-----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, RwoeO53mQNwwx+mNLcEAXt+YQzdiv9evgmENzYKdyXtxUaZAN4Dv3Ne3CHCjtcsR A2CIb8aePgGN9H39Pi0vHg== 0001012870-98-001401.txt : 19980522 0001012870-98-001401.hdr.sgml : 19980522 ACCESSION NUMBER: 0001012870-98-001401 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980521 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISE LABS INC CENTRAL INDEX KEY: 0001053997 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770470213 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-49685 FILM NUMBER: 98629937 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/A 1 AMENDMENT #1 TO THE FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998 REGISTRATION NO. 333-49685 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ AMENDMENT NO. 1 TO 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 INCORPORATION) IDENTIFICATION NO.) 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. MICHAEL C. DORAN, ESQ. JEFFREY A. HERBST, ESQ. ALAN K. TSE, ESQ. CAINE T. MOSS, ESQ. BROBECK, PHLEGER & HARRISON LLP STEPHANIE L. RUBY, ESQ. TWO EMBARCADERO PLACE WILSON SONSINI GOODRICH & ROSATI 2200 GENG ROAD PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94303 650 PAGE MILL ROAD (650) 424-0160 PALO ALTO, CALIFORNIA 94304 (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. [_] 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 THIS 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 MAY 21, 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. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "ISET," subject to official notice of issuance. 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(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 $1,950,000, including the nonaccountable expense allowance. See "Underwriting." (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. Currently, wafer foundry services and IC packaging are 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'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. 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 30, 1998. Excludes as of April 30, 1998: (i) 2,902,800 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 $8.08 per share; (ii) 1,597,200 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" and Notes 5 and 10 of Notes to Consolidated Financial Statements of the Company. 4 SUMMARY CONSOLIDATED FINANCIAL DATA
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, --------------------------------------- --------------- 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 $12,675 $40,538 Gross profit.......... 6,883 8,788 13,368 13,260 17,582 5,758 21,473 Income from operations........... 3,441 4,335 8,477 8,217 9,256 3,462 12,023 Income before income taxes................ 3,340 4,359 8,597 8,191 9,319 3,438 10,358 Net income............ 1,986 2,468 4,930 4,848 5,740 2,118 6,421 Net income per share(2): Basic............... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37 Diluted............. 0.11 0.14 0.28 0.28 0.33 0.12 0.36 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 18,001
AS OF APRIL 30, 1998 ------------------------- ACTUAL AS ADJUSTED (3) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 7,694 $ 43,485 Working capital (deficiency)....................... (15,485) 34,605 Total assets....................................... 88,496 124,287 Short-term debt, including current portion of long- term debt......................................... 17,565 3,266 Long-term debt, less current portion............... 18,995 10,585 Retained earnings.................................. 29,379 29,379 Total shareholders' equity......................... 29,943 88,443
- -------------------- (1) Statement of operations data for fiscal 1997 include the post-Alphatec 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. Any forward-looking statements are made as of the date of this Prospectus and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. 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; intense 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; changes in costs, availability and delivery time of raw materials and components; changes in costs and availability of labor; 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. The Company's gross margin has tended to fluctuate due in part to timing of costs associated with the acquisition of additional equipment to expand capacity and the delay associated with utilizing such expanded capacity. 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, January 31, 1998 and April 30, 1998 compared to the corresponding periods in the prior fiscal year 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. The Company's revenues for the quarter ended April 30, 1998 decreased slightly from the revenues for the quarter ended January 31, 1998. 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 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 6 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 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. Since November 1997, the Company has entered into arrangements with two 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 packaging 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 packaging services under these turnkey arrangements. Consequently, the Company believes, while these arrangements may favorably impact its revenues, they may have a negative impact on its gross 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 six months of fiscal 1998, 58.4%, 60.4% 54.2% and 45.9% 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 17.0% of the Company's revenues, respectively, derived from sales to the Company's largest customer in each respective period. Hana Technologies Limited, formerly Swire Technologies ("Hana Technologies") accounted for 21.4%, 30.2% and 17.0% of the Company's revenues in fiscal 1996 and 1997 and the six months ended April 30, 1998, respectively. A significant portion of the business that the Company derives from Hana Technologies relates to testing services for LSI Logic Corporation ("LSI Logic"). Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the Company's revenues in fiscal 1995 and 1996, respectively. Cirrus Logic Inc. ("Cirrus Logic") accounted for 12.3% of the Company's revenues in the six months ended April 30, 1998. 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, one of such customers is no longer a customer of the Manteca Operation. Accordingly, the Company's Manteca Operation (which accounted for approximately 10% of the Company's revenues in the first six months 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, 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, 7 including the major customer of the Company's Manteca Operation or Hong Kong subsidiary, will not reduce, cancel or delay orders or seek other suppliers (within the same or other geographical regions where the Company may not have a presence), 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 material 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 in part based on orders from their end- user customers. 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. From time-to-time, semiconductor and other companies have also experienced reduced prices and demand for some products, as well as delays or cancellations of orders by their customers. There can be no assurance that, should these circumstances occur in the future, they will not have a material adverse effect the Company's business, financial condition and results of operations. The loss of one or more of the Company customers, or reduced orders by any of its key customers, may have a material adverse effect on the Company's business, financial condition and results of operations. 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 8 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." RISKS OF INTERNATIONAL OPERATIONS In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998, the Company derived 1.2%, 21.4%, 30.2% and 17.1% 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 9 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./Amkor Technology, Inc., ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of Advanced Semiconductor Engineering, Inc., Orient Semiconductor Electronics, Ltd., Siliconware Precision Industries Co., Ltd., ST Assembly Test Services Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd., most 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 or continuing to use 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 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 its expenses 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 10 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 maintained, 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 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 11 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 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 mid-to 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 12 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 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 13 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 regulations or different interpretations of existing regulations, 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. Furthermore, the adoption of new regulations or different interpretations of existing regulations applicable to the Company's customers that are engaged in semiconductor manufacturing operations could cause such customers to curtail or suspend their manufacturing operations, which could result in a decrease in their demand for the Company's services. Any such decrease in demand 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 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% (or 75.0%, assuming the inclusion of options previously granted to such affiliates) 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 14 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"). In the absence of any agreement to the contrary, 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 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 981,375 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. 15 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. 