Section 2.1 hereof. "Sanwa Equipment Loans" means the loans evidenced by the agreements that are described on the Schedule as the "Sanwa Equipment Loan Agreements". "Sanwa Line of Credit" means the loan evidenced by the agreement that is described on the Schedule as the "Sanwa Line of Credit". "Schedule" means the schedule of exceptions attached hereto. "Shares" means the shares of stock of DTS and ISE Tech. "Subordinated Debt" means any debt incurred by the Borrowers that is subordinated to the debt owing by any such Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by such Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by a Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the consolidated total assets of a Borrower and its Subsidiaries taken as a whole, minus, without duplication, (i) the sum of any ----- amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, and (ii) Total Liabilities. --- "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of a Borrower, including in any event all Indebtedness. 1.2 Accounting Terms. All accounting terms not specifically defined ---------------- herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT ------------------------- 2.1 Revolving Advances. ------------------ (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Revolving Advances to Borrowers in an aggregate amount not to exceed the lesser of the Committed Line or the Borrowing Base. For purposes of this Agreement, "Borrowing Base" shall mean an 6 amount equal to eighty percent (80%) of Eligible Accounts owing to ISE plus (ii) seventy-five percent (75%) of the Eligible Accounts owing to Alphatec USA, Inc. and DTS that ISE purchased under the Business Sales Agreement minus any reserves plus (iii) eighty percent (80%) of the Eligible Accounts owing to DTS arising from invoices dated from and after the Closing Date plus (iv) from the Closing Date through December 15, 1997, Two Million Five Hundred Thousand Dollars ($2,500,000). Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. (b) The Revolving Advances shall bear interest at a floating rate equal to the Prime Rate. Interest shall be payable on the last Business Day of each month. (c) Whenever Borrowers desire a Revolving Advance, ISE will notify Bank by facsimile transmission or telephone no later than noon California time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit C hereto. Bank is authorized to make Revolving --------- Advances under this Agreement, based upon instructions received from a Responsible Officer, or without instructions if in Bank's reasonable discretion such Revolving Advances are necessary to meet Obligations which have become due and remain unpaid, subject to any applicable grace period. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer, and Borrowers shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Revolving Advances made under this Section 2.1 to any Borrower's deposit account specified by Borrowers. (d) If at any time the aggregate outstanding Revolving Advances exceed the lesser of the Committed Line or the Borrowing Base, Borrowers, shall within five (5) days notice thereof, immediately pay the amount of such excess to Bank. (e) Upon the repayment of that portion of the outstanding Revolving Advances necessary to eliminate clause (iv) of the Borrowing Base, such clause (iv) thereafter will not be a component of the Borrowing Base, and Bank will release the debenture granted by ISE Labs, Inc.- Hong Kong securing its guaranty. (f) The Revolving Facility shall terminate on the Revolving Maturity Date, at which time all outstanding Revolving Advances shall be immediately due and payable. The Revolving Facility shall be evidenced by this Agreement and a promissory note in substantially the form of Exhibit B-1. ----------- 2.1.1 Equipment Acquisition Facility. ------------------------------ (a) Subject to the terms and conditions of this Agreement, Bank agrees to make one Advance (the "Equipment Acquisition Advance") to Borrowers on the Closing Date in an amount equal to Fourteen Million Six Hundred Thousand Dollars ($14,600,000). The Equipment Acquisition Advance will be evidenced by this Agreement and a promissory note in substantially the form of Exhibit B-2. ----------- (b) The Equipment Acquisition Advance shall bear interest at a floating rate equal to the Prime Rate plus the Applicable Margin. Subject to the provisions of Sections 2.1.1 (c) and (d), Borrowers shall repay the Equipment Acquisition Advance in monthly installments of $243,333.33, plus accrued interest, each installment to be due on the last Business Day of each month. The entire outstanding principal amount of the Equipment Acquisition Advance, plus accrued and unpaid interest, shall be due on the Maturity Date. (c) Within 45 days of the last day of each fiscal quarter, beginning the fiscal quarter ending on March 31, 1998, and continuing until the earlier of (i) the date that Borrowers have made aggregate payments under this Section 2.1.1(c) of $6,000,000 or (ii) June 30, 1999, Borrowers shall make mandatory prepayments on account of the Equipment Acquisition Advance. Each such payment shall be equal to 7 twenty-five percent (25%) of Borrowers' consolidated net income after taxes plus depreciation and amortization for the preceding fiscal quarter. If the aggregate payments made under this Section 2.1.1(c) by June 30, 1999 are less than $6,000,000, then Borrowers shall pay to Bank on June 30, 1999 the amount of such deficiency. Payments made under this Section 2.1.1(c) shall be applied to the outstanding principal installments in the reverse order of maturity. (d) Upon receipt by a Borrower of proceeds in excess of Ten Million Dollars ($10,000,000) from the sale or issuance of its equity securities, such Borrower shall pay Bank the difference, if any, between Six Million Dollars ($6,000,000) minus the aggregate payments made through such date under Section 2.1.1(c). Such payment shall be applied to the outstanding principal installments in the reverse order of maturity. Upon such payment, Borrowers shall have no further obligations under Section 2.1.1(c). (e) Borrowers shall make a mandatory prepayment of the net after tax proceeds of the disposition of any Inventory outside the ordinary course of business located at the Manteca Facility or collection of Accounts arising out of such disposition outside the ordinary course of business, subject to the fourth sentence of this paragraph. Borrowers will provide Bank with a report within fifteen (15) days after the last day of each month of such assets sold. Such payments shall be applied to the outstanding principal installments in the reverse order of maturity. If the sale of the Manteca Facility together with the Contract Assembly Business yields proceeds greater than Nine Million Dollars ($9,000,000) after payment of related expenses, ISE shall make a mandatory prepayment upon receipt of such proceeds on account of the Equipment Acquisition Advance in an amount equal to Sixty Percent (60%) of the net after tax proceeds received from such sale after payment of related expenses. 2.1.2 Manteca Facility. On the date hereof, Borrowers may ---------------- request one Advance (the "Manteca Term Advance") in a principal amount not to exceed Five Million Four Hundred Thousand Dollars ($5,400,000). Interest shall accrue from the date of the Manteca Term Advance at a floating rate equal to the Prime Rate plus the Applicable Margin, and shall be payable monthly on the last Business Day of each month. In addition to monthly interest payments, Borrowers will pay Bank the entire principal amount of the Manteca Term Advance and all accrued but unpaid interest on the earlier of March 31, 1998 or the date of the sale of the Manteca Facility. Borrowers may prepay all or any part of the Manteca Term Advance without premium or penalty. Bank may, in its sole, but reasonable discretion, permit Borrowers to extend the repayment date of the principal amount of the Manteca Term Advance for six (6) months after the original Maturity Date, in which case Borrowers shall pay Bank an extension fee of Twenty Seven Thousand Dollars ($27,000). Borrower shall use the proceeds of the Manteca Term Advance to repay all amounts owing to Sanwa Bank California under that certain Line of Credit Agreement dated as of August 22, 1994, a copy of which is attached hereto. The Manteca Term Advance will be evidenced by this Agreement and a promissory note in substantially the form of Exhibit B-3. ----------- 2.1.3 Equipment Refinance Facility. On the Closing Date, ---------------------------- Borrowers may request one Advance (the "Equipment Refinance Advance" in a principal amount not to exceed Four Million Six Hundred Fifty Thousand Dollars ($4,650,000). Borrowers shall use the proceeds of the Equipment Refinance Advance to repay all amounts outstanding under the Sanwa Equipment Loans. Interest shall accrue on the Equipment Refinance Advance at a floating rate equal to the Prime Rate. Borrowers shall repay the Equipment Refinance Advance in installments of $116,250 per month, plus accrued interest, beginning on October 31, 1997 and continuing on the last Business Day of each month through January 31, 2001, on which date the entire outstanding principal amount of the Equipment Refinance Advance and all accrued but unpaid interest shall be due and payable. The Equipment Refinance Advance will be evidenced by this Agreement and a promissory note in substantially the form of Exhibit B-4. ----------- 2.2 Payments and Calculations. ------------------------- (a) Payments. Bank shall, at its option, charge such -------- interest, all Bank Expenses, and all Periodic Payments against any of a Borrower's deposit accounts or against the Revolving 8 Facility, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. Any Advance may be prepaid at any time without penalty or premium. (b) Computation. In the event the Prime Rate is changed ----------- from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.3 Crediting Payments. Bank shall credit a wire transfer of funds, ------------------ check or other item of payment to such deposit account or Obligation as a Borrower specifies. However, during the continuance of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.4 Fees. Borrowers shall pay to Bank the following: ---- (a) Facility Fee. A Facility Fee equal to One Hundred ------------ Six Thousand Five Hundred Dollars ($106,500), which fee shall be fully earned and nonrefundable; (b) Financial Examination and Appraisal Fees. Bank's ---------------------------------------- customary fees and reasonable out-of-pocket expenses for Bank's audits of a Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of any Borrower performed from time to time by Bank or its agents in its reasonable discretion; (c) Bank Expenses. Upon the date hereof, all Bank ------------- Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.5 Additional Costs. In case any change in any law, regulation, ---------------- treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law), in each case after the date of this Agreement: (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by a Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, 9 and the result of any of the foregoing is to materially increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any Advances, Bank shall notify ISE thereof. Borrowers agree to pay to Bank the amount of such material increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.6 Term. This Agreement shall become effective on the Closing Date ---- and shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Advances under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 2.7 ISE as Agent. Each Borrower appoints ISE as its agent with all ------------ necessary power and authority to give and receive notices, certificates or demands for and on behalf of both Borrowers, to act as disbursing agent for receipt of any Advances on behalf of the Borrowers, and to apply to Bank on behalf of Borrowers for Advances, any waivers and any consents. This authorization cannot be revoked, and Bank need not inquire as to ISE's authority to act for or on behalf of a Borrower. 3. CONDITIONS OF ADVANCES ---------------------- 3.1 Conditions Precedent to Initial Advance. The obligation of Bank --------------------------------------- to make the initial Advance is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of an officer of each Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an Intellectual Property Security Agreement for each Borrower; (d) a guaranty and debenture of ISE Labs, Inc. - Hong Kong; (e) the share certificates evidencing the Shares; (f) an audit of each Borrower's Collateral; (g) an appraisal of ISE's fixed assets; (h) an opinion of ISE and ISE Tech's counsel; (i) a copy of the Business Sales Agreement, and evidence of consummation of the transactions contemplated by the Business Sales Agreement; (j) financing statements (Forms UCC-1); (k) insurance certificates; (l) a solvency certificate; (m) a Non-Encumbrance Agreement; (n) a listing of Equipment owned by DTS; 10 (o) a pro forma balance sheet of Borrowers reviewed by Borrowers' independent accountants; (p) ISE's audited financial statements for 1995 and 1996; (q) aged listings of the accounts receivable and accounts payable of each Borrower; (r) consolidated income statement and balance sheet for ISE for the fiscal year to June 30 and a monthly, consolidated income statement and balance sheet for the months of July and August, 1997; (s) payment of the fees and Bank Expenses then due specified in Section 2.4 hereof; and (t) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Advances. The obligation of Bank to ------------------------------------ make each Advance, including the initial Advance, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Advance as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Advance. The making of each Advance shall be deemed to be a representation and warranty by Borrower on the date of such Advance as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST ----------------------------- 4.1 Grant of Security Interest. Each Borrower grants and pledges to -------------------------- Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by each Borrower of each of its covenants and duties under the Loan Documents. Such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof, subject to Permitted Liens, and provided that Bank takes the actions necessary to create a valid first priority security interest in the Collateral. 4.2 Delivery of Additional Documentation Required. Each Borrower --------------------------------------------- shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, ---------------- or agents) shall have the right, upon reasonable prior notice, from time to time during a Borrower's usual business hours, to inspect such Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify such Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 4.4 Stock Pledge. ------------ 11 (a) ISE hereby pledges, assigns and delivers to Bank and grants to Bank a security interest in the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing (all hereinafter called the "Pledged Collateral"), as security for the prompt performance of all of the Obligations. (b) The term "Pledged Collateral" shall also include any securities, instruments or distributions of any kind issuable, issued or received by ISE upon conversion of, in respect of, or in exchange for any other Pledged Collateral, including, but not limited to, those arising from a stock dividend, stock split, reclassification, reorganization, merger, consolidation, sale of assets or other exchange of securities or any dividends or other distributions of any kind upon or with respect to the Pledged Collateral. (c) The certificate or certificates for the securities included in the Pledged Collateral, accompanied by an instrument of assignment duly executed in blank by ISE, have been delivered by ISE to Bank. DTS shall cause its books to reflect the pledge of the Shares. During the continuance of an Event of Default hereunder, Bank may effect the transfer of any securities included in the Pledged Collateral into the name of Bank and cause new certificates representing such securities to be issued in the name of Bank. ISE will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Bank's security interest in the Pledged Collateral. (d) Unless an Event of Default (as defined below) shall have occurred and be continuing, ISE shall be entitled to exercise any voting rights with respect to the Pledged Collateral and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or -------- consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights of ISE to vote and give consents, waiver and ratifications shall cease in case such an Event of Default hereunder shall occur and be continuing. (e) ISE recognizes that, after the occurrence and continuance of an Event of Default, Bank, in connection with the exercise of its remedies hereunder, may be unable to effect a public sale of all or a part of the Pledged Collateral by reason of certain prohibitions contained in the Securities Act of 1933, as amended ("Act"), so that Bank may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Pledged Collateral for their own account, for investment and without a view to the distribution or resale thereof. ISE understands that private sales so made may be at prices and on other terms less favorable to the seller than if the Pledged Collateral were sold at public sales, and agrees that Bank has no obligation to delay the sale of any of the Pledged Collateral for the period of time necessary (even if Bank would agree), to register such securities for sale under the Act. ISE agrees that private sales made under the foregoing circumstances and otherwise permitted hereunder shall be deemed to have been made in a commercially reasonable manner. 4.5 Pledge of Purchased Loans. ------------------------- (a) ISE Tech hereby pledges, assigns and delivers to Bank and grants to Bank a security interest in the Purchased Loans, together with all other cash and noncash proceeds of the foregoing including, but not limited to, interest or other distributions of any kind upon or with respect thereto and all collateral therefor. (b) ISE Tech shall deliver to Bank on the Closing Date the following original documents (except where copies are otherwise expressly permitted): (i) The original of each promissory note executed in connection with the Purchased Loans, endorsed in blank; 12 (ii) The originals or copies of all security agreements, together with copies of all related financing statements executed in connection with the Purchased Loans; (iii) Assignments of Financing Statements on Form UCC-2 evidencing the pledge to Bank of all of ISE Tech's right, title and interest in and to any security interests in personal property created in connection with the Purchased Loans; (iv) The original executed guaranty signed in connection with the Purchased Loans; (v) An estoppel certificate in substantially the form attached hereto; and (vi) Such other documents and instruments as Bank may reasonably request to effect the pledge provided for in this Section 4.5. (c) ISE Tech is the owner of all of the Purchased Loans. ISE Tech has not assigned, transferred or hypothecated to any third party (nor released) any portion of its interest in any of the Purchased Loans or the security therefor. To the best of ISE Tech's knowledge, there are no agreements or arrangements by Alphatec or DTS with one or more of their respective creditors that would reasonably be expected to have a material adverse effect on the value of the Purchased Loans or any security thereto. Upon Bank's reasonable request, ISE Tech shall cause all payments received on account of the Purchased Loans to be paid directly to Bank. No interest shall accrue on the Purchased Loans and Borrower will not make payments to the Lender with respect thereto. Upon Bank's reasonable request, ISE Tech shall cause the borrowers obligated under the Purchased Loans to comply with all obligations under the Purchased Loans. ISE Tech irrevocably appoints Bank its attorney-in-fact to enforce any remedies available with respect to the Purchased Loans and to settle all claims and disputes arising in connection therewith for amounts and upon terms that Bank, in its sole discretion, deems appropriate. ISE Tech shall not amend any of the documents evidencing or entered into in connection with the Purchased Loans, or waive, compromise or settle any claim or right in connection therewith, without Bank's prior written consent, which will not be unreasonably withheld. As long as an event of default has not occurred and is continuing, Bank will take commercially reasonable steps to cooperate with Borrowers with respect to any claims by third parties with respect to the Purchased Loans. 5. REPRESENTATIONS AND WARRANTIES ------------------------------ Except as set forth in the Schedule, Borrowers represent and warrant as follows: 5.1 Due Organization and Qualification. Each Borrower and each ---------------------------------- Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where any such failure would not reasonably be expected to have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and ------------------------------ performance of the Loan Documents are within each Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in such Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which such Borrower is a party or by which such Borrower is bound. Such Borrower is not in default under any material agreement to which it is a party or by which it is bound, which default could reasonably expected to have a Material Adverse Effect. 