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 70.5% of their investment in the Common Stock in that the net tangible book value of the Common Stock after the offering will be approximately $3.84 per share as compared to an assumed initial public offering price of $13.00 per share. See "Dilution." CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus may contain certain forward-looking statements, including without limitation, statements concerning the Company's operations, economic performance and financial condition, including in particular, statements relating to the Company's growth strategy. The words "believe," "expect," "anticipate" and other similar expressions generally identify any such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any such forward-looking statements. Any such forward- looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under this section entitled "Risk Factors" and elsewhere in this Prospectus. Actual results could differ materially from any such forward-looking statements. In addition, important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in the Company's business or growth strategy or an inability to execute its strategy due to changes in its industry or the economy generally, changes with respect to the Company's current competitors or the emergence of new competitors and various competitive factors. In light of these risks and uncertainties, there can be no assurance that the matters referred to in any such forward-looking statements contained in this Prospectus will in fact occur. 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 $58,500,000, 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 $22.7 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. All $22.7 million of such indebtedness was incurred in fiscal 1997 and was used to fund the Alphatec Acquisition. The remaining proceeds will be used for capital expenditures of approximately $21 million to expand capacity in the remainder of fiscal 1998 and other working capital and general corporate purposes, including the payment of $1.6 million of accrued bonuses to Messrs. Raissi and Grammer. 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 April 30, 1998: (i) the actual short-term debt, including current portion of long-term debt, and the total capitalization of the Company and (ii) the short-term debt, including current portion of long-term debt, and the total 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 $22.7 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 APRIL 30, 1998 ----------------------- ACTUAL AS ADJUSTED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Short-term debt, including current portion of long-term debt.................................................. $ 17,565 $ 3,266 ========== ========== Long-term debt, less current portion................... $ 18,995 $ 10,585 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; 22,500,000 shares issued and outstanding as adjusted(1).......................... 18 23 Additional paid-in capital........................... 546 59,041 Retained earnings.................................... 29,379 29,379 ---------- ---------- Total shareholders' equity......................... 29,943 88,443 ---------- ---------- Total capitalization................................... $ 48,938 $ 99,028 ========== ==========
- --------------------- (1) Based on the number of shares of Common Stock outstanding as of April 30, 1998. Excludes as of April 30, 1998: (i) 2,902,800 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 $8.08 per share; (ii) 1,597,200 shares of Common Stock issuable upon exercise of options reserved for future issuance under the Company's 1998 Stock Incentive 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" and Notes 5 and 10 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 April 30, 1998 was $27,854,000, or $1.59 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 April 30, 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 $58,500,000 to the Company. The pro forma net tangible book value of the Company as of April 30, 1998 would have been approximately $86,354,000, or $3.84 per share. This represents an immediate increase in such net tangible book value of $2.25 per share to existing shareholders and an immediate dilution of $9.16 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 April 30, 1998....... $1.59 Increase attributable per share attributable to new investors................................................... 2.25 ----- Pro forma net tangible book value per share after the offering...................................................... 3.84 ------ Dilution to new investors...................................... $ 9.16 ======
The following table summarizes, on a pro forma basis as of April 30, 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 April 30, 1998. Excludes as of April 30, 1998: (i) 2,902,800 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 $8.08 per share; (ii) 1,597,200 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 future issuance under the Company's 1998 Employee Stock Purchase Plan. See "Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan" and Notes 5 and 10 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 six months ended April 30, 1997 and 1998 and the consolidated balance sheet data as of April 30, 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 six months ended April 30, 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
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ------------------------------------------- ------------------ 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 $12,675 $40,538 Cost of revenues....... 6,557 6,760 8,953 12,094 17,950 6,917 19,065 ------- ------- ------- ------- ------- ------- ------- Gross profit........... 6,883 8,788 13,368 13,260 17,582 5,758 21,473 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development.......... 571 601 1,048 1,111 1,097 457 1,322 Selling, general and administrative....... 2,871 3,852 3,843 3,932 7,229 1,839 8,128 ------- ------- ------- ------- ------- ------- ------- Total operating expenses............ 3,442 4,453 4,891 5,043 8,326 2,296 9,450 ------- ------- ------- ------- ------- ------- ------- Income from operations............ 3,441 4,335 8,477 8,217 9,256 3,462 12,023 Other income (expense): Interest and other income, net.......... 311 398 523 504 804 258 30 Interest expense...... (412) (374) (403) (530) (741) (282) (1,695) ------- ------- ------- ------- ------- ------- ------- Total other income (expense)........... (101) 24 120 (26) 63 (24) (1,665) ------- ------- ------- ------- ------- ------- ------- Income before income taxes................. 3,340 4,359 8,597 8,191 9,319 3,438 10,358 Provision for income taxes................. 1,354 1,891 3,667 3,343 3,579 1,320 3,937 ------- ------- ------- ------- ------- ------- ------- Net income............. $ 1,986 $ 2,468 $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421 ======= ======= ======= ======= ======= ======= ======= Net income per share(2): Basic................. $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37 ======= ======= ======= ======= ======= ======= ======= Diluted............... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36 ======= ======= ======= ======= ======= ======= ======= 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 18,001 AS OF OCTOBER 31, AS OF ------------------------------------------- APRIL 30, 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 $ 7,694 Working capital (deficiency).......... 13 2,679 2,937 3,020 (8,665) (15,485) Total assets........... 12,975 14,658 24,713 29,995 70,843 88,496 Short-term debt, including current portion of long-term debt.................. -- 451 880 1,414 14,861 17,565 Long-term debt, less current portion....... 3,800 3,756 4,534 4,595 17,189 18,995 Retained earnings...... 4,975 7,440 12,370 17,218 22,958 29,379 Total shareholders' equity................ 5,515 8,004 12,934 17,782 23,522 29,943
- -------------------- (1) Results of operations data for fiscal 1997 include the post-Alphatec 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. 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. Any forward-looking statements are made as of the date of this Prospectus and the Company assumes no obligation to update such forward- looking statements or to update the reasons why actual results could differ or have differed materially from those anticipated in such forward-looking statements. 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 high performance 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 six months of fiscal 1998, approximately 82.9% 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 and Singapore. 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. 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. Since November 1997, the Company has entered into arrangements with two 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 packaging 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 packaging services under these turnkey arrangements. Consequently, the Company believes, while these arrangements may favorably impact its revenues, they may have a negative impact on its gross 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, Hana Technologies, Hewlett-Packard Company, 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 17.0% of the Company's revenues in fiscal 1996, fiscal 1997 and the six months ended April 30, 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 revenues in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic accounted for 12.3% of the Company's revenues in the six months ended April 30, 1998. No other customer accounted for more than 10% of the Company's revenues during these periods. 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 its expenses more closely with revenue levels. The Company expects to invest additional 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 its operating expenses, if relationships with its creditors, suppliers and customers do not improve or if ISO 9002 certification is not maintained, the Company's overall business, financial condition and results of operations could be materially adversely affected. Until recently, the Manteca Operation (which accounted for approximately 10% of the Company's revenues in the first six months of fiscal 1998) had been almost entirely dependent on two customers. One of such customers is no longer a customer of the Manteca Operation. Revenues derived from this former customer of the Manteca Operation were $588,000, or approximately 14% of the Manteca Operation's total revenues in the six months ended April 30, 1998. The Company does not expect that the loss of this customer of the Manteca Operation by itself will have a material adverse effect on the results of the operations of the Company, as revenues from this customer represented 1.5% of the Company's consolidated revenues for the six months ended April 30, 1998. 23 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. RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statement of operations data as a percentage of revenues for the periods indicated:
SIX MONTHS YEAR ENDED OCTOBER 31, ENDED APRIL 30, ------------------------- ---------------- 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 54.6 47.0 ------- ------- ------- ------- ------- Gross profit...................... 59.9 52.3 49.5 45.4 53.0 ------- ------- ------- ------- ------- Operating expenses: Research and development........ 4.7 4.4 3.1 3.6 3.3 Selling, general and administrative................. 17.2 15.5 20.3 14.5 20.0 ------- ------- ------- ------- ------- Total operating expenses...... 21.9 19.9 23.4 18.1 23.3 ------- ------- ------- ------- ------- Income from operations............ 38.0 32.4 26.1 27.3 29.7 Other income (expense): Interest and other income (expense), net................. 2.3 2.0 2.3 2.0 0.1 Interest expense................ (1.8) (2.1) (2.1) (2.2) (4.3) ------- ------- ------- ------- ------- Total other income (expense).. 0.5 (0.1) 0.2 (0.2) (4.2) ------- ------- ------- ------- ------- Income before income taxes........ 38.5 32.3 26.3 27.1 25.5 Provision for income taxes........ 16.4 13.2 10.1 10.4 9.7 ------- ------- ------- ------- ------- Net income........................ 22.1% 19.1% 16.2% 16.7% 15.8% ======= ======= ======= ======= =======
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 $3.1 million or 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 of $2.1 million or 9.6% from the Company's domestic operations due to market conditions in the semiconductor industry. The increase in revenues of $10.2 million or 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 and, due to the inclusion of revenues from DTS and the Manteca Operation of approximately $5.0 million for the period subsequent to the Alphatec Acquisition. Six Months Ended April 30, 1997 and 1998. Revenues increased by $27.8 million from $12.7 million in the six months ended April 30, 1997 to $40.5 million in the six months ended April 30, 1998, due primarily to the inclusion of revenues of approximately $18.6 million 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 levels experienced in recent periods. 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 24 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 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. Six Months Ended April 30, 1997 and 1998. Gross profit increased by 273% from $5.8 million in the six months ended April 30, 1997 to $21.5 million in the six months ended April 30, 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 the results of DTS and the Manteca Operation. Gross margin increased from 45.4% in the six months ended April 30, 1997 to 53.0% in the six months ended April 30, 1998, reflecting an improvement in testing capacity utilization rates at the Company's locations. There can be no assurance that such trend will continue. The Company's gross margin has tended to fluctuate due in part 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 profit as a percentage of revenues, or gross margin, will continue to fluctuate from period-to-period. 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. Six Months Ended April 30, 1997 and 1998. Research and development expenses increased from $457,000 in the six months ended April 30, 1997 to $1.3 million in the six months ended April 30, 1998. This increase was primarily a result of the inclusion of the results of DTS and the Manteca Operation. As a percentage of revenues, research and development expenses decreased from 3.6% in the six months ended April 30, 1997 to 3.3% in the six months ended April 30, 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 a charge related to certain employment related bonuses aggregating $2.0 million, and the inclusion of expenses of DTS and the Manteca Operation aggregating $780,000. Six Months Ended April 30, 1997 and 1998. Selling, general and administrative expenses increased from $1.8 million in the six months ended April 30, 1997 to $8.1 million in the six months ended April 30, 1998. As a percentage of revenues, selling, general and administrative expenses increased from 14.5% in the six months ended April 30, 1997 to 20.0% in the six months ended April 30, 1998. These increases were primarily a result of the inclusion of expenses of DTS and the Manteca Operation of approximately $3.4 million and a charge of $1.8 million related to certain employment bonuses during the six months ended April 30, 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 six months ended April 30, 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 cash bonuses awarded to executives in future periods will be lower than historical levels. INTEREST AND OTHER INCOME, NET Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest income includes income from certificates of deposits and other interest bearing deposits. Other income 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. Six Months Ended April 30, 1997 and 1998. Interest and other income, net in the six months ended April 30, 1997 was $258,000. Interest and other income, net in the six months ended April 30, 1998 was $30,000. 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. Six Months Ended April 30, 1997 and 1998. Interest expense in the six months ended April 30, 1997 and 1998 was $282,000 and $1.7 million, 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. Six Months Ended April 30, 1997 and 1998. The provision for income taxes in the six months ended April 30, 1997 and 1998 was $1.3 million and $3.9 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 ten quarters in the period ended April 30, 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 QUARTER ENDED FISCAL 1997 QUARTER ENDED QUARTER ENDED ----------------------------------- ----------------------------------- ------------------ JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, 1996 1996 1996 1996 1997 1997 1997 1997 1998 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 $20,247 Cost of revenues........ 3,072 3,155 3,156 2,711 3,430 3,487 3,797 7,236 9,483 9,582 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Gross profit............ 3,213 3,893 3,332 2,822 2,768 2,990 3,910 7,914 10,808 10,665 Operating expenses...... 1,208 1,319 1,256 1,260 1,152 1,144 1,260 4,770 5,662 3,788 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Income from operations.. 2,005 2,574 2,076 1,562 1,616 1,846 2,650 3,144 5,146 6,877 Other income (expense), net.................... (20) 166 (45) (127) (65) 41 (72) 159 (902) (763) ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Income before income taxes.................. 1,985 2,740 2,031 1,435 1,551 1,887 2,578 3,303 4,244 6,114 Provision for income taxes.................. 810 1,119 829 585 596 724 990 1,269 1,613 2,324 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Net income.............. $1,175 $1,621 $1,202 $ 850 $ 955 $1,163 $1,588 $ 2,034 $ 2,631 $ 3,790 ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= Net income per share: Basic.................. $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15 $ 0.22 ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= Diluted................ $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15 $ 0.21 ====== ====== ====== ====== ====== ====== ====== ======= ======= ======= 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 17,500 Diluted................ 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,783 18,219 AS A PERCENTAGE OF REVENUES ------------------------------------------------------------------------------------------- Revenues................ 100.0% 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 47.3 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Gross profit............ 51.1 55.2 51.4 51.0 44.7 46.2 50.7 52.2 53.3 52.7 Operating expenses...... 19.2 18.7 19.4 22.8 18.6 17.7 16.3 31.4 27.9 18.7 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Income from operations.. 31.9 36.5 32.0 28.2 26.1 28.5 34.4 20.8 25.4 34.0 Other income (expense), net.................... (0.3) 2.4 (0.7) (2.3) (1.1) 0.6 (0.9) 1.0 (4.4) (3.8) ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Income before income taxes.................. 31.6 38.9 31.3 25.9 25.0 29.1 33.5 21.8 21.0 30.2 Provision for income taxes.................. 12.9 15.9 12.8 10.6 9.6 11.2 12.9 8.4 8.0 11.5 ------ ------ ------ ------ ------ ------ ------ ------- ------- ------- Net income.............. 18.7% 23.0% 18.5% 15.3% 15.4% 17.9% 20.6% 13.4% 13.0% 18.7% ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
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 three most recent quarters ended October 31, 1997, January 31, 1998 and April 30, 1998 compared to the corresponding periods in the prior fiscal year, 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 in part 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 expenses 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. Operating expenses decreased in the quarter ended April 30, 1998, primarily due to the absence of employment-related bonuses which had been incurred in the preceding two quarters as discussed above. 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; intense 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; changes in costs, availability and delivery time of raw materials and components; changes in costs and availability of labor; 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. The Company's gross margin has tended to fluctuate due in part to timing of costs associated with the acquisition of additional equipment to expand capacity and the delay associated with utilizing such expanded capacity. 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, January 31, 1998 and April 30, 1998 compared to the corresponding periods in the prior fiscal year 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. The Company's revenues for the quarter ended April 30, 1998 decreased slightly from the revenues for the quarter ended January 31, 1998. 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 "Risk Factors--Significant Fluctuations in Operating Results." 28 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has satisfied its liquidity needs principally from the cash generated from operations and equipment financing arrangements. At April 30, 1998, the Company had cash and cash equivalents of $7.7 million. In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998, cash generated from operating activities was $10.2 million, $6.0 million, $12.8 million and $20.0 million, respectively. Cash generated from operations consisted primarily of net income adjusted for non-cash depreciation and amortization charges, and changes in working capital, which in the six months ended April 30, 1998 reflected a significant increase in accounts payable and income taxes payable. In fiscal 1995, 1996 and 1997 and the six months ended April 30, 1998, capital expenditures were $8.0 million, $8.8 million, $14.1 million and $14.0 million, respectively. These capital expenditures related primarily 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. The Company currently intends to use approximately $21 million of the net proceeds from this offering for capital expenditures to expand capacity. 