5.3 No Prior Encumbrances. Each Borrower has good and indefeasible --------------------- title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. To Borrowers' knowledge, the --------------------------- Eligible Accounts arising before the Closing Date are bona fide existing obligations and the property giving rise to such Eligible Accounts 13 has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. The Eligible Accounts arising after the Closing Date are bona fide existing obligations and the property giving rise to such Eligible Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. No Borrower has received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 5.5 Merchantable Inventory. To Borrower's knowledge, all Inventory ---------------------- acquired before the Closing Date is in all material respects of good and marketable quality, free from all material defects. All Inventory acquired after the Closing Date is in all material respects of good and marketable quality, free from all material defects. 5.6 Shares. There are no subscriptions, warrants or other options ------ exercisable with respect to the Shares. The Shares represent one hundred percent (100%) of the issued and outstanding stock of DTS and ISE Tech, respectively, there are no agreements that require DTS or ISE Tech to issue any additional shares, and there are no outstanding options to purchase such additional shares. The Shares have been duly authorized and validly issued, and are fully paid and non-assessable. 5.7 Name; Location of Chief Executive Office. Except as disclosed in ---------------------------------------- the Schedule, no Borrower has done business under any name other than that specified on the signature page hereof. The chief executive office of each Borrower is located at the address indicated in Section 10 hereof. 5.8 Litigation. Except as set forth in the Schedule, there are no ---------- actions or proceedings pending by or against any Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could reasonably be expected to have a Material Adverse Effect or a material adverse effect on such Borrower's interest or Bank's security interest in the Collateral. No Borrower has knowledge of any such pending or threatened actions or proceedings. 5.9 No Material Adverse Change in Financial Statements. All -------------------------------------------------- consolidated financial statements related to Borrowers that have been delivered by a Borrower to Bank fairly present in all material respects Borrowers' consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrowers since the date of the most recent of such financial statements submitted to Bank. 5.10 Solvency. Each Borrower is solvent and able to pay its debts -------- (including trade debts) as they mature. 5.11 Regulatory Compliance. Each Borrower and each Subsidiary has met --------------------- the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from a Borrower's failure to comply with ERISA that is reasonably likely to result in such Borrower's incurring any liability that could reasonably be expected to have a Material Adverse Effect. No Borrower is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. No Borrower is engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Each Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Neither Borrower has violated any statutes, laws, ordinances or rules applicable to it, violation of which could reasonably be expected to have a Material Adverse Effect. 5.12 Environmental Condition. None of any Borrower's or any ----------------------- Subsidiary's properties or assets has ever been used by such Borrower or any Subsidiary or, to the best of any Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of such Borrower's knowledge, none of such Borrower's properties or assets has ever been designated or identified 14 in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by such Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by such Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.13 Taxes. Each Borrower and each Subsidiary has filed or caused to ----- be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.14 Subsidiaries. No Borrower owns any stock, partnership interest ------------ or other equity securities of any Person, except for Permitted Investments. 5.15 Government Consents. Each Borrower and each Subsidiary has ------------------- obtained all material consents, approvals and authorizations of, made all material declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of such Borrower's business as currently conducted, except that where the failure to obtain is not reasonably likely to cause a Material Adverse Effect. 5.16 Sanwa Loans. Attached hereto are copies of the agreements ----------- evidencing the Sanwa Equipment Loans and the Sanwa Line of Credit. Such agreements are in full force and effect. The principal amount outstanding under each such agreement is specified in the Schedule. 5.17 Business Sales Agreement. Attached hereto is a true and correct ------------------------ copy of the Business Sales Agreement. The transactions contemplated by the Business Sales Agreement have been completed or will be completed shortly thereafter, ISE has marketable title to the Purchased Assets as therein defined (except for Permitted Liens), no material consents or authorizations are necessary to complete such transactions, and any waiting period under any applicable law as a condition to such completion has expired. 5.18 Full Disclosure. No material representation or warranty made by --------------- a Borrower in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such representation or warranty not misleading as of the date of this Agreement. 6. AFFIRMATIVE COVENANTS --------------------- Borrowers covenant and agree that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make an Advance hereunder, each Borrower shall do all of the following: 6.1 Good Standing. Such Borrower shall maintain its and each of its ------------- Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect. Such Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could reasonably be expected to have a Material Adverse Effect. 6.2 Government Compliance. Such Borrower shall meet, and shall cause --------------------- each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Such Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could 15 reasonably be expected to have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrowers shall ------------------------------------------- deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month and each fiscal quarter, a company prepared consolidated and consolidating balance sheet and income statement covering Borrowers' consolidated operations during each such period, certified by a Responsible Officer; (b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrowers' fiscal year, audited consolidated and consolidating financial statements of Borrowers prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days upon becoming available, copies of all statements, reports and notices sent or made available generally by a Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against a Borrower or any Subsidiary that could individually result in damages or costs to a Borrower or any Subsidiary of Seven Hundred Fifty Thousand Dollars ($750,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within fifteen (15) days after the last day of each month, Borrowers shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of --------- accounts receivable and accounts payable. Borrowers shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit E hereto. --------- Bank shall have a right from time to time hereafter to audit each Borrower's Accounts at such Borrower's expense, provided that such audits will be conducted upon prior written notice to such Borrower and during such Borrower's usual business hours and no more often than every three (3) months unless an Event of Default has occurred and is continuing. If the Manteca Facility is not the subject of an agreement to sell on terms reasonably acceptable to Bank by February 15, 1998, Bank shall have a right, on or after such date, to obtain an appraisal and environmental report on the Manteca Facility at Borrower's expense. 6.4 Inventory; Returns. Such Borrower shall keep all Inventory in ------------------ good and marketable condition, free from all material defects, except to the extent such Inventory was acquired in a condition not good and marketable or not free from material defects. Returns and allowances, if any, as between such Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of such Borrower or predecessor, as they exist at the time of the execution and delivery of this Agreement, or as otherwise approved by Bank. Each Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Two Hundred Thousand Dollars ($200,000). 6.5 Taxes. Each Borrower shall make, and shall cause each Subsidiary ----- to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and each Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that such Borrower or a Subsidiary has made such payments or deposits; provided that such Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower or such Subsidiary. 16 6.6 Insurance. --------- (a) Each Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Each Borrower shall also maintain insurance relating to such Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to such Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, each Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Each Borrower shall maintain its principal -------------------- depository and operating accounts with Bank. 6.8 Quick Ratio. Borrowers on a consolidated basis shall maintain, ----------- as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 0.55 to 1.00. After the earlier of the date that clause (iv) of Section 2.1(a) is removed from the Borrowing Base or (ii) December 31, 1997, Borrowers on a consolidated basis shall maintain as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities of at least 0.70 to 1.00. For the purpose of this Section 6.8, twenty percent (20%) of the outstanding principal amount of the Manteca Term Advance shall be deemed to be a Current Liability. 6.9 Debt Service Coverage. Beginning with the fiscal quarter ending --------------------- December 31, 1997, Borrowers on a consolidated basis shall maintain, as of the last day of each fiscal quarter on an annualized basis, Debt Service Coverage of not less than 2.00 to 1.00. "Debt Service Coverage" shall mean the sum of Borrowers' net profits, depreciation, amortization and interest for the preceding fiscal quarter, divided by the current portion of long term debt plus capital expenditures for such fiscal quarter. For the purpose of this Section 6.9, twenty percent (20%) of the outstanding principal amount of the Manteca Term Advance shall be included in the current portion of long term debt. For the fiscal quarter ending on December 31, 1997, or the fiscal quarter in which the $1,600,000 payment is made to Sassan Raissi, the writeoffs associated with this amount shall not be included in the calculation of Debt Service Coverage. 6.10 Debt-Tangible Net Worth Ratio. Borrowers on a consolidated basis ----------------------------- shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities to Tangible Net Worth of not more than: 4.25 to 1.00 from the date hereof through May 31, 1998; a ratio of not more than 2.50 to 1.00 as of June 30, 1998 through September 30, 1999; and a ratio of not more than 2.00 to 1.00 as of October 31, 1999 and thereafter. 6.11 Tangible Net Worth. Borrowers on a consolidated basis shall ------------------ maintain, as of the last day of each calendar month, a Tangible Net Worth of not less than Ten Million Dollars ($10,000,000) plus fifty percent (50%) of Borrowers' quarterly net profits after tax plus eighty percent (80%) of the proceeds received by Borrowers from the sale or issuance after the Closing Date of the equity securities of ISE; provided that the Tangible Net Worth may be -------- reduced one time upon the completion of the sale of the Manteca Facility to reflect a reduction of not more than Nine Million Dollars ($9,000,000) in ISE's fixed assets and a reduction of Five Million Four Hundred Thousand Dollars ($5,400,000) of amounts that Borrowers owe to Bank, provided that notwithstanding such sale and reduction, Borrowers shall in all cases maintain a Tangible Net Worth of not less than Eight Million Dollars ($8,000,000). 17 6.12 Unrestricted Cash. Upon the Closing Date, Borrowers on a ----------------- consolidated basis shall maintain a balance of unrestricted cash and cash equivalents of Two Million Dollars ($2,000,000). 6.13 Domestic Assets. Borrowers shall maintain not less than seventy --------------- percent (70%) of their consolidated assets (i) in corporations incorporated under the laws of a state of the United States and (ii) in the United States. 6.14 Registration of Intellectual Property Rights. Each Borrower -------------------------------------------- shall register or apply to register (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Collateral Assignment, Patent Mortgage and Security Agreement delivered to Bank by such Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Such Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. Such Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in such additional intellectual property rights. This section shall not require registration of any intellectual property prior to the occurrence of an uncured Event of Default that such Borrower reasonably determines is not necessary or appropriate in the management of its business. 6.15 San Jose Refinance. Upon the refinancing of ISE's real estate ------------------ located in San Jose, California, (to which Bank hereby consents) Borrower shall repay that portion of the outstanding Revolving Advances necessary to eliminate clause (iv) of the Borrowing Base. Upon such repayment, clause (iv) thereafter will not be a component of the Borrowing Base or any financial or other covenant. 6.16 Further Assurances. At any time and from time to time each ------------------ Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS ------------------ Borrowers covenant and agree that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, a Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose ------------ of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of such Borrower or its Subsidiaries; (iii) Transfers of idle, worn-out or obsolete Equipment; (iv) transfers of Equipment among Borrowers or to Subsidiaries, provided Bank retains in all cases a first priority security interest in such Equipment, or (v) disposition of the Manteca Facility for a purchase price that does not result in paying off the Manteca Term Advance. 7.2 Change in Business. Engage in any business, or permit any of its ------------------ Subsidiaries to engage in any business, other than the businesses currently engaged in by such Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in such Borrower's ownership (other than as a result of the exercise of employee stock options). Such Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of ----------------------- its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (not an Affiliate). 18 7.4 Indebtedness. Create, incur, assume or be or remain liable with ------------ respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien ------------ with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution ------------- or payment on account of or in redemption, retirement or purchase of any capital stock, provided that Borrower may repurchase its shares from former employees, directors and agents in accordance with any repurchase agreements so long as an Event of Default has not occurred or would exist after giving effect of such repurchase. 7.7 Investments. Directly or indirectly acquire or own, or make any ----------- Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Except as set forth in the ---------------------------- Schedule, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of such Borrower except for transactions that are in the ordinary course of such Borrower's business, upon fair and reasonable terms that are no less favorable to such Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any ----------------- Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or --------- similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as may be necessary in the ordinary course of a Borrower's business, such Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which such Borrower gives Bank prior written notice and as to which such Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" controlled by an ---------- "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; or fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act; or violate any law or regulation, which violation could reasonably be expected to have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 7.12 Capital Expenditures. Pay or become committed to pay more than -------------------- Five Million Dollars ($5,000,000) in any fiscal year prior to the sale of the Manteca Facility, and Ten Million Dollars ($10,000,000) in any fiscal year after the sale of the Manteca Facility, for any capitalized Equipment. 8. EVENTS OF DEFAULT ----------------- Any one or more of the following events shall constitute an Event of Default by Borrowers under this Agreement: 8.1 Payment Default. If a Borrower fails to pay the principal of, or --------------- any interest on, any Advances when due and payable; or fails to pay any portion of any other Obligations not constituting such principal or interest, including without limitation Bank Expenses, within thirty (30) days of receipt by a Borrower of an invoice for such other Obligations; 19 8.2 Covenant Default. If a Borrower fails to perform any material ---------------- obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between a Borrower or the Borrowers and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within twenty (20) days after a Borrower receives written notice thereof or any officer of such Borrower actually becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the twenty (20) day period or cannot after diligent attempts by a Borrower be cured within such twenty (20) day period, and such default is likely to be cured within a reasonable time, then such Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse ----------------------- change in a Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral from the condition that existed on the Closing Date; 8.4 Attachment. If any material portion of a Borrower's assets is ---------- attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if a Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of a Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of a Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within thirty (30) days after a Borrower receives written notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by a Borrower (provided that no Advances will be required to be made during such cure period); 8.5 Insolvency. If a Borrower becomes insolvent, or if an Insolvency ---------- Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is commenced against a Borrower and is not dismissed or stayed within thirty (30) days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is an uncured default in any ---------------- agreement to which a Borrower is a party with a third party or parties resulting in a right by such third party or parties, (unless waived), to accelerate the maturity of any Indebtedness in an amount in excess of Three Hundred Thousand Dollars ($300,000) or that could reasonably be expected to have a Material Adverse Effect; 8.7 Subordinated Debt. If a Borrower makes any payment on account of ----------------- Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8 Judgments. If a judgment or judgments for the payment of money --------- in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against a Borrower, and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Advances will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or ------------------ material misstatement exists now or hereafter in any material warranty or material representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document, as of the date of such warranty or representation. 