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 due date has been extended 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. The Company has limited borrowing capacity under such line. In the six months ended April 30, 1998, net cash used by financing activities totalled $3.2 million for debt repayments. The Company's borrowings under the various term loans, notes payable and line of credit require that the Company maintain quarterly compliance with certain financial covenants, including certain minimum cash and investment balances, tangible net worth and domestic assets as a proportion of total assets, and certain financial ratios, including debt to tangible net worth, liquid assets to current liabilities and certain debt service ratios. As of April 30, 1998, the Company was not in compliance with one of its financial covenants. The Company has obtained a waiver from its lender for such covenant breach. The Company plans to use a portion of the proceeds from this offering to repay the indebtedness to which such covenant relates. At April 30, 1998, the Company had a working capital deficiency of approximately $15.5 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, all of which is available for future borrowings. Additionally, the Company is currently negotiating to finance recently purchased capital equipment through a combination of leases 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 29 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 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. 30 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, A leading industry research organization estimates that total worldwide semiconductor sales were over $147 billion in 1997 and will grow to approximately $288 billion by 2002. Further, according to such organization, 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: [GRAPHICAL REPRESENTATION OF SEMICONDUCTOR PRODUCTION PROCESS APPEARS HERE] 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 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 31 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. 32 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. Currently, wafer foundry services and IC packaging are 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. 33 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. In the past, the market for independent testing services was comprised of 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. Most test service providers currently 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 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 34 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 Systems 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 35 that it is 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 36 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 its Hong Kong subsidiary, 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 45.9% of total revenues in fiscal 1995, 1996 and 1997 and the first six months of fiscal 1998, respectively. Hana Technologies accounted for 21.4%, 30.2% and 17.0% of the Company's revenues in fiscal 1996, fiscal 1997 and the six months ended April 30, 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 37 Company's revenue in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic accounted for 12.3% of the Company's revenues in the six months ended April 30, 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 customers: 8x8, Inc. ESS Technology, Inc. Pantronix Corporation Actel Corporation Gadzoox Microsystems, Philips Electronics Adaptec, Inc. Inc. N.V. Advansys Inc. Hamilton Hallmark Quality AHA, Inc. Technologies Semiconductor, Inc. Alliance Semiconductor Hana Technologies, Quantum Effect Design Corporation Limited Inc. Altera Corporation Hewlett-Packard Company Rendition, Inc. Analog Devices, Inc. Honeywell Inc. S3 Incorporated Atmel Corporation Hughes Defense Silicon Graphics, Auravision Corporation Communications Inc. C-Cube Microsystems, I-Cube, Inc. Silicon Image Inc. Inc. ICS, Inc. Slextronics, Inc. Chip Express Integrated Silicon SMC Corporation Corporation Solution, Inc. Synergy Microsystems, Chips and Technologies, Intel Corporation Inc. Inc. Level One Technologies, Trident Corporation Cirrus Logic, Inc. Inc. TriQuint Credence Systems LSI Logic Corporation Semiconductor, Inc. Corporation Marvel Semiconductor, TRW Inc. Cypress Semiconductor Inc. Tseng Labs, Inc. Corporation Minimed Technologies, Vitesse Semiconductor Delphi (a subsidiary of Inc. Corporation General Motors Mosys International, Inc. WSI Corporation Corporation) Motorola, Inc. Wyle Laboratories, DynaChip Corporation National Semiconductor Inc. Epic Corporation Corporation Xilinx, Inc. NeoMagic Corporation Zoran Corporation Novalog, Inc. Zycad Corporation Oak Technology, Inc. Orbit Semiconductor Inc. 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 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. Also, from time-to-time, the Company operates testers on consignment from certain customers. 38 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." 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. In addition, until recently the Company's Manteca Operation has been almost entirely dependent on two customers. However, one of such customers is no longer a customer of the Manteca Operation. Revenues of approximately $588,000, or approximately 14% of the Manteca Operation's total revenues were derived from this former customer of the Manteca Operation in the six months ended April 30, 1998. The Company does not expect that the loss of this customer by itself will have a material adverse effect on the Company's business, financial condition or results of operations, as revenues from this customer represented less than 1.5% of total consolidated revenues for the six months ended April 30, 1998. Accordingly, the Company's Manteca Operation (which accounted for approximately 10% of the Company's revenues in the first six months of fiscal 1998) is dependent on one customer, for substantially all of its revenues. 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." 39 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 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./Amkor Technology, Inc., ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of Advanced Semiconductor Engineering, Inc., Orient Semiconductor Electronics, Ltd., Siliconware Precision Industries Co., Ltd., ST Assembly Test Services Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd., most 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 or continuing to use 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. 40 The Company incurred research and development expenses of $1.0 million, $1.1 million, $1.1 million and $1.3 million in fiscal 1995, 1996 and 1997 and the first six months 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. 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 additional testing facility in Singapore. The Company expects that this lease will be effective in mid-1998 and will terminate in 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 April 30, 1998, the Company had 607 employees, with 453 in general operations, 49 in engineering (including research and development), 51 in quality assurance, 32 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." 41 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. 42 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE The executive officers, directors and key employee of the Company, and their ages and positions as of April 30, 1998, are as follows:
NAME AGE POSITION Executive Officers and Directors Saeed A. Malik.......... 46 President, Chief Executive Officer and Director Sassan Raissi........... 54 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......... 48 Vice President, Operations and Director Zafar A. Malik.......... 43 President of Integrated Qualification Labs Division Patrick H. Yu........... 45 Vice President, Applications Engineering Dharam V. Ahuja......... 56 Vice President, Business Development Muneer A. Malik......... 48 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 43 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. 44 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 Stock 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 on 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 Second Amended and Restated Articles of Incorporation (the "Amended Articles") 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. The Amended Articles have been approved by the Company's shareholders of record prior to this offering. 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. 45 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 (hereinafter referred to as the Named Executive Officers) for 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 46 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 47 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 48 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 shareholder 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 49 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 November 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 50 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 51 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. 52 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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 Company has paid $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to his employment agreement. In addition, the Company agreed to 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, which amount has not yet been paid. See "Management--Employment Contracts and Termination of Employment and Change of Control Arrangements." In November 1997, the Company entered into an employment and non-competition agreement with Mr. Grammer for a term ending on September 30, 2000. The Company has paid $175,000 to Mr. Grammer as a sign-on bonus pursuant to an employment and non-competition agreement. In addition, the Company agreed to 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, which amount has not yet been paid. 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 fiscal 1995, 1996 and 1997 and the first six months of fiscal 1998, the Company sold approximately $1,907,000, $1,635,000, $2,552,000 and $1,053,000, respectively, of products and services to S3 Incorporated. The accounts receivable from S3 Incorporated was approximately $220,000, $372,000, $646,000 and $237,000 at October 31, 1995, 1996, 1997 and April 30, 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. 53 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth at April 30, 1998 certain information with respect to the beneficial ownership of the Common Stock, and as adjusted to reflect the sale of Common Stock offered hereby for (i) each person who is known by the Company to beneficially own 5% or more 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 officers 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).... 4,748,849 27.1% 271,600 4,477,249 19.9% Laurence F. and Terri L. Jorstad Living Trust Dated April 30,1998(4)(5).......... 4,748,849 27.1 271,600 4,477,249 19.9 Alex M. Barrios(4)...... 4,748,849 27.1 271,600 4,477,249 19.9 Zafar A. Malik(4)(6).... 1,582,969 9.0 90,100 1,492,869 6.6 Patrick H. Yu(4)........ 1,582,969 9.0 90,100 1,492,869 6.6 Dharam V. Ahuja(7)...... 437,514 2.5 5,000 432,514 1.9 Muneer A. Malik(8)...... 52,500 * 0 52,500 * Terry N. Holdt(9)....... 52,500 * 0 52,500 * All directors, named executive officers and current officers as a group (10 persons)(10)........... 18,975,000 100.0% 1,000,000 17,975,000 75.0%
- --------------------- * 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 April 30, 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 April 30, 1998. Shares beneficially owned exclude shares held by Messrs. Zafar A. and Muneer A. Malik. (4) Such person's address is c/o ISE Labs, Inc., 2095 Ringwood Avenue, San Jose, CA 95131. (5) Consists of 4,748,849 shares of Common Stock held in the Laurence F. and Terri L. Jorstad Living Trust dated April 30, 1998, created by Mr. Jorstad and his spouse. Such persons are the trustees of and the primary beneficiaries of such living trust. (6) Shares beneficially owned exclude shares held by Messrs. Saeed A. Malik and Muneer A. Malik. (7) 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. (8) Consists of 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. Shares beneficially owned exclude shares held by Messrs. Zafar A. Malik and Saeed A. Malik. (9) Consists of 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. (10) Includes 1,475,000 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 1,475,000 shares. Also see Notes 3, 7, 8 and 9 above. 54 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 April 30, 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. 55 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"). Absent any contractual prohibition, 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, 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 one (1) year, 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 (approximately 225,000 shares immediately after the offering) or the average weekly trading volume of the Company's Common Stock on the Nasdaq Stock Market during the four (4) calendar weeks preceding the filing of a Form 144 with respect 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 two (2) 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 effective date 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. 56 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. 57 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. 58 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 Act of 1933, as amended, 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 (the "SEC"). 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, including the exhibits thereto, may be inspected, without charge, at the public reference facilities maintained by the SEC 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 SEC 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 SEC's public reference facilities in Washington, D.C. or through the SEC'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. 59 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-28 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, APRIL 30, --------------- ----------- 1996 1997 1998 (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents........................ $ 4,655 $ 4,969 $ 7,694 Accounts receivable, net of allowance for doubtful accounts and returns of $96, $1,127 and $1,466 (unaudited).............................. 4,475 12,743 12,728 Inventories--raw materials....................... -- 78 232 Prepaid expenses and other current assets........ 115 1,086 765 Deferred income taxes............................ 102 254 317 ------- ------- ------- Total current assets........................... 9,347 19,130 21,736 Property, plant and equipment, net................. 19,161 49,222 64,671 Intangible assets, net............................. -- 2,491 2,089 Other non-current assets........................... 1,487 -- -- ------- ------- ------- Total.......................................... $29,995 $70,843 $88,496 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt.................................. $ -- $ 9,812 $ 9,812 Accounts payable................................. 1,145 5,668 11,103 Accrued liabilities.............................. 2,892 6,186 4,736 Income taxes payable............................. 876 1,080 3,817 Current portion of long-term debt................ 1,414 5,049 7,753 ------- ------- ------- Total current liabilities...................... 6,327 27,795 37,221 Deferred income taxes.............................. 1,291 2,337 2,337 Long-term debt, less current portion............... 4,595 17,189 18,995 ------- ------- ------- Total liabilities.............................. 12,213 47,321 58,553 ------- ------- ------- 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 29,379 ------- ------- ------- Total shareholders' equity..................... 17,782 23,522 29,943 ------- ------- ------- Total.......................................... $29,995 $70,843 $88,496 ======= ======= =======
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)
SIX MONTHS ENDED YEARS ENDED OCTOBER 31, APRIL 30, ------------------------- ------------------ 1995 1996 1997 1997 1998 (UNAUDITED) Revenues....................... $22,321 $25,354 $35,532 $ 12,675 $ 40,538 Cost of revenues............... 8,953 12,094 17,950 6,917 19,065 ------- ------- ------- -------- -------- Gross profit................... 13,368 13,260 17,582 5,758 21,473 ------- ------- ------- -------- -------- Operating expenses: Research and development..... 1,048 1,111 1,097 457 1,322 Selling, general and administrative.............. 3,843 3,932 7,229 1,839 8,128 ------- ------- ------- -------- -------- Total operating expenses... 4,891 5,043 8,326 2,296 9,450 ------- ------- ------- -------- -------- Income from operations......... 8,477 8,217 9,256 3,462 12,023 ------- ------- ------- -------- -------- Other income (expense): Interest and other income, net......................... 523 504 804 258 30 Interest expense............. (403) (530) (741) (282) (1,695) ------- ------- ------- -------- -------- Total other income (expense)................. 120 (26) 63 (24) (1,665) ------- ------- ------- -------- -------- Income before income taxes..... 8,597 8,191 9,319 3,438 10,358 Provision for income taxes..... 3,667 3,343 3,579 1,320 3,937 ------- ------- ------- -------- -------- Net income..................... $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421 ======= ======= ======= ======== ======== Net income per share: Basic........................ $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37 ======= ======= ======= ======== ======== Diluted...................... $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36 ======= ======= ======= ======== ======== 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 18,001 ======= ======= ======= ======== ========
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)........... -- -- -- 6,421 6,421 ---------- --- ---- ------- ------- Balance as of April 30, 1998 (unaudited)........ 17,500,000 $18 $546 $29,379 $29,943 ========== === ==== ======= =======
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)
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, -------------------------- ----------------- 1995 1996 1997 1997 1998 (UNAUDITED) Cash flows from operating activities: Net income..................... $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421 Reconciliation to net cash provided by operating activities: Depreciation and amortization................. 2,016 3,829 6,269 2,559 6,719 Deferred income taxes......... 243 141 242 196 (63) Changes in assets and liabilities: Accounts receivable.......... (1,191) (1,212) (3,315) (728) 15 Inventory.................... -- -- 16 -- (154) Prepaid expenses and other current assets.............. 544 (53) (821) 26 321 Other non-current assets..... -- (1,212) (363) 1,487 -- Accounts payable............. 2,036 (1,216) 2,125 318 5,435 Accrued liabilities.......... 1,382 (167) 2,035 (1,856) (1,450) Income taxes payable......... 236 997 857 (240) 2,737 ------- ------- -------- ------- -------- Net cash provided by operating activities....... 10,196 5,955 12,785 3,880 19,981 ------- ------- -------- ------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment................. (7,984) (8,750) (14,132) (6,406) (14,025) Proceeds from sale of equipment..................... 254 725 1,245 1,245 -- 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) (5,161) (14,025) ------- ------- -------- ------- -------- 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) (910) (3,231) ------- ------- -------- ------- -------- Net cash provided by (used in) financing activities... 1,207 595 25,452 563 (3,231) ------- ------- -------- ------- -------- Net increase (decrease) in cash and equivalents................ 3,673 (1,475) 314 (718) 2,725 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 $ 3,937 $ 7,694 ======= ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURES: Cash paid for interest......... $ 402 $ 501 $ 663 $ 282 $ 1,623 Cash paid for income taxes..... 2,630 2,205 1,525 945 1,300 Property, plant and equipment acquired under capital leases........................ -- -- -- -- 7,741
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. Options granted to consultants are accounted for using the fair value method prescribed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"). In addition, the Company complies with the disclosure provisions of 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). The following table sets forth the computation of basic and diluted net income per share:
YEAR ENDED SIX MONTHS OCTOBER 30, ENDED APRIL 30, ----------------------- --------------- 1995 1996 1997 1997 1998 (UNAUDITED) Net income............................. $ 4,930 $ 4,848 $ 5,740 $ 2,118 $ 6,421 ======= ======= ======= ======= ======= Weighted average shares outstanding.... 17,500 17,500 17,500 17,500 17,500 Dilutive effect of stock options....... 501 ------- ------- ------- ------- ------- Shares used in diluted computation..... 17,500 17,500 17,500 17,500 18,001 ======= ======= ======= ======= ======= Basic earnings per share............... $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.37 ======= ======= ======= ======= ======= Diluted earnings per share............. $ 0.28 $ 0.28 $ 0.33 $ 0.12 $ 0.36 ======= ======= ======= ======= =======
Anti-dilutive options totaling 2,549,600 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. 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 F-9 ISE LABS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 April 30, 1998, the consolidated statements of income and of cash flows for the six months ended April 30, 1997 and 1998 and the consolidated statement of shareholders' equity for the six months ended April 30, 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, APRIL 30, ------------------ ----------- 1996 1997 1998 (UNAUDITED) (IN THOUSANDS) Property, plant and equipment: Machinery and equipment.................. $ 24,041 $ 55,036 $ 75,284 Furniture and fixtures................... 95 297 339 Buildings................................ 4,665 7,445 7,445 Building improvements.................... 265 1,182 1,189 -------- -------- -------- 29,066 63,960 84,197 Less accumulated depreciation and amortization............................ (11,491) (17,124) (21,972) -------- -------- -------- 17,575 46,836 62,225 Land..................................... 1,586 2,386 2,386 -------- -------- -------- $ 19,161 $ 49,222 $ 64,671 ======== ======== ======== Accrued liabilities: Accrued employee compensation............ $ 2,217 $ 2,313 $ 2,108 Other.................................... 675 3,873 2,628 -------- -------- -------- $ 2,892 $ 6,186 $ 4,736 ======== ======== ========
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. 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. 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............................. (2,549,600) 2,549,600 $ 7.80 ---------- --------- Balance at October 31, 1997................. 1,950,400 2,549,600 7.80 Options granted (unaudited)................. (353,200) 353,200 10.11 ---------- --------- Balance at April 30, 1998 (unaudited)....... 1,597,200 2,902,800 8.08 ========== ========= 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...................... 2,549,600 10 2,549,600 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 for the year ended October 31, 1997 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: NON EMPLOYEE DIRECTORS On December 31, 1997, the Company appointed two outside directors, one of whom is related to the Company's President and Chief Executive Officer. Upon appointment, each non-employee Board member received a non-qualified stock option grant for 52,500 shares of the Company's common stock at $10.40 per share. One of the non-employee directors 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 six months of fiscal 1998, the Company sold approximately $1,907,000, $1,635,000, $2,552,000, and $1,053,000 (unaudited), respectively, of products and services to S3 Incorporated. The accounts receivable from S3 Incorporated was approximately $372,000, $646,000 and $237,000 (unaudited) at October 31, 1996, and 1997 and April 30, 1998, respectively. EMPLOYEE STOCK PLANS 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. Under the 1998 Plan, 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 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. 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. Certain management functions of Alphatec USA are shared with those of Alphatec and other related companies. As disclosed in Note 4, an allocation of all joint operational costs has been charged to the Company. The charges are based on a proportional cost allocation which management believes is reasonable. Management does not believe that such costs on a stand-alone basis would have been materially different from the costs allocated. 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. F-20 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 F-21 ALPHATEC USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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 Manteca semiconductor assembly operations. This resulted in the establishment of a provision for impairment totaling $9,348,000 relating to machinery and equipment, which was recorded as an operating expense in the six months ended June 30, 1997. The impairment was calculated based on management's estimation of fair value of machinery and equipment. 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 AMOUNTS) 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, which was approximately $1.5 million less than the net book value of the assets acquired. (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.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 31 Management............................................................... 43 Certain Relationships and Related Transactions........................... 53 Principal and Selling Shareholders....................................... 54 Description of Capital Stock............................................. 55 Shares Eligible for Future Sale.......................................... 56 Underwriting............................................................. 57 Legal Matters............................................................ 58 Experts.................................................................. 58 Additional Information................................................... 59 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. All amounts are estimated except the SEC registration fee, the NASD filing fee and the Nasdaq National Market fee:
AMOUNT TO BE COMPANY PAID BY THE ------- ------------ Securities and Exchange Commission Registration Fee........ $ 28,000 NASD Filing Fee............................................ 10,000 Nasdaq National Market Listing Fee......................... 95,000 Legal Fees and Expenses.................................... 500,000 Blue Sky Qualification Fees and Expenses................... 5,000 Accounting Fees and Expenses............................... 350,000 Printing and Engraving Expenses............................ 175,000 Transfer Agent's and Registrar's Fees and Expenses......... 10,000 Nonaccountable Expense Allowance for Donaldson, Lufkin & Jenrette Securities Corporation........................... 750,000 Miscellaneous Fees......................................... 27,000 ---------- Total.................................................. $1,950,000 ==========
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 3.1) and Article VI, Section 4 of the Company's Bylaws (Exhibit 3.2) provide for indemnification of its directors and II-1 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 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 April 30, 1998, the Company issued options to purchase an aggregate of 2,902,800 shares of Common Stock pursuant to grants to certain employees, directors and service providers of the Company under the 1998 Stock Incentive Plan 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
EXHIBIT 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. 3.3** Amended and Restated Articles of Incorporation of the Registrant as currently in effect. 3.4** Bylaws of the Registrant as currently in effect. 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.
II-2
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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. 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. 10.12** Deed of Trust (Non-Construction) & Assignment of Rents by and among the Registrant, First Bancorp, and Sanwa Bank California, dated August 22, 1994. 10.13** Equipment Purchase Line of Credit Agreement by and between Sanwa Bank California and the Registrant dated August 22, 1994. 10.14** Finance/Capital Lease Line of Credit Agreement by and between Comerica Leasing, a Division of Comerica Bank and the Registrant dated March 30, 1998. 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 LLP, Independent Accountants relating to the consolidated financial statements of ISE Labs, Inc. 23.3** Consent of Price Waterhouse LLP, Independent Accountants relating to the consolidated financial statements of Alphatec USA, Inc. 24.1* Power of Attorney (included on page II-4 of the Registration Statement). 27.1** Financial Data Schedule.
- --------------------- *Previously filed. **Filed herewith. ***To be filed by amendment. (b) Financial Statement Schedules: Schedules are 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 II-3 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-4 SIGNATURES PURSUANT 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 AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN SAN JOSE, CALIFORNIA ON THIS 21ST DAY OF MAY, 1998. ISE Labs, Inc. By: /s/ SAEED A. MALIK _________________________________ SAEED A. MALIK President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO 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 May 21, 1998 - ------------------------------------- Executive Officer, (SAEED A. MALIK) Director (Principal Executive Officer) /s/ Ray G. Grammer* Chief Financial May 21, 1998 - ------------------------------------- Officer (Principal (RAY G. GRAMMER) Financial and Accounting Officer) /s/ Laurence F. Jorstad* Director May 21, 1998 - ------------------------------------- (LAURENCE F. JORSTAD) /s/ Alex M. Barrios* Director May 21, 1998 - ------------------------------------- (ALEX M. BARRIOS) /s/ Muneer A. Malik* Director May 21, 1998 - ------------------------------------- (MUNEER A. MALIK) /s/ Terry N. Holdt* Director May 21, 1998 - ------------------------------------- (TERRY N. HOLDT) /s/ Saeed A. Malik *By: ________________________________ SAEED A. MALIK Attorney-in-Fact II-5 EXHIBIT INDEX
EXHIBIT 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. 3.3** Amended and Restated Articles of Incorporation of the Registrant as currently in effect. 3.4** Bylaws of the Registrant as currently in effect. 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. 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. 10.12** Deed of Trust (Non-Construction) & Assignment of Rents by and between the Registrant, First Bancorp, and Sanwa Bank California, dated August 22, 1994. 10.13** Equipment Purchase Line of Credit Agreement by and between Sanwa Bank California and the Registrant dated August 22, 1994. 10.14** Finance/Capital Lease Line of Credit Agreement by and between Comerica Leasing, a Division of Comerica Bank and the Registrant dated March 30, 1998. 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 the Registration Statement). 27.1** Financial Data Schedule.