20 9. BANK'S RIGHTS AND REMEDIES -------------------------- 9.1 Rights and Remedies. If any Event of Default occurs and is ------------------- continuing, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of a Borrower under this Agreement or under any other agreement between any Borrower or the Borrowers and Bank; (c) Cause all Obligations to bear interest, during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to or demand upon a Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Each Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Each Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of a Borrower's owned premises, such Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (f) Without notice to a Borrower set off and apply to the Obligations any and all (i) balances and deposits of such Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of such Borrower held by Bank; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, a Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including a Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (i) Exercise all the powers of a Bank under the Purchased Loans as though Bank were the absolute owner of such Purchased Loans, including without limitation the right to file any claims in respect of the Purchased Loans in any Insolvency Proceeding in which Alphatec or DTS is the debtor, 21 and to accept or reject any plan of reorganization and to otherwise note Borrower's claims in respect of the Purchased Loans in any manner that Bank deems appropriate; (j) Bank may credit bid and purchase at any public sale; and (k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers. 9.2 Power of Attorney. Effective only upon the occurrence and ----------------- continuance of an Event of Default, each Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as such Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse a Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign a Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance and Accounts for amounts and upon terms which Bank determines to be reasonable; and (e) dispose of the Collateral in accordance with the Code; provided Bank may exercise such power of attorney to sign the name of a Borrower on any of the documents described in Section 4.2 relating to the perfection of Bank's security interest in the Collateral, regardless of whether an Event of Default has occurred. The appointment of Bank as a Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide Advances hereunder is terminated. 9.3 Accounts Collection. At any time from the date of this ------------------- Agreement, Bank may notify any Person owing funds to a Borrower of Bank's security interest in such funds and verify the amount of such Account. Each Borrower shall collect all amounts owing to such Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If a Borrower fails to pay any amounts or furnish ------------- any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank reasonably deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank reasonably deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Remedies Cumulative. Bank's rights and remedies under this ------------------- Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 10. WAIVERS; INDEMNIFICATION ------------------------ 10.1 Demand; Protest. Each Borrower waives demand, protest, notice of --------------- protest, notice of dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which such Borrower may in any way be liable. 22 10.2 Bank's Liability for Collateral. So long as Bank complies with ------------------------------- reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrowers. 10.3 Indemnification. Each Borrower shall defend, indemnify and hold --------------- harmless until all Obligations have been paid in full, Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or reasonable Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and either Borrower under this Agreement; including without limitation in each case with respect to (a) and (b) reasonable attorneys fees and expenses, but excluding in the case of (a) and (b) all obligations, demands, claims, liabilities, Bank Expenses and losses caused by Bank's gross negligence or willful misconduct. 10.4 Subrogation and Similar Rights. Notwithstanding any other ------------------------------ provision of this Agreement or any other Loan Document, until all Obligations have been paid in full, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating the Borrower to the rights of Bank under the Loan Documents) to seek contribution, indemnification, or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by such Borrower with respect to the Obligations in connection with the Loan Documents or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by such Borrower with respect to the Obligations in connection with the Loan Documents or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 10.4 shall be null and void. If any payment is made to a Borrower in contravention of this Section 10.4, such Borrower shall hold such payment in trust for Bank and such payment shall be promptly delivered to Bank for application to the Obligations, whether matured or unmatured. 10.5 Waivers of Notice. Except as otherwise expressly provided ----------------- herein, each Borrower waives notice of acceptance hereof; notice of the existence, creation or acquisition of any of the Obligations; notice of an Event of Default; notice of the amount of the Obligations outstanding at any time; notice of intent to accelerate; notice of any adverse change in the financial condition of any other Borrower or of any other fact that might increase the Borrower's risk; presentment for payment; demand; protest and notice thereof as to any instrument; default; and all other notices and demands to which the Borrower would otherwise be entitled. Each Borrower waives any defense arising from any defense of any other Borrower, or by reason of the cessation from any cause whatsoever of the liability of any other Borrower. Bank's failure at any time to require strict performance by any Borrower of any provision of the Loan Documents shall not waive, alter or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage or other security instrument, or exercising any rights available thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of any Borrower. Each Borrower also waives any defense arising from any act or omission of Bank that changes the scope of the Borrower's risks hereunder, other than any act or omission resulting from Bank's gross negligence or willful misconduct. Each Borrower hereby waives any right to assert against Bank any defense (legal or equitable), setoff, counterclaim, or claims that such Borrower individually may now or hereafter have against another Borrower or any other Person liable to Bank with respect to the Obligations in any manner or whatsoever. 10.6 Subrogation Defenses. Each Borrower hereby waives any defense -------------------- based on impairment or destruction of its subrogation or other rights against any other Borrower and waives all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as 23 those statutory provisions are now in effect and hereafter amended, and under any other similar statutes now and hereafter in effect. 10.7 Right to Settle, Release. ------------------------ (a) The liability of Borrowers hereunder shall not be diminished by (i) any agreement, understanding or representation that any of the Obligations is or was to be guaranteed by another Person or secured by other property, or (ii) any release or unenforceability, whether partial or total, of rights, if any, that Bank may now or hereafter have against any other Person, including another Borrower, or property with respect to any of the Obligations. (b) Without notice to any Borrower and without affecting the liability of any Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Obligations with respect to a Borrower, (ii) grant other indulgences to a Borrower in respect of the Obligations, (iii) modify in any manner any documents relating to the Obligations with respect to a Borrower, (iv) release, surrender or exchange any deposits or other property securing the Obligations, whether pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any guarantor, endorser or other Person who is now or may hereafter be liable with respect to any of the Obligations. 10.8 Primary Obligation. This Agreement is a primary and original ------------------ obligation of each Borrower and shall remain in effect notwithstanding future changes in conditions, including any change of law or any invalidity or irregularity in the creation or acquisition of any Obligations or in the execution or delivery of any agreement between Bank and any Borrower. Each Borrower shall be liable for existing and future Obligations as fully as if all of the Loan were advanced to the Borrower. Bank may rely on any certificate or representation made by any Borrower as made on behalf of, and binding on, all Borrowers, including without limitation Borrowing Certificates, Borrowing Base Certificates and Compliance Certificates. 10.9 Subordination. All indebtedness of a Borrower now or hereafter ------------- arising held by another Borrower is subordinated to the Obligations and the Borrower holding the indebtedness shall take all actions reasonably requested by Bank to effect, to enforce and to give notice of such subordination. 10.10 Enforcement of Rights. Borrowers are jointly and severally --------------------- liable for the Obligations and Bank may proceed against one or more of the Borrowers to enforce the Obligations without waiving its right to proceed against any of the other Borrowers. 11. NOTICES ------- Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to a Borrower or to Bank, as the case may be, at its addresses set forth below: If to ISE: ISE Labs, Inc. 2095 Ringwood Avenue San Jose, CA 95131 Attn: President, Saeed Malik FAX: (408) 954-1676 If to ISE TECH: ISE Technology, Inc. 2095 Ringwood Avenue 24 San Jose, CA 95131 Attn: Saeed Malik FAX: (408) 954-1676 If to DTS: Digital Testing Service, Inc. 3600 Peterson Way Santa Clara, CA 95054 Attn: Sassan Raissi FAX: (408) 954-1676 with a copy to: Brobeck, Phleger & Harrison LLP 2200 Geng Road Two Embarcadero Place Palo Alto, CA 94303 Attn: Warren T. Lazarow, Esq. FAX: (650) 496-2885 If to Bank: Comerica Bank-California 55 Almaden Boulevard, Second Floor San Jose, CA 95113 Attn: Mary Beth Suhr FAX: (408) 271-4021 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER ------------------------------------------ This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. EACH BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 13. GENERAL PROVISIONS ------------------ 13.1 Successors and Assigns. This Agreement shall bind and inure to ---------------------- the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder -------- ------- may be assigned by a Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to a Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 13.2 Time of Essence. Time is of the essence for the performance of --------------- all obligations set forth in this Agreement. 25 13.3 Severability of Provisions. Each provision of this Agreement -------------------------- shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 13.4 Amendments in Writing, Integration. This Agreement cannot be ---------------------------------- amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are superseded by this Agreement and the Loan Documents. 13.5 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 13.6 Survival. All covenants, representations and warranties made in -------- this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrowers to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 10.3 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 13.7 Confidentiality. In handling any confidential information Bank --------------- shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received 26 pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrowers, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrowers and have delivered a copy to Borrowers, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ISE LABS, INC. By: /s/ Saeed Malik ----------------------------------- Title: President --------------------------------- DIGITAL TESTING SERVICES, INC. By: /s/ Sassan Raissi ----------------------------------- Title: President --------------------------------- ISE TECHNOLOGY, INC. By: /s/ Saeed Malik ----------------------------------- Title: President --------------------------------- COMERICA BANK-CALIFORNIA By: /s/ Mary Beth Suhr ----------------------------------- Title: Vice President --------------------------------- 27 EXHIBIT A --------- The Collateral shall consist of all right, title and interest of a Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles, and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of a Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to a Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by a Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by a Borrower and Borrower's Books relating to any of the foregoing; (e) All documents, cash, deposit accounts, securities, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. 28 EXHIBIT C --------- LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE:_______________________ FAX#: (408) 271-4021 TIME:_______________________ FROM:_______________________________________________________________________ CLIENT NAME (BORROWER) REQUESTED BY:_______________________________________________________________ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE:_______________________________________________________ PHONE NUMBER:_______________________________________________________________ FROM ACCOUNT # ____________________ TO ACCOUNT # _______________________ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT - -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $_________________________________________ PRINCIPAL PAYMENT (ONLY) $_________________________________________ INTEREST PAYMENT (ONLY) $_________________________________________ PRINCIPAL AND INTEREST (PAYMENT) $_________________________________________ OTHER INSTRUCTIONS:_________________________________________________________ ____________________________________________________________________________ All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: - ----------------- The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. ____________________________________________ _____________________________ Authorized Requester Phone # ____________________________________________ _____________________________ Received By (Bank) Phone # _______________________________________________ Authorized Signature (Bank) 29 EXHIBIT D BORROWING BASE CERTIFICATE ________________________________________________________________________________ Borrowers: ISE Labs, Inc. ISE Technology, Inc. Digital Testing Services, Inc. Commitment Amount: $8,000,000 ________________________________________________________________________________
ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of_______ $_______________ 2. Additions (please explain on reverse) $_______________ 3. TOTAL ACCOUNTS RECEIVABLE $_______________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due (120 days for DTS through 12-31-97) $______________ 5. Balance of 50% over 90 day accounts $______________ 6. Concentration Limits $______________ 7. Governmental Accounts $______________ 8. Contra Accounts $______________ 9. Promotion or Demo Accounts $______________ 10. Intercompany/Employee Accounts $______________ 11. Other (please explain on reverse) $______________ 12. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______________ 13. Eligible Accounts (#3 minus #12) $_____________ 14. LOAN VALUE OF ACCOUNTS (75% of #13) $_______________ ALPHATEC ACCOUNTS 15. Eligible Accounts Book Value as of $_______________ 16. LOAN VALUE OF ALPHATEC ELIGIBLE ACCOUNTS (75% of #16) $_______________ OVERADVANCE 17. Until December 17, 1997, $2,500,000 $_______________ BALANCES 18. Maximum Loan Amount $_______________ 19. Total Funds Available [Lesser of #18 or (#14 plus #16 plus #17)] $_______________ 20. Present balance owing on Line of Credit $_______________ 21. Outstanding under Sublimits ( ) $_______________ 22. RESERVE POSITION (#19 minus #20 and #21)
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Comerica Bank-California. COMMENTS: ISE, for itself and as Agent for ISE Technology, Inc. and Digital Testing Services, Inc. ________________________________________________________ By:_____________________________________________________ Authorized Signer BANK USE ONLY Rec'd By: ___________________ Auth. Signer Date: ________________________ Verified: ____________________ Auth. Signer Date: ________________________ 30 EXHIBIT E COMPLIANCE CERTIFICATE TO: COMERICA BANK-CALIFORNIA FROM: ISE LABS, INC. ISE TECHNOLOGY, INC. DIGITAL TESTING SERVICES, INC. The undersigned authorized officer of ISE Labs, Inc. on behalf of itself, ISE Technology, Inc. and Digital Testing Services, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrowers and Bank (the "Agreement"), (i) Borrowers are in compliance in all material respects for the period ending ______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrowers stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ---------------------------------------------------- ------------------------ -------- Monthly financial statements Monthly within 30 days Yes No Quarterly financial statements Quarterly within 30 days Yes No Annual (CPA Audited) FYE within 120 days Yes No A/R & A/P Agings Monthly within 15 days Yes No A/R Audit Initial and Semi-Annual Yes No Form 10K Annually within 5 days Yes No Form 10Q Quarterly within 5 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ---------------------------------------------------- ------------------------ ------------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 0.55:1.00/1/ _____:1.0 Yes No Minimum Tangible Net Worth $10,000,000/2/ $________ Yes No Maximum Debt/Tangible Net Worth 4.25:1.00/3/ _____:1.0 Yes No Minimum Debt Service Ratio (Quarterly) 2.0:1.0 _____:1.0 Yes No
/1/ 0.7:1.0 after repayment of over-formula or December 31, 1997. /2/ Plus 50% of quarterly NPAT plus 80% of new equity. May be reduced upon sale of Manteca Facility--see Agreement. /3/ Reduces to 2.50:1.00 by June 30, 1998 and 2.0:1.0 by October 31, 1999 and thereafter. COMMENTS REGARDING EXCEPTIONS: See Attached. Sincerely, _____________________________________ Signature(s) _____________________________________ Title(s) _____________________________________ Date BANK USE ONLY Received by:__________________________ authorized signer Date:_________________________________ Verified:_____________________________ authorized signer Date:_________________________________ Compliance Status: Yes No 31 ATTACHMENT 1 ------------ PRICING GRID
INDEBTEDNESS/EBITDA PRICING PERIOD LEVEL APPLICABLE MARGIN RATIO (1) (more than)1.75 1 0.75% (less than)1.75, 2 0.50% (more than)0.75 (less than)0.75, 3 0.25% (more than)0.50 (less than)0.50 4 0.00%
1. The Applicable Margin for each Advance (excluding the Revolving Advance) will be set for each pricing period and will vary depending upon whether such period is a Level 1 Period, Level 2 Period, Level 3 Period, or Level 4 Period. 2. The first Pricing Period, which commences on the date of the Loan Agreement and ends on the March 31, 1998, will be a Level 2 Period. 3. The second Pricing Period, which commences on April 1, 1998 and ends on May 15, 1998, will be a Level 1, 2, 3 or 4 Pricing Period depending upon Borrower's annualized Indebtedness/EBITDA ratio for the most recent quarter period ending prior to the first day of such Pricing Period. 4. Pricing Period shall mean (a) the Pricing Period commencing on the date of the Loan Agreement and ending on March 31, 1998, (b) the 45 day period commencing April 1, 1998 and ending May 15, 1998, (c) the three month period commencing June 1, 1998 and ending August 31, 1998 and (d) each consecutive three month period thereafter beginning on the day following the last day of the immediately preceding three month period and ending on the last day of that time period. 32 SCHEDULE OF EXCEPTIONS Permitted Indebtedness - ---------------------- Permitted Investments - --------------------- Permitted Liens - --------------- Prior Names (Section 5.7) - ----------- Litigation (Section 5.8) - ---------- Sanwa Equipment Loan Agreements - ------------------------------- Sanwa Line of Credit - -------------------- 33 DISBURSEMENT REQUEST AND AUTHORIZATION Borrowers: ISE Labs, Inc. ISE Technology, Inc. Digital Testing Services, Inc. ================================================================================ LOAN TYPE. This is a Variable Rate, Revolving Line of Credit and a Variable Rate Term . PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business. SPECIFIC PURPOSE. The specific purpose of the revolving loan is Short Term Working Capital and of the term loans is the acquisition of property and the refinancing of debt. DISBURSEMENT INSTRUCTIONS. Borrowers understand that no loan proceeds will be disbursed until all of Bank's conditions for making the loan have been satisfied. Please disburse the loan proceeds as follows:
Revolving Equipment Manteca Refinance Line Facility Facility Facility --------- --------- --------- --------- Amount paid to Borrowers directly: $______ $______ $______ $______ Undisbursed Funds $______ $______ $______ $______ Principal $______ $______ $______ $______