- --------------------- * Previously filed. ** Filed herewith. *** To be filed by amendment. EX-3.3 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION Exhibit 3.3 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: I. NAME The name of the corporation is ISE LABS, INC. II. PURPOSE 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. III. NUMBER OF DIRECTORS The number of directors of this corporation is five. IV. CHANGE IN NUMBER OF DIRECTORS The number of directors may be changed only by an amendment of these articles adopted by the affirmative vote of not less than 80% of the shares entitled to vote thereon. V. SHARES This corporation is authorized to issue one class of stock to be designated "Common Stock." The total number of shares which the corporation is authorized to issue is Forty Million (40,000,000) shares, $0.001 par value per share. No distinctions shall exist between the shares of the corporation or the holders thereof. This Article V can be amended only by the vote or written consent of the holders of at least 70% of the outstanding voting shares. VI. INDEMNIFICATION 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 amendment and restatement of the articles of incorporation has been duly approved by the board of directors. 4. The foregoing 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 17,499,988. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was at least 80%. 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: December 31, 1997. /s/ Saeed A. Malik ---------------------------- Saeed A. Malik, President /s/ Warren T. Lazarow ---------------------------- Warren T. Lazarow, Secretary FIRST AMENDMENT TO THE BYLAWS OF ISE LABS, INC. The Bylaws of ISE Labs, Inc. (the "Company") are hereby amended, effective as of August 1, 1992, in the following respect: 1. Section 10.03 of Article X is hereby deleted in its entirety. 2. Except as modified by this First Amendment, all the terms and provisions of the Bylaws shall continue in full force and effect. CERTIFICATE OF PRESIDENT OF ISE LABS, INC. The undersigned, Saeed Malik hereby certifies that he is the duly elected and acting President of ISE Labs, Inc., a California corporation (the "Corporation"), and that the First Amendment to the Bylaws attached hereto was duly adopted by Written Consent of the Board of Directors on August 1, 1992. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 1st day of August, 1992. /s/ Saeed Malik ------------------------------- Saeed Malik, President SECOND AMENDMENT TO THE BYLAWS OF ISE LABS, INC. The Bylaws of ISE Labs, Inc. (the "Company") are hereby amended, effective as of October 13, 1997, in the following respects: 1. Section 10.01 of Article X is hereby deleted in its entirety. 2. Subsection (e) is hereby added to Section 10.04 of Article X to read as follows: "(e) The provisions of this Section 10.04 shall terminate upon the earliest to occur of (i) the first date on which shares of the Common -------- Stock are held of record by more than five hundred (500) persons, (ii) a firm commitment underwritten public offering, pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the corporation's Common Stock, (iii) a sale, transfer or other disposition of all or substantially all of the corporation's assets or outstanding voting securities or the sale of at least voting control of the corporation is effected through a merger, reorganization, consolidation or recapitalization or (iv) December 31, 2002." 3. Except as modified by this Second Amendment, all the terms and provisions of the Bylaws shall continue in full force and effect. CERTIFICATE OF SECRETARY OF ISE LABS, INC. The undersigned, Warren T. Lazarow hereby certifies that he is the duly elected and acting Secretary of ISE Labs, Inc., a California corporation (the "Corporation"), and that the Second Amendment to the Bylaws attached hereto was duly adopted by Written Consent of the Board of Directors on October 13, 1997. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 13th day of October, 1997. /s/ Warren T. Lazarow ---------------------------- Warren T. Lazarow, Secretary THIRD AMENDMENT TO THE BYLAWS OF ISE LABS, INC. The Bylaws of ISE Labs, Inc. (the "Company") are hereby amended, effective as of December 31, 1997, in the following respects: 1. Section 3.02 of Article III is amended and restated to read as follows: "Section 3.02 Number and Qualifications of Directors. The --------------------------------------------------- Authorized number of Directors shall be five until changed by a duly adopted amendment to the Articles of Incorporation." 2. Except as modified by this Third Amendment, all the terms and provisions of the Bylaws shall continue in full force and effect. CERTIFICATE OF SECRETARY OF ISE LABS, INC. The undersigned, Warren T. Lazarow hereby certifies that he is the duly elected and acting Secretary of ISE Labs, Inc., a California corporation (the "Corporation"), and that the Third Amendment to the Bylaws attached hereto was duly adopted by Written Consent of the Board of Directors on December 31, 1997. IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this 31st day of December, 1997. /s/ Warren T. Lazarow ---------------------------- Warren T. Lazarow, Secretary EX-3.4 3 BYLAWS OF REGISTRANT AS CURRENTLY IN EFFECT EXHIBIT 3.4 ----------- TABLE OF CONTENTS TO BYLAWS ARTICLES TITLE AND SECTION - -------- ----------------- I OFFICES 1.01 Principal Office 1.02 Other Offices II MEETINGS OF SHAREHOLDERS 2.01 Place of Meetings 2.02 Annual Meetings 2.03 Special Meetings 2.04 Notice of Shareholders' Meetings 2.05 Manner of Giving Notice; Affidavit of Notice 2.06 Quorum 2.07 Adjourned Meeting and Notice Thereof 2.08 Voting 2.09 Waiver of Notice or consent by Absent Shareholders 2.10 Shareholder Action by Written Consent Without a Meeting 2.11 Record Date for Shareholder Notice, Voting, and Giving Consents 2.12 Proxies 2.13 Inspectors of Election III DIRECTORS 3.01 Powers 3.02 Number and Qualification of Directors 3.03 Election and Term of Office of Directors 3.04 Vacancies 3.05 Place of Meetings and Telephonic Meetings 3.06 Annual Meetings 3.07 Other Regular Meetings 3.08 Special Meetings 3.09 Quorum 3.10 Waiver of Notice 3.11 Adjournment 3.12 Notice of Adjournment 3.13 Action Without Meeting 3.14 Fees and Compensation of Directors IV COMMITTEES 4.01 Committees of Directors 4.02 Meetings and Action of Committees V OFFICERS 5.01 Officers 5.02 Election of Officers 5.03 Subordinate Officers, Etc. 5.04 Removal and Resignation of Officers 5.05 Vacancies in Offices 5.06 Chairman of the Board 5.07 President 5.08 Vice Presidents 5.09 Secretary 5.10 Chief Financial Officer VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.01 Agents, Proceedings and Expenses 6.02 Actions Other than by the Corporation 6.03 Actions by the Corporation 6.04 Successful Defense by Agent 6.05 Required Approval 6.06 Advance of Expenses 6.07 Other Contractual Rights 6.08 Limitations 6.09 Insurance 6.10 Fiduciaries of Corporate Employee Benefit Plan 6.11 Amendment to California Law VII CORPORATE LOANS AND GUARANTEES TO DIRECTORS, OFFICERS AND EMPLOYEES 7.01 Limitations on Corporate Loans and Guarantees 7.02 Permissible Corporate Loans and Guarantees VIII GENERAL CORPORATE MATTERS 8.01 Record Date for Purposes Other than Notice and Voting 8.02 Checks, Drafts, Evidence of Indebtedness 8.03 Corporate Contracts and Instruments; How Executed 8.04 Certificate for Shares 8.05 Lost Certificates 8.06 Representation of Shares of Other Corporations 8.07 Construction and Definitions IX RECORDS AND REPORTS 9.01 Maintenance and Inspection of Share Register 9.02 Maintenance and Inspection of Bylaws 9.03 Maintenance and Inspection of Other Corporate Records 9.04 Inspection by Directors 9.05 Annual Report to Shareholders 9.06 Financial Statements 9.07 Annual Statement of General Information X OWNERSHIP AND TRANSFER OF SHARES 10.01 Stock 10.02 Price or Consideration for Shares 10.03 Grant of Preemptive Rights 10.04 Restriction on Transfer of Shares XI AMENDMENTS 11.01 Amendment by Shareholders 11.02 Amendment by Directors BYLAWS OF ISE LABS, INC. ------------------------------- ARTICLE I OFFICES ------- Section 1.01 Principal Offices. The Board of Directors shall fix the ------------------------------ location of the principal executive of the corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. Section 1.02 Other Offices. The officers or the Board of Directors may at -------------------------- any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business, and may change the location of any office of the corporation. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ Section 2.01 Place of Meetings. Meetings of shareholders shall be held at ------------------------------ any place within or outside the State of California designated by the Board of Directors upon proper notice. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2.02 Annual Meetings. Unless held at a time and date designated ---------------------------- each year by the Board of Directors in accordance with applicable law, an annual meeting of shareholders shall be held on the ________ of each year at _____________; provided, however, that should such day fall 1 upon a legal holiday, then the annual meeting of shareholders shall be held at the same time and place on the next day thereafter ensuing which is a full business day. At the annual meeting, Directors shall be elected and any other proper business may be transacted. Section 2.03 Special Meetings. ----------------------------- (a) A special meeting of the shareholders may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President, or by one or more shareholders holding shares which, in the aggregate, entitle them to cast not less than ten percent (10%) of the votes at any such meeting. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President, and the Secretary of the corporation. The secretary upon receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.01, 2.04 and 2.05 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty- five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this Section 2.03 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. Section 2.04 Notice of Shareholders' Meetings. --------------------------------------------- (a) All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.05 not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, or the other 2 person or persons calling the meeting, at the time of giving the notice, intend to present for action by the shareholders. The notice of any meeting at which Directors are to be elected shall include the names of any nominees which, at the time of the notice, management intends to present for election. (b) If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a Director has a direct or indirect financial interest, as contemplated by Section 310 of the Corporations Code of California, (herein the "Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of such Code, the notice shall also state the general nature of such proposal. Section 2.05 Manner of Giving Notice; Affidavit of Notice. --------------------------------------------------------- (a) Notice of any meeting of shareholders shall be given either personally or by first class mail or telegraphic or other written communication, charges prepaid, addressed to each shareholder at the address of such shareholder appearing on the books of the corporation or more recently given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or has been so given, notice shall be deemed to have been properly given to such shareholder if sent by first class mail or telegraphic or other written communication to the corporation's principal executive office to the attention of such shareholder, or if published at least once in a newspaper of general circulation in the county where such office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. (b) If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further 3 mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of such notice. (c) An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, Assistant Secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation. Section 2.06 Quorum. The presence in person or by proxy of the holders of ------------------- a majority of the shares entitled to vote at the subject meeting of shareholders shall constitute 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 transact 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. Section 2,07 Adjourned Meeting and Notice Thereof. ------------------------------------------------- (a) Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 2.06. (b) When any meeting of shareholders, either annual or special, is adjourned to another time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the Board or Directors shall set a new record date. Notice of any such adjourned meeting, if required, shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.04 and 2.05. At any adjourned meeting the corporation may transact any business which 4 might have been transacted at the original meeting. Section 2.08 Voting. ------------------- (a) The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11, subject to the provisions of Sections 702 to 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). Such vote may be by voice vote or by ballot; provided, however, that all elections for Directors must be by ballot upon demand by a shareholder if made before the voting begins. Any shareholder entitled to vote on any matter (other than the election of directors) may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. If a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of Directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Code or the Articles of Incorporation. (b) At a shareholders' meeting involving the election of Directors, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the shareholder's shares) unless the names of such candidates have been placed in nomination prior to commencement of the voting and a shareholder has given notice to the meeting prior to commencement of the voting, of the shareholder's intention to cumulate his votes. If any shareholder has given such notice, then every shareholder entitled to vote may cumulate his votes for candidates in nomination and give any candidate up to a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which such shareholder's shares are entitled, or distribute the total number of his votes as so calculated among any or all of the candidates. The candidates receiving the highest number of votes shall be elected. 