CHARGES PAID IN CASH. Borrowers have paid or will pay in cash as agreed the following charges: $106,500 Loan Fee $ 2,250 Accounts Receivables Audit $ 8,500 Collateral Appraisals ($10,000 already received on $18,500 bill) $ 300 UCC Search Fees $ 200 UCC Filing Fees $_______ Outside Counsel Fees and Expenses (Estimate) Total Charges Paid in Cash $________ AUTOMATIC PAYMENTS. Cash Borrower hereby authorizes Bank automatically to deduct from such Borrower's account numbered 8501-092236 the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Bank shall not be obligated to advance funds to cover the payment. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, EACH BORROWER REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT IN ALL MATERIAL RESPECTS AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN SUCH BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN SUCH BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF ____________________, 19____. BORROWER: ISE Labs, Inc. for itself and as Agent for ISE Technology, Inc. and Digital Testing Services, Inc. ____________________________________________________________ Authorized Officer ================================================================================ AGREEMENT TO PROVIDE INSURANCE GRANTORS: ISE Labs, Inc. BANK: Comerica Bank-California ISE Technology, Inc. Digital Testing Services, Inc. ================================================================================ INSURANCE REQUIREMENTS. ISE Labs, Inc., ISE Technology, Inc. and Digital Testing Services, Inc. ("Grantors") understand that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantors by Bank. These requirements are set forth in the Loan Documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): Collateral: All Inventory, Equipment and Fixtures. Type: All risks, including fire, theft and liability. Amount: Full insurable value. Basis: Replacement value. Endorsements: Loss payable clause to Bank with stipulation that coverage will not be canceled or diminished without a minimum of twenty (20) days prior written notice to Bank. INSURANCE COMPANY. Grantors may obtain insurance from any insurance company Grantors may choose that is reasonably acceptable to Bank. Grantors understand that credit may not be denied solely because insurance was not purchased through Bank. FAILURE TO PROVIDE INSURANCE. Grantors agree to deliver to Bank, on or before closing, evidence of the required insurance as provided above, with an effective date of September 30, 1997, or earlier. Grantors acknowledge and agree that if Grantors fail to provide any required insurance or fails to continue such insurance in force, Bank may do so at Grantors' expense as provided in the Loan and Security Agreement. The cost of such insurance, at the option of Bank, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTORS ACKNOWLEDGE THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTORS' EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. Subject to the confidentiality provisions of the Loan and Security Agreement, for purposes of insurance coverage on the Collateral, Grantors authorize Bank to provide to any person (including any insurance agent or company) all information Bank deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTORS ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED ____________________________, 19___. GRANTOR: ISE Labs, Inc., for itself and as Agent for ISE Technology, Inc. and Digital Testing Services, Inc. x______________________________________________________ Authorized Officer FOR BANK USE ONLY INSURANCE VERIFICATION DATE:___________________ PHONE:___________________ AGENT'S NAME:____________________________________________________ INSURANCE COMPANY:_______________________________________________ POLICY NUMBER:___________________________________________________ EFFECTIVE DATES:_________________________________________________ COMMENTS:________________________________________________________ CORPORATE RESOLUTIONS TO BORROW ________________________________________________________________________________ BORROWER: ISE LABS, INC. ________________________________________________________________________________ I, the undersigned officer of ISE Labs, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of California. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or by other duly authorized corporate action in lieu of a meeting), duly called and held, at which a quorum was present and voting, the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan Agreement"). EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one or more promissory note or notes of the Corporation, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. 1 FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on ______________________, 19____ and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X______________________________________ ________________________________________________________________________________ 2 CORPORATE RESOLUTIONS TO BORROW ________________________________________________________________________________ BORROWER: ISE TECHNOLOGY, INC. ________________________________________________________________________________ I, the undersigned officer of ISE Technology, Inc.. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of California. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or by other duly authorized corporate action in lieu of a meeting), duly called and held, at which a quorum was present and voting, the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan Agreement"). EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one or more promissory note or notes of the Corporation, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. 1 FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on ______________________, 19____ and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X______________________________________ ________________________________________________________________________________ 2 CORPORATE RESOLUTIONS TO BORROW ________________________________________________________________________________ BORROWER: DIGITAL TESTING SERVICES, INC. ________________________________________________________________________________ I, the undersigned officer of Digital Testing Services, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or by other duly authorized corporate action in lieu of a meeting), duly called and held, at which a quorum was present and voting, the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ ______________________ ______________________ ________________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Comerica Bank-California ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan Agreement"). EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one or more promissory note or notes of the Corporation, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. 1 FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on ______________________, 19____ and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X______________________________________ ________________________________________________________________________________ 2 SOLVENCY CERTIFICATE -------------------- The undersigned hereby certifies that the undersigned is the Chief Executive Officer of ISE Labs, Inc. ("Borrower"). This Certificate is being delivered pursuant to the Loan and Security Agreement dated as of the date hereof (the "Loan Agreement") and executed by and among Borrower, ISE Technology, Inc. and Digital Testing Services, Inc. as Co-borrowers ("Borrowers"), and Comerica Bank-California (the "Bank"). All capitalized terms used which are not otherwise defined herein shall have the meanings attributed to such terms in the Loan Agreement. The undersigned has reviewed the Loan Agreement and the contents of this Certificate and, in connection with the execution and delivery hereof, has made such investigation and inquiries as he deems necessary and prudent. The undersigned further certifies that the financial information, assumptions and valuation techniques that underlie and form the basis for the representations made in this Certificate were reasonable when made and were made in good faith and continue to be reasonable as of the date hereof. The undersigned hereby further certifies that to his knowledge in his capacity as an officer of the Borrower: 1. Attached hereto as Exhibit A are pro forma balance sheets of Borrowers --------- that give effect to the consummation of the acquisition contemplated by the Business Sales Agreement dated as of August 21, 1997 and the funding of the Advances, and the consummation of all other transactions contemplated by the Loan Agreement (all of the foregoing being collectively referred to as the "Transactions"), and the payment of all fees and expenses in connection therewith. 2. On the date hereof, after giving effect to the transactions contemplated by the Loan Agreement and the payment of fees and expenses in connection therewith, the undersigned in good faith after due inquiry believes that: (a) The fair market going concern value of all of the assets of Borrowers is greater than the total amount of liabilities, including contingent, subordinated, absolute, fixed, matured or unmatured and liquidated or unliquidated liabilities of Borrowers. (b) The present fair market going concern value of the assets of Borrowers is sufficient to pay the probable liability of Borrowers on their existing debts as such debts become absolute and matured. (c) Borrowers are able to pay their debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business. (d) Borrowers are not engaged, or about to engage, in business or transactions for which they have unreasonably small capital. 3. Borrowers do not intend to or believe that they will incur debts or liabilities that will be beyond their ability to pay as they mature. 4. In consummating the Transactions, Borrowers do not intend to hinder, delay or defraud either present or future creditors or any other person to which they are or will become indebted on or after the date hereof. 1 5. In reaching the conclusions set forth in this Certificate, the undersigned has considered, among other things: (a) the cash and other current assets of Borrowers reflected in the Pro Forma Balance Sheets; (b) all contingent liabilities of Borrowers including, without limitation, claims arising out of pending or threatened litigation against Borrowers, and in so doing, the undersigned has computed the amount of such liabilities as the amount which, in light of all the facts and circumstances existing on the date hereof, represents the amount that reasonably can be expected to become an actual or matured liability; and (c) such other financial, statistical and other data as the person signing this Certificate has deemed necessary for the purposes of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ____ day of October, 1997. 2 EX-10.4A 10 MANTECA NOTE EXHIBIT 10.4A MANTECA NOTE $5,400,000 San Jose, California Date: October 2, 1997 ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC. (collectively, "Borrower"), for value received, hereby promises to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States of America, pursuant to that certain Loan and Security Agreement dated as of October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $5,400,000 or, if lesser, (ii) the principal amount of the Manteca Term Advance. This Note is one of the Notes referred to in the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. Borrower further promises to pay interest on the Manteca Term Advance hereunder in like funds on the principal amount hereof from time to time outstanding from the date hereof until paid in full, at a rate or rates per annum and payable on the dates determined pursuant to the Loan Agreement. Payment on this Note shall be applied in the manner set forth in the Loan Agreement. The Loan Agreement contains provisions for acceleration of the maturity of the Manteca Term Advance hereunder upon the occurrence of certain stated events and also provides for optional and mandatory prepayments of principal hereof prior to any stated maturity upon the terms and conditions therein specified. The Manteca Term Advance made by Bank to Borrower pursuant to the Loan Agreement shall be recorded by Bank on the books and records of Bank. The failure of Bank to record the Manteca Term Advance or any prepayment or payment made on account of the principal balance hereof shall not limit or otherwise affect the obligation of Borrower under this Note and under the Loan Agreement to pay the principal, interest and other amounts due and payable under the Manteca Term Advance. Any principal or interest payments on this Note not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at the Default Rate. Upon the occurrence of a default hereunder or an Event of Default under the Loan Agreement, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Bank, be immediately collectible by on behalf of Bank pursuant to the Loan Agreement and applicable law. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including reasonable attorney's fees, costs and expenses. The right to plead any and all statutes of limitations as a defense to any demand hereunder is hereby waived to the full extent permitted by law. The amount of this Note is secured by the Collateral identified and described as security therefor in the Loan Agreement. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflicts of laws principles that would cause the application of the laws of any other jurisdiction. The provisions of this Note shall inure to the benefit of and be binding upon any successor to Borrower and shall extend to any holder hereof. DIGITAL TESTING SERVICES, INC. ISE ELABS, INC. By: /s/ Sassan Raissi By: /s/ Saeed Malik --------------------------- --------------------------- Title: President Title: President ------------------------ ------------------------ ISE TECHNOLOGY, INC. By: /s/ Saeed Malik --------------------------- Title: President ------------------------ EX-10.4B 11 EQUIPMENT ACQUISITION NOTE EXHIBIT 10.4B EQUIPMENT ACQUISITION NOTE $14,600,000 San Jose, California Date: October 2, 1997 ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC. (collectively, "Borrower"), for value received, hereby promises to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States of America, pursuant to that certain Loan and Security Agreement dated as of October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $14,600,000 or, if lesser, (ii) the principal amount of the Equipment Acquisition Advance. This Note is one of the Notes referred to in the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. Borrower further promises to pay interest on the Equipment Acquisition Advance hereunder in like funds on the principal amount hereof from time to time outstanding from the date hereof until paid in full, at a rate or rates per annum and payable on the dates determined pursuant to the Loan Agreement. Payment on this Note shall be applied in the manner set forth in the Loan Agreement. The Loan Agreement contains provisions for acceleration of the maturity of the Equipment Acquisition Advance hereunder upon the occurrence of certain stated events and also provides for optional and mandatory prepayments of principal hereof prior to any stated maturity upon the terms and conditions therein specified. The Equipment Acquisition Advance made by Bank to Borrower pursuant to the Loan Agreement shall be recorded by Bank on the books and records of Bank. The failure of Bank to record the Equipment Acquisition Advance or any prepayment or payment made on account of the principal balance hereof shall not limit or otherwise affect the obligation of Borrower under this Note and under the Loan Agreement to pay the principal, interest and other amounts due and payable under the Equipment Acquisition Advance. Any principal or interest payments on this Note not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at the Default Rate. Upon the occurrence of a default hereunder or an Event of Default under the Loan Agreement, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Bank, be immediately collectible by on behalf of Bank pursuant to the Loan Agreement and applicable law. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including reasonable attorney's fees, costs and expenses. The right to plead any and all statutes of limitations as a defense to any demand hereunder is hereby waived to the full extent permitted by law. The amount of this Note is secured by the Collateral identified and described as security therefor in the Loan Agreement. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflicts of laws principles that would cause the application of the laws of any other jurisdiction. The provisions of this Note shall inure to the benefit of and be binding upon any successor to Borrower and shall extend to any holder hereof. DIGITAL TESTING SERVICES, INC. ISE ELABS, INC. By: /s/ Sassan Raissi By: /s/ Saeed Malik --------------------------- --------------------------- Title: President Title: President ------------------------ ------------------------ ISE TECHNOLOGY, INC. By: /s/ Saeed Malik --------------------------- Title: President ------------------------ EX-10.4C 12 REVOLVING PROMISSORY NOTE EXHIBIT 10.4C REVOLVING PROMISSORY NOTE $8,000,000 San Jose, California Date: October 2, 1997 ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC. (collectively, "Borrower"), for value received, hereby promises to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States of America, pursuant to that certain Loan and Security Agreement dated as of October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $8,000,000 or, if lesser, (ii) the principal amount of all Revolving Advances outstanding as of the maturity date hereof. This Note is one of the Notes referred to in the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. Borrower further promises to pay interest on each Revolving Advance hereunder in like funds on the principal amount hereof until paid in full, at a rate or rates per annum and payable on the dates determined pursuant to the Loan Agreement. Payment on this Note shall be applied in the manner set forth in the Loan Agreement. The Loan Agreement contains provisions for acceleration of the maturity of the Revolving Advances hereunder upon the occurrence of certain stated events and also provides for optional and mandatory prepayments of principal hereof prior to any stated maturity upon the terms and conditions therein specified. All Revolving Advances made by Bank to Borrower pursuant to the Loan Agreement shall be recorded by Bank on the books and records of Bank. The failure of Bank to record any Revolving Advance or any prepayment or payment made on account of the principal balance hereof shall not limit or otherwise affect the obligation of Borrower under this Note and under the Loan Agreement to pay the principal, interest and other amounts due and payable under the Revolving Advances. Any principal or interest payments on this Note not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at the Default Rate. Upon the occurrence and continuance of a default hereunder or an Event of Default under the Loan Agreement, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Bank, be immediately collectible by on behalf of Bank pursuant to the Loan Agreement and applicable law. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including reasonable attorney's fees, costs and expenses. The right to plead any and all statutes of limitations as a defense to any demand hereunder is hereby waived to the full extent permitted by law. The amount of this Note is secured by the Collateral identified and described as security therefor in the Loan Agreement. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflicts of laws principles that would cause the application of the laws of any other jurisdiction. The provisions of this Note shall inure to the benefit of and be binding upon any successor to Borrower and shall extend to any holder hereof. DIGITAL TESTING SERVICES, INC. ISE ELABS, INC. By: /s/ Sassan Raissi By: /s/ Saeed Malik --------------------------- --------------------------- Title: President Title: President ------------------------ ------------------------ ISE TECHNOLOGY, INC. By: /s/ Saeed Malik --------------------------- Title: President ------------------------ EX-10.4D 13 EQUIPMENT REFINANCE NOTE EXHIBIT 10.4D EQUIPMENT REFINANCE NOTE $4,650,000 San Jose, California Date: October 2, 1997 ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC. (collectively, "Borrower"), for value received, hereby promises to pay to the order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States of America, pursuant to that certain Loan and Security Agreement dated as of October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i) the principal amount of $4,650,000 or, if lesser, (ii) the principal amount of the Equipment Refinance Advance. This Note is one of the Notes referred to in the Loan Agreement. All terms defined in the Loan Agreement shall have the same definitions when used herein, unless otherwise defined herein. Borrower further promises to pay interest on the Equipment Refinance Advance hereunder in like funds on the principal amount hereof from time to time outstanding from the date hereof until paid in full, at a rate or rates per annum and payable on the dates determined pursuant to the Loan Agreement. Payment on this Note shall be applied in the manner set forth in the Loan Agreement. The Loan Agreement contains provisions for acceleration of the maturity of the Equipment Refinance Advance hereunder upon the occurrence of certain stated events and also provides for optional and mandatory prepayments of principal hereof prior to any stated maturity upon the terms and conditions therein specified. The Equipment Refinance Advance made by Bank to Borrower pursuant to the Loan Agreement shall be recorded by Bank on the books and records of Bank. The failure of Bank to record the Equipment Refinance Advance or any prepayment or payment made on account of the principal balance hereof shall not limit or otherwise affect the obligation of Borrower under this Note and under the Loan Agreement to pay the principal, interest and other amounts due and payable under the Equipment Refinance Advance. Any principal or interest payments on this Note not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest at the Default Rate. Upon the occurrence of a default hereunder or an Event of Default under the Loan Agreement, all unpaid principal, accrued interest and other amounts owing hereunder shall, at the option of Bank, be immediately collectible by on behalf of Bank pursuant to the Loan Agreement and applicable law. Borrower waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including reasonable attorney's fees, costs and expenses. The right to plead any and all statutes of limitations as a defense to any demand hereunder is hereby waived to the full extent permitted by law. The amount of this Note is secured by the Collateral identified and described as security therefor in the Loan Agreement. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California, excluding conflicts of laws principles that would cause the application of the laws of any other jurisdiction. The provisions of this Note shall inure to the benefit of and be binding upon any successor to Borrower and shall extend to any holder hereof. DIGITAL TESTING SERVICES, INC. ISE ELABS, INC. By: /s/ Sassan Raissi By: /s/ Saeed Malik --------------------------- --------------------------- Title: President Title: President ------------------------ ------------------------ ISE TECHNOLOGY, INC. By: /s/ Saeed Malik --------------------------- Title: President ------------------------ EX-10.4E 14 AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.4E AMENDMENT --------- TO -- LOAN AND SECURITY AGREEMENT --------------------------- This Amendment to Loan and Security Agreement is entered into as of April 1, 1998, by and between Comerica Bank-California ("Bank") and ISE Labs, Inc, ISE Technology, Inc. and Digital Testing Services, Inc. (collectively, the "Borrowers"). RECITALS -------- Borrowers and Comerica are parties to that certain Loan and Security Agreement dated as of October 2, 1997, as amended from time to time (the "Agreement"). Borrowers and Bank desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. The reference in Section 2.1.2 of the Agreement to "March 31, 1998" is amended to read "September 30, 1998". 2. Notwithstanding any other provisions of the Agreement, each of the Advances shall bear interest at a floating rate equal to the Prime Rate from and after February 9, 1998. 3. Section 6.10 is amended to read as follows: 6.10 Debt-Tangible Net Worth Ratio. Borrowers on a consolidated basis shall maintain, as of the last day of each calendar month, a ratio of Total Liabilities of not more than 3.00 to 1.00 through May 31, 1998; a ratio of not more than 2.50 to 1.00 as of June 30, 1998 through September 30, 1999; and a ratio of not more than 2.00 to 1.00 as of October 31, 1999 and thereafter. 4. The reference in Section 6.11 to Ten Million Dollars ($10,000,000) is amended to read "Eighteen Million Dollars ($18,000,000)". The words "provided that notwithstanding such sale and reduction, Borrowers shall in all cases maintain a Tangible Net Worth of not less than Eight Millin Dollars ($8,000,000)" are deleted from Section 6.11. 5. Section 6.14 is deleted from the Agreement. 6. Section 7.12 is amended to read as follows: 7.12 Capital Expenditures. Pay or become committed to pay more than Nine Million Dollars ($9,000,000) in any fiscal year prior to the earlier of (i) Borrower's receipt of not less than Twelve Million Dollars ($12,000,000) from the sale or issuance of its equity securities or (ii) the sale of the Manteca Facility, and Twelve Million Dollars ($12,000,000) in any fiscal year thereafter, for any capitalized Equipment. 7. In consideration of this Amendment, Borrower shall pay Bank Twenty- seven Thousand Dollars ($27,000) plus reasonable appraisal, environmental, title and other out of pocket expenses incurred in connection with the Manteca Facility, which fee is payable on April 1, 1999; provided Bank shall waive such fee if an Event of Default has not occurred and Borrower has maintained in a demand deposit account with Bank, from the date hereof through April 1, 1999, net free collected balances of at least Four Million Dollars ($4,000,000). 1 8. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Agreement. Except as amended, the Agreement remains in full force and effect. 9. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written. ISE LABS, INC. By: /s/ Saeed Malik ----------------------------- Title: President --------------------------- ISE TECHNOLOGY, INC. By:/s/ Saeed Malik ------------------------------- Title:____________________________ DIGITAL TESTING SERVICES, INC. By: /s/ Saeed Malik ------------------------------- Title:____________________________ COMERICA BANK-CALIFORNIA By: /s/ Mary Beth Suhr ------------------------------- Title: Vice President ---------------------------- 2 EX-10.5 15 NONCOMPETITION BETWEEN REGISTRANT & DR. SASSAN EXHIBIT 10.5 EMPLOYMENT AND NON-COMPETITION AGREEMENT ---------------------------------------- This Agreement is entered into by and between ISE Labs, Inc. and its successors and assigns ("ISE"), on the one hand, and Sassan Raissi ("Employee") on the other hand. The effective date of the Agreement is the date of acquisition of Digital Test Services ("DTS") by ISE. WHEREAS, ISE desires to employ, retain and make secure for the companies the experience and services of Employee, being one of the key employees of ISE: NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Employment ---------- 1.1 Period. ISE shall employ Employee as President of DTS in Santa ------ Clara, California and Employee shall perform services for and continue in the employment of ISE for the period commencing on the date hereof through September 30, 2000 ("The Employment Period") subject however, to prior termination by either party as set forth in Article III herein. 1.2 Base Salary and Employee Benefits. During Employee's employment --------------------------------- hereunder, ISE will pay to Employee a base salary of not less than $175,000 per year, subject to regular base salary review in accordance with ISE's compensation policy. ISE shall also provide to Employee such employee benefits provided to all ISE's other employees. 1.2.1 Sign-On Bonus. Employee will be paid the sum of $2,000,000 ------------- (two millions) within 5 days of the effective date of this Agreement. 1.2.2 Other Compensation. Employee will be paid the sum of ------------------ $1,500,000 (one million and five hundred thousand dollars) based on the achievement of milestones mutually agreed to by Employee and ISE and the successful integration of DTS and ISE as mutually agreed to by Employee and ISE. 1.2.3 Stock Options. Based on approximately 17.5 million shares ------------- (post-split) held by the owners of ISE prior to the DTS acquisition, and the creation of an Employee Stock Option Plan (ESOP) with 3.5 million shares, Employee will be granted Non-Statutory Stock Options for 750,000 (post-split) shares under the ESOP plan. The Stock Options granted Employee shall have a strike price equal to fair market value on the date of the grant. Normal ESOP vesting is 25% after one year and a 6.25% vesting every quarter thereafter. Employee's Stock Options will vest on an expedited schedule as follows: 50% of the options shall vest on the first anniversary after signing of this Agreement and 12.5% of the options vesting every quarter thereafter. The Employee will be fully vested on the second anniversary of this Agreement. In addition, if ISE is acquired by another company, all of Employee's stock options will vest immediately. ARTICLE II Non-Competition --------------- 2.1 Non-Competition. Employee agrees that for a period of three --------------- years from the effective date of this agreement, the Employee will not (a) engage in competition with ISE in the performance of any services that directly relates to testing of semiconductor devices as conducted by ISE prior to the effective Date of this Agreement, or (b) induce any employee of ISE or DTS, who at the time of such inducement is an employee of ISE or DTS, to terminate his or her employment, except as otherwise may be required in the performance of Employee's duties to ISE or DTS. Notwithstanding the foregoing, Employees may own, directly or indirectly, solely as an investment, up to one percent (1%) of any class of "publicly traded securities" of any person or entity which owns a business that directly competes with ISE. For the purposes of this Section 2.1, the term "publicly traded securities" shall mean securities that are traded on a national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System. Notwithstanding the foregoing, Employee will not be prohibited from competing with ISE, if ISE, or any entity deriving title to its good will or shares, ceases to carry out the business of testing semiconductor devices. 2.2 Savings Clause. If any restriction set forth in Section 2.1 -------------- above is held to be unreasonable, then both parties agree, and hereby submit, to the reduction and limitation of such prohibition as shall be deemed reasonable. ARTICLE III Termination of Employment ------------------------- 3.1 Death. In the event of Employee's death during the term of his ----- employment hereunder, ISE shall pay to Employee's estate within ten (10) days of notice of Employee's death the sign-on bonus and other compensation as set forth in Sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee) and any unpaid salary and benefits due to Employee through the date of Employee's death. 3.2 Termination of Employment by ISE With Cause. Employee's ------------------------------------------- employment hereunder may be terminated by ISE for Cause by giving Employee written notice of such termination. For the purposes of this Agreement, "Cause" shall be limited to: (a) Employee's willful failure to perform his or her assigned job duties (other than as a result of sickness, accident or similar cause beyond Employee's control) after receipt by Employee of not less than two written warnings setting forth the specific performance deficiencies and a reasonable period of time, not less than thirty (30) days, to cure such performance deficiencies; (b) Employee's engaging in willful misconduct that is demonstrably and materially injurious to the interests of ISE; (c) Employee's misappropriation of ISE's material property or proprietary information; or (d) Employee's conviction of a felony that is materially injurious to the business reputation of ISE. 2. Employee may be terminated for the reasons set forth in (a), (b), (c) or (d) of this section. In the event that Employee is terminated for cause, ISE shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination with Cause and such payment shall be made by ISE to Employee on the date Employee is terminated with Cause. 3.3 Termination of Employment by ISE Without Cause. Employee's ---------------------------------------------- employment hereunder may be terminated by ISE without Cause upon ninety (90) days written notice to Employee. In such event ISE shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination without Cause and such payment shall be made by ISE to Employee on the date Employee is terminated without Cause. ISE shall also pay to Employee a severance amount solely equal to three months base salary. 3.4 Termination of Employment for Certain Reasons. Employee may --------------------------------------------- terminate his employment with ISE hereunder for Certain Reasons. "Certain Reasons" shall mean: (a) a reduction in cash compensation, or a material reduction in employee benefits, each of which does not generally affect ISE's employees; (b) a material demotion of job duties or; (c) relocation in excess of one year of Employee's regular workplace from Santa Clara and Alameda Counties, California, provided however, that in each event, Employee has provided ISE written notice of Employee's intention to terminate for Certain Reasons, stating the Certain Reasons and ISE has not cured the Certain Reasons within fifteen (15) days after receipt of Employee's written notice. In the event of Employee's termination for Certain Reasons, ISE shall pay Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination for Certain Reasons and such payment shall be made by ISE to Employee on the date Employee terminates employment for Certain Reasons. ISE shall also pay to Employee a severance amount on the date of termination for Certain Reasons. The severance amount will be equal solely to three months base salary. 3.5 Termination of Employment by Employee Without Certain Reasons. ------------------------------------------------------------- Employee may terminate his employment with ISE hereunder for any reason, without cause, with a three months written notice. In such event, ISE shall pay to Employee any unpaid salary earned through the date of termination without Certain Reasons and such payment shall be made by ISE to Employee on the date Employee terminates employment without Certain Reasons. ARTICLE IV Miscellaneous ------------- 4.1 Successors, Assigns, Merger. This Agreement shall be binding --------------------------- upon and shall inure to the benefit of ISE and its successors and assigns. This Agreement shall be 3. binding upon Employee and shall inure to his benefit and to the benefit of his heirs, executors, administrators and legal representatives, but shall not be assignable by Employee. 4.2 Entire Agreement. This Agreement constitutes the entire ---------------- agreement between ISE and/or DTS and/or Alphatec USA, Inc. and Employee relating to his employment with any of such parties and the additional matters herein provided for. This Agreement supersedes and replaces any prior verbal or written agreements between such three parties, including the Employment Agreement (the "Prior Agreement") entered into by Employee in connection with the sale of DTS to Alphatec USA, Inc. By executing this Agreement, Employee agrees that he is not entitled to any compensation under said Prior Agreement and will not have and will not assert any rights or benefits thereunder. ISE is aware of payments to be made to Employee by Alphatec USA, Inc. under the Prior Agreement on or about the effective date of this agreement. Such payments are the responsibility of Alphatec USA, Inc. and ISE will not make up for any or all payments not made by Alphatec USA, Inc. This Agreement may be amended or altered only in writing signed by ISE and Employee. 4.3 Applicable Law Severability. This Agreement shall be construed --------------------------- and interpreted in accordance with the laws of the State of California. Each provision of this Agreement is severable from the others, and if any provision hereof shall be to any extent unenforceable it and the other provisions hereof shall continue to be enforceable to the full extent allowable, as if such offending provision had not been a part of this Agreement. 4.4 No Setoff. No amounts payable and due to Employee by ISE --------- herein shall be made without set-off or counterclaim. 4.5 Expense. In the event of any action (at law, equity or in ------- arbitration) between or among any of the parties to this Agreement alleging a breach of this Agreement or seeking enforcement of this Agreement, the prevailing party shall be entitled to recover his reasonable attorneys' fees and costs of such action from the non-prevailing party. 4. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on Dated: October 1, 1997. ISE, INC. By: /s/ Saeed Malik ------------------------------- Saeed Malik Its: President EMPLOYEE /s/ Sassan Raissi -------------------------------------- 5. EX-10.6 16 NONCOMPETITION BETWEEN REGISTRANT & RAY G. EXHIBIT 10.6 EMPLOYMENT AND NON-COMPETITION AGREEMENT ---------------------------------------- This Agreement is entered into by and between ISE Labs, Inc. and its successors and assigns ("ISE"), on the one hand, and Ray Grammer ("Employee") on the other hand. The effective date of the Agreement is the date of acquisition of Digital Test Services ("DTS") by ISE. WHEREAS, ISE desires to employ, retain and make secure for the companies the experience and services of Employee, being one of the key employees of ISE: NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Employment ---------- 1.1 Period. ISE shall employ Employee as Vice-President of DTS in ------ Santa Clara, California and Employee shall perform services for and continue in the employment of ISE for the period commencing on the date hereof through September 30, 2000 ("The Employment Period") subject however, to prior termination by either party as set forth in Article III herein. 1.2 Base Salary and Employee Benefits. During Employee's employment --------------------------------- hereunder, ISE will pay to Employee a base salary of not less than $175,000 per year, subject to regular base salary review in accordance with ISE's compensation policy. ISE shall also provide to Employee such employee benefits provided to all ISE's other employees. 1.2.1 Sign-On Bonus. Employee will be paid the sum of $175,000 (one ------------- hundred seventy five thousand) within 10 days of the effective date of this Agreement. 1.2.2 Other Compensation. Employee will be paid the sum of $100,000 ------------------ (one hundred thousand) dollars based on the achievement of milestones mutually agreed to by Employee and ISE and the successful integration of DTS and ISE as mutually agreed to by Employee and ISE. 1.2.3 Stock Options. Based on approximately 17.5 million shares ------------- (post-split) held by the owners of ISE prior to the DTS acquisition, and the creation of an Employee Stock Option Plan (ESOP) with 3.5 million shares, Employee will be granted Non-Statutory Stock Options for 100,000 (post-split) shares under the ESOP plan. The Stock Options granted Employee shall have a strike price equal to fair market value on the date of the grant. ESOP vesting is 25% after one year and a 6.25% vesting every quarter thereafter. ARTICLE II Non-Competition --------------- 2.1 Non-Competition. Employee agrees that for a period of three --------------- years from the effective date of this agreement, the Employee will not (a) engage in competition with ISE in the performance of any services that directly relates to testing of semiconductor devices as conducted by ISE prior to the effective date of this Agreement, or (b) induce any employee of ISE or DTS, who at the time of such inducement is an employee of ISE or DTS, to terminate his or her employment, except as otherwise may be required in the performance of Employee's duties to ISE or DTS. Notwithstanding the foregoing, Employees may own, directly or indirectly, solely as an investment, up to one percent (1%) of any class of "publicly traded securities" of any person or entity which owns a business that directly competes with ISE. For the purposes of this Section 2.1, the term "publicly traded securities" shall mean securities that are traded on a national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System. Notwithstanding the foregoing, Employee will not be prohibited from competing with ISE, if ISE, or any entity deriving title to its good will or shares, ceases to carry out the business of testing semiconductor devices. 2.2 Savings Clause. If any restriction set forth in Section 2.1 -------------- above is held to be unreasonable, then both parties agree, and hereby submit, to the reduction and limitation of such prohibition as shall be deemed reasonable. ARTICLE III Termination of Employment ------------------------- 3.1 Death. In the event of Employee's death during the term of his ----- employment hereunder, ISE shall pay to Employee's estate within ten (10) days of notice of Employee's death the sign-on bonus and other compensation as set forth in 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee) and any unpaid salary and benefits due to Employee through the date of Employee's death. 3.2 Termination of Employment by ISE With Cause. Employee's ------------------------------------------- employment hereunder may be terminated by ISE for Cause by giving Employee written notice of such termination. For the purposes of this Agreement, "Cause" shall be limited to: (a) Employee's willful failure to perform his or her assigned job duties (other than as a result of sickness, accident or similar cause beyond Employee's control) after receipt by Employee of not less than two written warnings setting forth the specific performance deficiencies and a reasonable period of time, not less than thirty (30) days, to cure such performance deficiencies; (b) Employee's engaging in willful misconduct that is demonstrably and materially injurious to the interests of ISE; (c) Employee's misappropriation of ISE's material property or proprietary information; or (d) Employee's conviction of a felony that is materially injurious to the business reputation of ISE. Employee may be terminated for the reasons set forth in (a), (b), (c) or (d) of this section. In the event that Employee is terminated for cause, ISE shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination with Cause and such payment shall be made by ISE to Employee on the date Employee is terminated with Cause. 3.3 Termination of Employment by ISE Without Cause. Employee's ---------------------------------------------- employment hereunder may be terminated by ISE without Cause upon ninety (90) days written notice to Employee. In such event ISE shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination without Cause and such payment shall be made by ISE to Employee on the date Employee is terminated without Cause. ISE shall also pay to Employee a severance amount solely equal to three months base salary. 3.4 Termination of Employment for Certain Reasons. Employee may --------------------------------------------- terminate his employment with ISE hereunder for Certain Reasons. "Certain Reasons" shall mean: (a) a reduction in cash compensation, or a material reduction in employee benefits, each of which does not generally affect ISE's employees; (b) a material demotion of job duties or; (c) relocation in excess of one year of Employee's regular workplace from Santa Clara and Alameda Counties, California, provided however, that in each event, Employee has provided ISE written notice of Employee's intention to terminate for Certain Reasons, stating the Certain Reasons and ISE has not cured the Certain Reasons within fifteen (15) days after receipt of Employee's written notice. In the event of Employee's termination for Certain Reasons, ISE shall pay Employee the Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already been paid to Employee); and any unpaid salary earned through the date of termination for Certain Reasons and such payment shall be made by ISE to Employee on the date Employee terminates employment for Certain Reasons. ISE shall also pay to Employee a severance amount on the date of termination for Certain Reasons. The severance amount will be equal solely to three months base salary. 3.5 Termination of Employment by Employee Without Certain Reasons. ------------------------------------------------------------- Employee may terminate his employment with ISE hereunder for any reason, without cause, with a three months written notice. In such event, ISE shall pay to employee any unpaid salary earned through the date of termination without Certain Reasons and such payment shall be made by ISE to Employee on the date Employee terminates employment without Certain Reasons. ARTICLE IV Miscellaneous ------------- 4.1 Successors, Assigns, Merger. This Agreement shall be binding --------------------------- upon and shall inure to the benefit of ISE and its successors and assigns. This Agreement shall be 3binding upon Employee and shall inure to his benefit and to the benefit of his heirs, executors, administrators and legal representatives, but shall not be assignable by Employee. 4.2 Entire Agreement. This Agreement constitutes the entire ---------------- agreement between ISE and/or DTS and/or Alphatec USA, Inc. and Employee relating to his employment with any of such parties and the additional matters herein provided for. This Agreement supersedes and replaces any prior verbal or written agreements ("Prior Agreements") between such three parties. By executing this Agreement, Employee agrees that he is not entitled to any compensation under said Prior Agreements and will not have and will not assert any rights or benefits thereunder. This Agreement may be amended or altered only in writing signed by ISE and Employee. 4.3 Applicable Law Severability. This Agreement shall be construed --------------------------- and interpreted in accordance with the laws of the State of California. Each provision of this Agreement is severable from the others, and if any provision hereof shall be to any extent unenforceable it and the other provisions hereof shall continue to be enforceable to the full extent allowable, as if such offending provision had not been a part of this Agreement. 4.4 No Setoff. No amounts payable and due to Employee by ISE --------- herein shall be made without set-off or counterclaim. 4.5 Expense. In the event of any action (at law, equity or in ------- arbitration) between or among any of the parties to this Agreement alleging a breach of this Agreement or seeking enforcement of this Agreement, the prevailing party shall be entitled to recover his reasonable attorneys' fees and costs of such action from the non-prevailing party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on Dated: October 15, 1997. ISE, INC. By: /s/ Saeed Malik -------------------------------------- Saeed Malik Its: President EMPLOYEE /s/ Ray Grammer -------------------------------------------- EX-10.7 17 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.7 ISE LABS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is entered into as of the ___ day of ____________ 1997 by and between ISE Labs, Inc., a California corporation (the "Company") and __________________ (the "Indemnitee"). RECITALS A. The Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, shareholders, controlling persons, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, controlling persons, shareholders, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, shareholders, controlling persons, agents and fiduciaries of the Company may not be willing to serve in such capacities without additional protection. D. The Company (i) desires to attract and retain the involvement of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to be involved with the Company and (ii) wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law. E. In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein. NOW, THEREFORE, the Company and Indemnitee hereby agrees as follows: 1. Indemnification. --------------- a. Indemnification of Expenses. The Company shall indemnify --------------------------- and hold harmless Indemnitee (including its respective directors, officers, partners, employees, agents and spouses) and each person who controls any of them or who may be liable within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was, or may be deemed, a director, officer, shareholder, employee, controlling person, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was, or may be deemed, to be serving at the request of the Company as a director, officer, shareholder, employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any claim) under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relate directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto (hereinafter an "Indemnification Event") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor is presented to the Company. b. Reviewing Party. Notwithstanding the foregoing, (i) the --------------- obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as described in Section 10(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 1(e) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) and Indemnitee acknowledges and agrees that the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, 2. that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 1(e) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. c. Contribution. If the indemnification provided for in ------------ Section 1(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying Indemnitee thereunder, shall contribute to the amount paid or payable by Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Company's securities, the relative benefits received by the Company and Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 3. The Company and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 1(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company's securities, in no event shall an Indemnitee be required to contribute any amount under this Section 1(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by Indemnitee or (ii) the proceeds received by Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. d. Survival Regardless of Investigation. The ------------------------------------ indemnification and contribution provided for in this Section 1 will remain in full force and effect regardless of any investigation made by or on behalf of Indemnitee or any officer, director, employee, agent or controlling person of Indemnitee. e. Change in Control. The Company agrees that if there is ----------------- a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses under this Agreement or any other agreement or under the Company's Articles of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to abide by such opinion and to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. f. Mandatory Payment of Expenses. Notwithstanding any other ----------------------------- provision of this Agreement, to the extent that Indemnitee have been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section 1(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection herewith. 2. Expenses; Indemnification Procedure. ----------------------------------- 4. a. Advancement of Expenses. The Company shall advance all ----------------------- Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than fifteen days after written demand by Indemnitee therefor to the Company. b. Notice/Cooperation by Indemnitee. Indemnitee shall give -------------------------------- the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). c. No Presumptions; Burden of Proof. For purposes of this -------------------------------- Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo ---- contendere, or its equivalent, shall not create a presumption that Indemnitee - ---------- did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. d. Notice to Insurers. If, at the time of the receipt by ------------------ the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt written notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in each of the policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. e. Selection of Counsel. In the event the Company shall be -------------------- obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel reasonably approved by the applicable Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; 5. provided that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. The Company shall have the right to conduct such defense as it sees fit in its sole discretion, including the right to settle any claim against Indemnitee without the consent of Indemnitee. 3. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- a. Scope. The Company hereby agrees to indemnify Indemnitee ----- to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of this Agreement or any other agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its Board of Directors or an officer, shareholder, employee, controlling person, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 8(a) hereof. b. Nonexclusivity. The indemnification provided by this -------------- Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, the laws of the State of California, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not take while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity and such indemnification shall inure to the benefit of Indemnitee from and after the date hereof. 4. No Duplication of Payments. The Company shall not be -------------------------- liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Articles of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 6. 5. Partial Indemnification. If Indemnitee is entitled ----------------------- under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. Mutual Acknowledgement. The Company and Indemnitee ---------------------- acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, controlling persons, agents or fiduciaries under this Agreement or otherwise. 7. Liability Insurance. To the extent the Company maintains ------------------- liability insurance applicable to directors, officers, employees, control persons, agents or fiduciaries, each of Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director, or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, controlling persons, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent, control person, or fiduciary. 8. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: a. Claims Initiated by Indemnitee. To indemnify or ------------------------------ advance expenses to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnify under this Agreement or any other agreement or insurance policy or under the Company's Articles of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under California statute or law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; or b. Claims Under Section 16(b). To indemnify Indemnitee -------------------------- for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute; or 9. Period of Limitations. No legal action shall be --------------------- brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of five years from the date of accrual of such cause of action, and any claim or cause of action of the 7. Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such five-year period; provided, however, that -------- ------- if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 10. Construction of Certain Phrases. ------------------------------- a. For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was or may be deemed a director, officer, employee, agent, control person, or fiduciary of such constituent corporation, or is or was or may be deemed to be serving at the request of such constituent corporation as a director, officer, employee, control person, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. b. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. c. For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of securities of the Company representing more than 30% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of 8. two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. d. For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(e) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the right of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). e. For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee are seeking indemnification, or Independent Legal Counsel. f. For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. Counterparts. This Agreement may be executed in one or ------------ more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement -------------------------------------- shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to 9. assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise, including subsidiaries of the Company, at the Company's request. 13. Attorneys' Fees. In the event that any action is --------------- instituted by an Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action was made in bad faith or was frivolous. 14. Notice. All notices and other communications required or ------ permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at Indemnitee's address as set forth beneath Indemnitee's signatures to this Agreement and if to the Company at the address of its principal corporate offices (attention: Secretary) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. 15. Consent to Jurisdiction. The Company and Indemnitee ----------------------- each hereby irrevocably consent to the jurisdiction and venue of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the courts of the State of California. 16. Severability. The provisions of this Agreement shall be ------------ severable in the event that any of the provisions hereof (including any provision within a single section, 10. paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and ------------- its provisions construed and enforced in accordance with the laws of the State of California, as applied to contracts between California residents, entered into and to be performed entirely within the State of California, without regard to the conflict of laws principles thereof. 18. Subrogation. In the event of payment under this ----------- Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, ------------------------- termination or cancellation of this Agreement shall be effective unless it is in writing signed by all parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. No Construction as Employment Agreement. Nothing --------------------------------------- contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 21. Corporate Authority. The Board of Directors of the ------------------- Company and its shareholders have approved the terms of this Agreement. 11. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. ISE LABS, INC., a California corporation By: ------------------------------------ Saeed A. Malik, President 2095 Ringwood Avenue San Jose, CA 95131 INDEMNITEE: --------------------------------------- 12. EX-10.8 18 FINANCE/CAPITAL LEASE [LETTERHEAD OF COMERICA] March 30, 1998 EXHIBIT 10.8 Mr. Richard Bradford Controller Digital Testing Services, Inc., 3600 Peterson Way Santa Clara, CA 95054 Dear Richard: Comerica Leasing, a Division of Comerica Bank ("Lessor") is pleased to offer the following commitment for a finance/capital lease line of credit to ISE Labs, Inc. and Digital Testing Services, Inc. ("Co-Lessees") for the acquisition of Hewlett Packard and Creedence Integrated Circuit Test Systems and Seiko Epson Handlers. Outlined below are the major terms and conditions of this commitment: Lease Line Amount: $10,000,000 Lease Line Expiration: March 1, 1999 Lease Term: 60 Months Net Lease: Lessee will be responsible for all maintenance, taxes, insurance and all other costs relating to the operation of the equipment. Benefits of Ownership: Title and all benefits of ownership will be retained by Lessee. Rental Payments: 60 fixed payments at 2.025247% of total equipment cost, due monthly in arrears, the first of which is due 30 days from lease closing (7.95% A.P.R). Interim Payments: Interim payments made by Comerica Leasing to the vendors prior to equipment acceptance and lease commencement shall be funded on an Interim Lease Schedule at Comerica Bank's prevailing prime rate of interest. Interest only shall be due and payable upon the expiration of the Interim Lease Schedule or commencement of the base lease term, whichever occurs first. [LOGO] Mr. Richard Bradford March 30, 1998 Page Two Lease Termination The Lessee has the option to purchase the Option: equipment for $1.00. CONDITIONS: IF THIS COMMITMENT MEETS WITH YOUR APPROVAL, IT IS THEN SUBJECT TO THE FOLLOWING ADDITIONAL CRITERIA: 1) Execution of all mutually agreeable documentation necessary to effect each takedown under the lease line of credit. 2) Rental payment quotations apply only to leases closed on or before April 13, 1998, after which they are subject to change. Rental payments are based on a 5-year constant yield-to-maturity treasury at 5.72%. For leases closed after April 13, 1998, rental payments will be adjusted to reflect the treasury rates in effect at the time of closing. The monthly rental factor will become fixed for the term of the lease at lease commencement. 3) The above commitment and Lessor's willingness to enter into a lease is based upon there being no developments which, in the sole opinion of Lessor, would adversely affect the Lessee's creditworthiness and/or ability to meet any obligations. 4) Lessee must provide Lessor with a Certificate of Insurance at closing showing Comerica Leasing, a Division of Comerica Bank as a named insured for physical damage risks. [LOGO] Mr. Richard Bradford March 30, 1998 Page Three We appreciate the opportunity to extend this commitment for your consideration and look forward to continuing our relationship with ISE Labs and Digital Testing Services. Should there be any questions, please do not hesitate to contact me at (408) 271-4060. Sincerely, /s/ Mark H. Freund Mark H. Freund Vice President cc. Ray Grammer Mary Beth Suhr EX-10.9 19 1998 STOCK INCENTIVE PLAN EXHIBIT 10.9 ISE LABS, INC. 1998 STOCK INCENTIVE PLAN ------------------------- ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 1998 Stock Incentive Plan is intended to promote the interests of ISE Labs, Inc., a California corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, - the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special below-market option grants, - the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the purchase of such shares or as a bonus for performance of services rendered the Corporation (or any Parent or Subsidiary), - the Automatic Option Grant Program under which eligible non- employee Board members shall automatically receive option grants at periodic intervals to purchase shares of Common Stock, and - the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special below-market option grant. B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. However, any discretionary option grants or stock issuances for members of the Primary Committee shall be made by a disinterested majority of the Board. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. D. The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. 2. F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals who first become non-employee Board members after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic 3. Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non- employee Board member. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 4,500,000 shares, which shall consist of (i) the number of shares which remained available for issuance under the Predecessor Plan on the date the Underwriting Agreement for the offering is executed (the "Underwriting Date"), including the shares subject to outstanding options under that Predecessor Plan, plus (ii) an increase of one million (1,000,000) shares. In addition, the number of shares of Common Stock reserved for issuance under the Plan will automatically be increased on the first trading day of each calendar year, beginning in calendar year 1999, by an amount equal to the lessor of three percent (3%) of the total number of shares of Common Stock outstanding on the last trading day of the preceding calendar year or one million (1,000,000) shares. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1998 calendar year. C. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation (including unvested shares issued under the Predecessor Plan and repurchased by the Corporation at or after the Plan Effective Date), at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised 4. under Section IV of Article Two of the Plan shall NOT be available for subsequent issuance under the Plan. D. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 5. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM ---------------------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document -------- shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. -------------- 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 6. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at ---------------------------- such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. -------------------------------- 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 7. (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no ------------------ stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the ----------------- discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the ---------------------------------- Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. Non-Statutory Options shall be subject to the same restrictions, except that a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. --- A. ELIGIBILITY. Incentive Options may only be granted to Employees. ----------- B. EXERCISE PRICE. The exercise price per share shall not be less -------------- than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 8. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares ----------------- of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is --------------- granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. However, an outstanding option shall NOT become exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). 9. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain - -------- the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction, so that each such option shall, immediately prior to the effect date of such Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate Transaction and shall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. F. The Plan Administrator shall have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the ------- expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. G. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program upon the occurrence of a Change in Control so that each such option shall, immediately prior to the effect date of such Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to that option and may 10. be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation's outstanding repurchase rights under such program upon the subsequent termination of the Optionee's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control. Each option so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of the option term or (ii) the ------- expiration of the one (1) year period measured from the effective date of Optionee's cessation of Service. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under the Federal tax laws. I. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and 11. the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection ----- notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. 12. (iii) The grant of such limited stock appreciation right shall automatically constitute pre-approval by the Plan Administrator of any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. (iv) The balance of the option (if any) shall remain outstanding and exercisable in accordance with the documents evidencing such option. 13. ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM -------------------------------------- I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for those calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete discretion to determine whether to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall automatically be granted an option under the Salary Investment Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, -------- that each such document shall comply with the terms specified below. A. EXERCISE PRICE. -------------- 1. The exercise price per share shall be thirty-three and one- third percent (33 1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 14. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock ----------------------- subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66 2/3%), where X is the number of option shares,Optionee's base salary for the calendar year, and A is the dollar amount of the approved reduction in the B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become ---------------------------- exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease -------------------------------- Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option ------- term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three - ------- (3)-year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised 15. for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year ------- option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earlier of (i) the expiration ------- of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service or (iii) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant Program, pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board shall be required at the time of the actual option surrender and cash distribution. D. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 16. ARTICLE FOUR STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. PURCHASE PRICE. -------------- 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. ------------------ 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and 17. (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non- attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. 18. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 19. ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM ------------------------------ I. OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified ----------- below: 1. Each individual who is first elected or appointed as a non- employee Board member at any time after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 25,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary . 2. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as an Eligible Director, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase 2,500 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 2,500-share option grants any one Eligible Director may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received a stock option grant from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. EXERCISE PRICE. -------------- 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. OPTION TERM. Each option shall have a term of ten (10) years ----------- measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be ------------------------------- immediately exercisable for any or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each initial 25,000-share grant and each annual 2,500-share grant shall vest, and the Corporation's repurchase 20. right shall lapse, with respect to twenty-five percent (25%) of the option shares on the one (1) year anniversary of the option grant date and with respect to the balance of the option shares in a series of twelve (12) successive equal quarterly installments upon Optionee's completion of each additional month of Service over the twelve (12) quarter period measured from the first anniversary of the option grant date. E. TERMINATION OF BOARD SERVICE. The following provisions shall ---------------------------- govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully -vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)- month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 21. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully- vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction or Change in Control. D. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. E. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price -------- payable for such securities shall remain the same. 22. F. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 23. ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM --------------------------------- I. OPTION GRANTS Each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable in cash. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. -------------- 1. The exercise price per share shall be thirty-three and one- third percent (33 1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock ----------------------- subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66 2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non- employee Board member's election, and 24. B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become ---------------------------- exercisable in a series of twelve (12) equal monthly installments upon the Optionee's completion of each month of Board service over the twelve (12)-month period measured from the grant date. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board ---------------------------- service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the - ------- expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as ----------------------------- a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the earlier of (i) the expiration of the ten ------- (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ------- ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the 25. total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration ------- of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earlier or (i) the expiration of ------- the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 26. ARTICLE SEVEN MISCELLANEOUS ------------- I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation ----------------- withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at -------------- the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 27. III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately at the Plan Effective Date. However, the Salary Investment Option Grant Program and the Director Fee Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Section 12 Registration Date. All options outstanding under the Predecessor Plan on the Section 12 Registration Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest to occur of (i) April -------- 1, 2008, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Should the Plan terminate on April 1, 2008, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. 28. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 29. APPENDIX -------- The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant ------------------------------ program in effect under the Plan. B. BOARD shall mean the Corporation's Board of Directors. ----- C. CHANGE IN CONTROL shall mean a change in ownership or control of the ----------------- Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. ---- E. COMMON STOCK shall mean the Corporation's common stock. ------------ F. CORPORATE TRANSACTION shall mean either of the following stockholder- --------------------- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or A-1. (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean ISE Labs, Inc., a California corporation, and ----------- its successors. H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option --------------------------------- grant in effect for non-employee Board members under Article Six of the Plan. I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option ---------------------------------- grant program in effect under the Plan. J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to ----------------- participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. K. EMPLOYEE shall mean an individual who is in the employ of the -------- Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. L. EXERCISE DATE shall mean the date on which the Corporation shall have ------------- received written notice of the option exercise. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall ----------------- be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. A-2. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, ----------------- by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. INCENTIVE OPTION shall mean an option which satisfies the requirements ---------------- of Code Section 422. P. INVOLUNTARY TERMINATION shall mean the termination of the Service of ----------------------- any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement ---------- or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. -------- A-3. S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the -------------------- requirements of Code Section 422. T. OPTIONEE shall mean any person to whom an option is granted under the -------- Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. U. PARENT shall mean any corporation (other than the Corporation) in an ------ unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PARTICIPANT shall mean any person who is issued shares of Common Stock ----------- under the Stock Issuance Program. W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability -------------------------------------------- of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. X. PLAN shall mean the Corporation's 1998 Stock Incentive Plan, as set ---- forth in this document. Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the ------------------ Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Z. PLAN EFFECTIVE DATE shall mean April 2, 1998. ------------------- AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing Stock ---------------- Option Plan in effect immediately prior to the Plan Effective Date hereunder. A-4. AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non- ----------------- employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program solely with respect to the selection of the eligible individuals who may participate in such program. AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary -------------------------------------- investment option grant program in effect under the Plan. AD. SECONDARY COMMITTEE shall mean a committee of one or more Board ------------------- members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common ---------------------------- Stock is first registered under Section 12 of the 1934 Act. AF. SECTION 16 INSIDER shall mean an officer or director of the ------------------ Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AG. SERVICE shall mean the performance of services for the Corporation (or ------- any Parent or Subsidiary) by a person in the capacity of an Employee, a non- employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the -------------- New York Stock Exchange. AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the ------------------------ Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect ---------------------- under the Plan. AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in ---------- an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A-5. AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value --------------- ------- per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. AM. TAXES shall mean the Federal, state and local income and employment ----- tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under --------------- Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). AO. UNDERWRITING AGREEMENT shall mean the agreement between the ---------------------- Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. AP. UNDERWRITING DATE shall mean the date on which the Underwriting ----------------- Agreement is executed and priced in connection with an initial public offering of the Common Stock. A-6. EX-10.10 20 1998 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.10 ISE LABS, INC. 1998 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of ISE Labs, Inc. by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The number of shares of Common Stock initially authorized to be issued under the Plan is Six Hundred Thousand (600,000) shares. In addition, the number of shares of Common Stock reserved for issuance under the Plan will automatically be increased on the first trading day of each calendar year, beginning in calendar year 1999, by an amount equal to the lessor of three percent (3%) of the total number of shares of Common Stock outstanding on the last trading day of the preceding calendar year or four hundred thousand (1,000,000) shares. B. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. OFFERING PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date of such offering period. However, the initial offering period shall commence at the Effective Time and terminate on the last business day in July 2000. The next offering period shall commence on the first business day in August 2000, and subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall be comprised of a series of one or more successive Purchase Intervals. Purchase Intervals shall run from the first business day in February each year to the last business day in July of the same year and from the first business day in August each year to the last business day in January of the following year. However, the first Purchase Interval in effect under the initial offering period shall commence at the Effective Time and terminate on the last business day in January 1999. D. Should the Fair Market Value per share of Common Stock on any Purchase Date within an offering period be less than the Fair Market Value per share of Common Stock on the start date of that offering period, then that offering period shall automatically terminate immediately after the purchase of shares of Common Stock on such Purchase Date, and a new offering period shall commence on the next business day following such Purchase Date. The new offering period shall have a duration of twenty (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any offering period under the Plan may enter that offering period on such start date or on any subsequent Semi-Annual Entry Date within that offering period, provided he or she remains an Eligible Employee. B. Each individual who first becomes an Eligible Employee after the start date of an offering period may enter that offering period on any subsequent Semi-Annual Entry Date within that offering period on which he or she is an Eligible Employee. C. The date an individual enters an offering period shall be designated his or her Entry Date for purposes of that offering period. 2. D. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock during an offering period may be any multiple of one percent (1%) of the Base Salary paid to the Participant during each Purchase Interval within that offering period, up to a maximum of ten percent (10%). The deduction rate so authorized shall continue in effect throughout the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Interval. (ii) The Participant may, prior to the commencement of any new Purchase Interval within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the ten percent (10%) maximum) shall become effective on the start date of the first Purchase Interval following the filing of such form. B. Payroll deductions shall begin on the first pay day following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. 3. VII. PURCHASE RIGHTS A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a ----------------------- separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be ------------------------------ automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than Participants whose payroll deductions have previously been refunded pursuant to the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Interval ending on such Purchase Date to the purchase of whole shares of Common Stock at the purchase price in effect for the Participant for that Purchase Date. C. PURCHASE PRICE. The purchase price per share at which Common -------------- Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall be equal to eighty-five percent (85%) of the lower of ----- (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common ---------------------------- Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Interval ending with that Purchase Date by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed One Thousand Five Hundred (1,500) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. In addition, the maximum aggregate number of shares of Common Stock purchasable by all Participants on any one Purchase Date shall not exceed One Hundred Fifty Thousand (150,000) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. 4. E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to ------------------------- the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable on the Purchase Date shall be promptly refunded. F. TERMINATION OF PURCHASE RIGHT. The following provisions shall ----------------------------- govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next scheduled Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Interval in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Interval in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the Purchase Interval in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf for that Purchase Interval or (b) have such funds held for the purchase of shares on his or her behalf on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service within (i) ninety (90) days following the commencement of such leave or, if longer, the period during which such Participant's right to reemployment with the Corporation is guaranteed by either statute or contract, his or her payroll 5. deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, unless the Participant withdraws from the Plan prior to his or her return. If the Participant's leave of absence, whether paid or unpaid, (i) G. CORPORATE TRANSACTION. Each outstanding purchase right shall --------------------- automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the Purchase Interval in which such Corporate Transaction occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of ----- Common Stock on the Participant's Entry Date into the offering period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant and in the aggregate shall continue to apply to any such purchase. The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares ---------------------------- of Common Stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. ASSIGNABILITY. The purchase right shall be exercisable only by ------------- the Participant and shall not be assignable or transferable by the Participant. J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder ------------------ rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair 6. Market Value per share on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Interval, then the payroll deductions which the Participant made during that Purchase Interval with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on April 2, 1998 and shall become effective at the Effective Time, provided no purchase rights granted -------- under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until (i) the Plan shall have been approved by the stockholders of the Corporation and (ii) the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. In the event such stockholder approval is not obtained, or such compliance is not effected, within twelve (12) months after the date on which the Plan is adopted by the Board, the Plan shall terminate and have no further force or effect, and all sums collected from Participants during the initial offering period hereunder shall be refunded. 7. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in July 2008, (ii) the date on -------- which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any Purchase Interval. However, the Board may not, without the approval of the Corporation's stockholders, (i) increase the number of shares of Common Stock issuable under the Plan or the maximum number of shares purchasable per Participant on any one Purchase Date, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan or (iii) modify eligibility requirements for participation in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation; however, each Plan Participant shall bear all costs and expenses incurred by such individual in the sale or other disposition of any shares purchased under the Plan. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 8. SCHEDULE A ---------- CORPORATIONS PARTICIPATING IN EMPLOYEE STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME ------------------------ ISE Labs, Inc. APPENDIX -------- The following definitions shall be in effect under the Plan: A. BASE SALARY shall mean the (i) regular base salary paid to a ----------- Participant by one or more Participating Companies during such individual's period of participation in one or more offering periods under the Plan plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate. The following items of compensation shall NOT be included in Base Salary: (i) all overtime payments, bonuses, commissions (other than those functioning as base salary equivalents), profit-sharing distributions and other incentive-type payments and (ii) any and all contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate under any employee benefit or welfare plan now or hereafter established. B. BOARD shall mean the Corporation's Board of Directors. ----- C. CODE shall mean the Internal Revenue Code of 1986, as amended. ---- D. COMMON STOCK shall mean the Corporation's common stock. ------------ E. CORPORATE AFFILIATE shall mean any parent or subsidiary ------------------- corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. F. CORPORATE TRANSACTION shall mean either of the following --------------------- stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean ISE Labs, Inc., a California corporation, ----------- and any corporate successor to all or substantially all of the assets or voting stock of ISE Labs, Inc. which shall by appropriate action adopt the Plan. A-1. H. EFFECTIVE TIME shall mean the time at which the Underwriting -------------- Agreement is executed and finally priced. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a ----------------- Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. ENTRY DATE shall mean the date an Eligible Employee first ---------- commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. FAIR MARKET VALUE per share of Common Stock on any relevant date ----------------- shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period which begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. L. 1933 ACT shall mean the Securities Act of 1933, as amended. -------- M. PARTICIPANT shall mean any Eligible Employee of a Participating ----------- Corporation who is actively participating in the Plan. A-2. N. PARTICIPATING CORPORATION shall mean the Corporation and such ------------------------- Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan are listed in attached Schedule A. O. PLAN shall mean the Corporation's 1998 Employee Stock Purchase ---- Plan, as set forth in this document. P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more ------------------ Board members appointed by the Board to administer the Plan. Q. PURCHASE DATE shall mean the last business day of each Purchase ------------- Interval. The initial Purchase Date shall be January 29, 1999. R. PURCHASE INTERVAL shall mean each successive six (6)-month period ----------------- within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in ---------------------- February and August each year on which an Eligible Employee may first enter an offering period. T. STOCK EXCHANGE shall mean either the American Stock Exchange or -------------- the New York Stock Exchange. U. UNDERWRITING AGREEMENT shall mean the agreement between the ---------------------- Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. A-3. EX-10.11 21 PROMISSORY NOTE DATED AUGUST 22, 1994 [LOGO OF SANWA BANK APPEARS HERE] EXHIBIT 10.11 PROMISSORY NOTE Principal Plus Interest -- Equal Principal Installment Payments Variable Interest Rate August 22, 1994 Mountain View, California FOR VALUE RECEIVED, the undersigned (the "Borrower") hereby promises to pay to the order of SANWA BANK CALIFORNIA (the "Bank"), at its Mountain View Office or at such other place or to such other parties as the holder of this Note may from time to time designate in writing, the principal sum of Two Million Five Hundred Twenty Thousand & 00/100 Dollars ($2,520,000.00) with interest thereon as set forth below. Interest shall accrue and principal and interest shall be payable as follows: 1. INTEREST RATE. Interest shall accrue on the outstanding principal balance under this Note at a variable rate equal to the Bank's "Reference Rate," as it may change from time to time, where the "Reference Rate" is defined as an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate (and as to which loans may be made by the Bank at, below or above such reference rate). Such interest rate shall be adjusted concurrently with any change in the Reference Rate. Interest shall be calculated on the basis of 360 days per year but charged on the actual number of days elapsed. 2. PAYMENT OF INTEREST. The Borrower hereby promises and agrees to pay interest monthly on the first day of each month, commencing on September 1, 1994. If interest is not paid as it becomes due, without waiving any Event of Default occasioned by such non-payment, the Bank may, at its option but without any obligation to do so, add such unpaid interest to principal and it shall thereafter become and be treated as part of the principal and shall thereafter bear like interest. 3. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the terms of this Note, the Borrower hereby promises and agrees to pay principal in 119 monthly installments of $21,000.00 per installment, commencing on September 1, 1994 and continuing on the first day of each month thereafter. On August 1, 2004 the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal balance then outstanding, together with all accrued and unpaid interest thereon. The acceptance by the holder of any payment under this Note after the date that such payment is due shall not constitute a waiver of the right to require prompt payment when due of future or succeeding payments or to declare a default as herein provided for any failure to so pay. The acceptance by the holder of the payment of a portion of any installment at any time that such installment is due and payable in its entirety shall neither cure nor excuse the default caused by failure to pay the whole of such installment and shall not constitute a waiver of the holder's rights to require full payment when due of all future or succeeding installments. At the Bank's option, any partial payments may first be applied to pay any late fees or other fees then due and unpaid, and then to accrued interest then due and unpaid and the remainder thereof (if any) shall be applied to reduce principal. 4. LATE FEE. If any payment of principal or interest, or any portion thereof, under this Note is not paid within ten (10) calendar days after it is due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. 5. PREPAYMENT. The Borrower shall be permitted to repay, without penalty or charge, all or any portion of the principal balance of this Note prior to the maturity date of this Note. Any prepayments shall first be applied to pay accrued interest and the remaining portion of such prepayments shall then be applied to reduce the outstanding principal balance. 6. TERMS AND CONDITIONS INCORPORATED BY REFERENCE. The Note shall be subject to all the terms and conditions set forth in the following described credit agreement between the Bank and the Borrower (the "Prior Agreement"): That certain Equipment Purchase Line of Credit Agreement dated August 22, 1994. The Borrower hereby re-confirms all representations and warranties and re-affirms all covenants and agreements set forth in the Prior Agreement as if such representations, warranties, covenants, and agreements were set forth in and made a part of this Note. To the extent the Borrower has granted the Bank a security interest in any collateral to secure the obligations under the Prior Agreement (whether such grant is contained in the Prior Agreement or in a separate document), the Borrower hereby grants to the Bank a security interest in such collateral to additionally secure all of the obligations of the Borrower to the Bank pursuant to this Note. 7. EVENTS OF DEFAULT. Any one or more of the following described events shall constitute an Event of Default under this Note: A. The Borrower shall fail to pay any amount under this Note when due. B. There shall occur a default under any other indebtedness owed by the Borrower (or any one or more of them) to the Bank or under any agreement securing, guarantying or relating to such other indebtedness or the indebtedness evidenced by this Note. C. Any representation or warranty made by the Borrower under or in connection with this Note or any financial statement given by the Borrower or any guarantor of this Note shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. D. The Borrower or any guarantor of this Note shall; (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties or assets; (iii) file a voluntary petition in bankrupt or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankruptcy; or (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee for itself or any of its properties, assets or businesses. E. Any guaranty of this Note shall be revoked or limited or its enforceability or validity shall be contested by any guarantor, by operation of law, legal proceeding or otherwise or any guarantor who is a natural person shall die. F. The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted, or any Borrower who is a natural person shall die. Upon the occurrence of any Event of Default described above, the holder of this Note, at its election, may declare the entire balance of principal and interest thereon immediately due and payable, together with all costs of collection, including, but not limited to, reasonable attorneys' fees and all expenses incurred in connection with the protection of, or realization on, the security for this Note. Interest thereafter on the unpaid principal balance, accrued interest and costs incurred shall be payable at a rate which is 3% per annum in excess of the rate otherwise charged according to the terms of this Note. 8. ASSUMPTION. This Note is not assumable without the express prior written consent of the holder. 9. ATTORNEYS' FEES. In the event that an action is instituted to enforce or collect this Note, or any portion hereof, or attorneys are engaged in connection with the protection of or realization on any security for this Note, the Borrower promises to pay all costs in connection therewith, including but not limited to reasonable attorneys' fees, court costs and such other sums as the court, may establish. 10. DISPUTE RESOLUTION. A. DISPUTES. It is understood and agreed that, upon the request of any party to this Note, any dispute, claim or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable, now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (i) this Note, or any related agreements, documents or instruments, (ii) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (iii) any incidents, omissions, acts, practices, or occurrences causing injury to any party whereby another party or its agents, employees or representatives may be liable, in whole or in part, or (iv) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") as follows: B. STEP I - MEDIATION. At the request of any party to the dispute, claim or controversy, the matter shall be referred to the nearest office of JAMS for mediation, which is an informal, non-binding conference or conferences between the parties in which a retired judge or justice from the JAMS panel will seek to guide the parties to a resolution of the case. C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY). Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase, then (subject to the restriction at the end of this subparagraph) all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in Los Angeles, California (or such other city as may be agreed upon by the parties) and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of JAMS and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys' fees and costs. This subparagraph shall apply only if, at the time of the submission of the matter to JAMS, the dispute or issues involved do not arise out of any transaction which is secured by real property collateral or, if so secured, all parties consent to such submission. As soon as practicable after selection of the arbitrator, the arbitrator, or the arbitrator's designated representative, shall determine a reasonable estimate of anticipated fees and costs of the arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter, each party shall, within 10 days of receipt of said statement, deposit said sum with the arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL PROPERTY). If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration, as provided in the above subparagraph, and has not been resolved by Step I mediation, then any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of JAMS appointed pursuant to the provisions of Section 638(1) of the California Code of Civil Procedure, or any amendment, addition or successor section thereto, to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If the parties are unable to agree upon a member of the JAMS panel to act as referee, then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend any cause of action which is the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. E. PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of, or the exercise of any rights under any portion of this Dispute Resolution provision, shall limit the right of any party to exercise self help remedies such as set off, foreclosure against any real or personal property collateral, or the obtaining of provisional or ancillary remedies, such as injunctive relief or the appointment of a receiver, from any court having jurisdiction before, during or after the pendency of any arbitration. At the Bank's option, foreclosure under the a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional remedies, pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party to submit the controversy or claim to arbitration. 11. WAIVER. The liability of the undersigned is joint and several. The makers, endorsers and/or guarantors hereof do hereby severally waive presentment, demand, protest and notice of protest, dishonor and non-payment. Such parties expressly consent to the extension of time for the performance of any obligation hereunder and the release of any party liable for the obligation. The release of any party liable hereon shall not operate to release any other party liable hereon. 12. SEVERABILITY. Every provision hereof is intended to be several. If any provision of this Note is determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall not affect the other provisions hereof, which shall remain binding and enforceable. 13. JURISDICTION. This Note is made in the State of California, and it is mutually agreed that California law shall apply to the interpretation of the terms and conditions of this Note. 14. ENTIRE AGREEMENT. This Note and all documents, instruments and agreements mentioned herein constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties pertaining to the transactions contemplated hereunder not incorporated or referenced in this Note or in such documents, instruments and agreements are superseded hereby. 15. REAL PROPERTY SECURITY. This Note is secured by a certain deed of trust dated August 22, 1994, encumbering the real property described therein and located in Santa Clara County, State of California, (the "Deed of Trust"). In the event the Borrower, or any holder of title to or any interest in the real property encumbered by the Deed of Trust, sells, conveys, alienates, assigns, transfers or disposes of the real property, or any part thereof or any interest therein, or becomes divested of its title or any interest herein in any manner or way, or enters into a master lease covering all or any portion thereof or an undivided interest therein, whether voluntary, involuntary or otherwise, or enters into an agreement to do so, without the prior written consent of the holder of this Note, the holder may, at its election, declare this Note, irrespective of the maturity date specified herein or in any written agreement pertaining to this Note, immediately due and payable without notice. No waiver of this right shall be effective unless in writing. Consent by the holder of this Note to one such transaction shall not constitute or be deemed to be a waiver of the rights of the holder provided herein as to future or succeeding transactions. BORROWER: ISE LABS, INC. By: /s/ Saeed A malik ------------------------------------------ Saeed A. Malik, President By: /s/ Alex M. Barrios ------------------------------------------ Alex M. Barrios, Vice President By: /s/ Laurence F. Jorstad ------------------------------------------ Laurence F. Jorstad, Vice President ADDRESS: 2095 Ringwood Avenue San Jose, CA 95131 (3) EX-11.1 22 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11.1 ISE LABS, INC. CALCULATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, ----------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- ------- -------- -------- Net income........................... $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631 ======= ======= ======= ======== ======== Weighted average common shares outstanding for basic net income per share............................... 17,500 17,500 17,500 17,500 17,500 Potential shares issuable on exercise of employee stock options.............. -- -- -- -- 268 ------- ------- ------- -------- -------- Total weighted average common shares outstanding for diluted net income per share........................... 17,500 17,500 17,500 17,500 17,768 ======= ======= ======= ======== ======== Basic net income per share........... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 ======= ======= ======= ======== ======== Diluted net income per share......... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15 ======= ======= ======= ======== ========
EX-21.1 23 LIST OF SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 The subsidiaries of ISE Labs, Inc. are as follows: Digital Testing Services, Inc., a California corporation ISE Technology, Inc., a California corporation ISE Labs Hong Kong Limited, a Hong Kong Company EX-23.2 24 CONSENT OF PRICE WATERHOUSE RELATING TO ISE EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated December 12, 1997, except as to Note 10 which is as of April 2, 1998 relating to the consolidated financial statements of ISE Labs, Inc. which appears in such Prospectus. We also consent to the references to us under the headings "Experts" in such Prospectus. /s/ PRICE WATERHOUSE LLP Price Waterhouse LLP San Jose, California April 8, 1998 EX-23.3 25 CONSENT OF PRICE WATERHOUSE RELATING TO ALPHATEC EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated February 7, 1997 relating to the consolidated statements of operations, of shareholders deficit, and of cash flows, of Alphatec USA, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" in such Prospectus. /s/ PRICE WATERHOUSE LLP Price Waterhouse LLP San Jose, California April 8, 1998 EX-27.1 26 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS OCT-31-1997 OCT-31-1998 NOV-01-1996 NOV-01-1997 OCT-31-1997 JAN-31-1998 4,969 6,077 0 0 13,870 16,466 1,127 1,127 78 192 19,130 22,494 66,346 77,276 17,124 20,310 71,593 82,499 27,853 29,691 0 0 0 0 0 0 17 17 23,505 26,136 71,593 82,499 35,532 20,291 35,532 20,291 17,950 9,483 17,950 9,483 8,326 5,662 0 0 741 869 9,319 4,244 3,579 1,613 5,740 2,631 0 0 0 0 0 0 5,740 2,631 0.33 0.15 0.33 0.15
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