5 Section 2.09 Waiver of Notice or Consent by Absent Shareholders. --------------------------------------------------------------- (a) The transactions of any meeting of shareholders, either annual or special, however called and noticed, and whenever held, shall be as valid as if it had occurred 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 person entitled to vote but not present in person or by proxy, signs a written waiver of notice, a consent to the holding of the meeting, or any approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2.04(b), the waiver of notice of consent shall state the general nature of such proposal. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (b) Attendance of a person at a meeting shall constitute a waiver of notice of such meeting unless such person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if such objection is expressly made at the meeting. Section 2.10 Shareholder Action by Written Consent Without a Meeting. -------------------------------------------------------------------- (a) Any action which may be taken at any annual or special meeting of shareholders, other than the election of Directors, may be taken without a meeting and without prior notice, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding shares representing 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. In the case of election of Directors, such consents shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of Directors; provided, however, that a Director may be elected at any time to fill a vacancy not 6 filled by the current Directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors; provided, however, that a Director may be elected at any time to fill a vacancy not filled by the current Directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of Directors. (b) All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxyholder, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent in writing effective upon receipt by the Secretary of the corporation if occurring prior to the time that written consents respecting the number of shares required to authorize the proposed action have been filed with the Secretary. (c) If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders have not been received, the Secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 2.05 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of agents of the corporation, pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 2.11 Record Date for Shareholder Notice, Voting, and Giving ------------------------------------------------------------------- Consents. - -------- (a) For purposes of determining the shareholders entitled to notice of any meeting, to vote, or to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date which shall not be more than sixty (60) days nor less than ten (10) days 7 prior to the date of any such meeting nor more than sixty (60) days prior to such action without a meeting, and in such case only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the California General Corporation Law. (b) If the Board of Directors does not so fix a record date: (i) 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 on which 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; and (ii) the record date for determining those shareholders entitled to give consent to corporation action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. When prior action of the Board has been taken, the record date shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Section 2.12 Proxies. Every person entitled to vote for Directors or on -------------------- any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by such person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless: (i) revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked, or by 8 a subsequent proxy executed by the person executing the earlier proxy, or such person's attendance at the meeting and voting in person; or (ii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no such proxy shall be valid after the expiration of eleven (11) months from the date of such proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 705(e) and (f) of the Code. Section 2.13 Inspectors of Election. ----------------------------------- (a) Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint said inspectors at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares, or their proxies present at the meeting, shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or shareholder's proxy shall, appoint a person to fill the vacancy. (b) The inspector shall: (i) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (ii) receive votes, ballots or consents; (iii) hear and determine all challenges and questions in any way arising in connection with the right to vote; 9 (iv) count and tabulate all votes or consents; (v) determine when the polls shall close; (vi) determine the result; and (vii) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS --------- Section 3.01 Powers. ------------------- (a) Subject to the provisions of the Code and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, 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. (b) Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Directors shall have the power and authority to: (i) select and remove all officers, agents, and employees of the corporation, prescribe such powers and duties for them as are not inconsistent with the law, the Articles of Incorporation or these Bylaws, fix their compensation, and require from them security for faithful service; (ii) change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or outside the State of California; designate any place within or without 10 the State for the holding of any shareholder's meeting or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates; (iii) authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled or tangible or intangible property actually received; and (iv) borrow money and incur indebtendness for the purpose of the corporation, and cause to be executed and delivered therefore, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefore. Section 3.02 Number of Qualifications of Directors. The authorized number -------------------------------------------------- of Directors shall be five until changed by a duly adopted amendment to ------------- the Articles of Incorporation. Section 3.03 Election and Term of Office of Directors. ----------------------------------------------------- (a) Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual shareholders' meeting. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. (b) No reduction of the authorized number of Directors shall have the effect of removing any Director prior to the expiration of this term of office. 11 Section 3.04 Vacancies. ---------------------- (a) Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, through less than a quorum, or by a sole remaining Director, except that a vacancy created by the removal of a Director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each Director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. (b) A vacancy or vacancies in the Board of Directors shall be deemed to exist in the case of the death, resignation or removal of any Director, or if the Board of Directors by resolution declares vacant the office of a Director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of Directors is increased, or if the shareholders fail, at any meeting of shareholders at which any Director or Directors are elected, to elect the full authorized number of Directors to be voted for at that meeting. (c) The shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. (d) Any director may resign upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. A resignation shall be effective upon the receipt of said notice, unless the notice specifies a later time for its effectiveness. If the resignation of a Director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. (e) No reduction of the authorized number of Directors shall have the effect of removing any Director prior to the expiration of his term of office. 12 Section 3.05 Place of Meetings and Telephonic Meetings. Regular meetings ------------------------------------------------------ of the Board of Directors may be held without notice, at any time and at any place within or outside the State of California that is designated by these Bylaws, or by resolution of the Board. In the absence of the designation of a place, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board shall be held at any place that has been designated in the notice of the meeting or, if not stated in the notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communications equipment, so long as all Directors participating in such meeting can hear one another, and all such Directors shall be deemed to be present in person at such meeting. Section 3.06 Annual Meetings. Immediately following each annual meeting ---------------------------- of shareholders, the Board of Directors shall hold a regular meeting for purposes of organization, the election of officers and the transaction of other business. Notice of such meeting shall not be required. Section 3.07 Other Regular Meetings. Other regular meetings of the Board ----------------------------------- of Directors may be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice. Section 3.08 Special Meetings. ----------------------------- (a) Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or the majority of the Directors. (b) Notice of the time and place of special meetings shall be delivered personally or by telephone to each Director or sent by first-class mail or telegram, charges pre-paid, addressed to each Director at his or her address as it is shown upon the records of the corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph 13 company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the Director or to a person at the office of the Director who the person giving the notice has reason to believe will promptly communicate it to the Director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 3.09 Quorum. A majority of the authorized number of Directors ------------------- shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. 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 shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the Code (regarding approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 (regarding appointment of committees), and Section 317(e) (regarding indemnification of directors). A meeting at which a quorum is initially present may continue to transact business nothwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.10 Waiver of Notice. The transactions of any meeting of the ----------------------------- Board of Directors, however called and noticed or wherever held, shall be 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. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any Director who attends the meeting without protesting, the lack of notice. Section 3.11 Adjournment. A majority of the Directors present, whether or ------------------------ not constituting a quorum, may adjourn any meeting to another time and place. 14 Section 3.12 Notice of Adjournment. Notice of the time and place of ---------------------------------- holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, to the Directors who were not present at the time of the adjournment. Section 3.13 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 shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Section 3.14 Fees and Compensation of Directors. Directors and members of ----------------------------------------------- committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services. ARTICLE IV COMMITTEES ---------- Section 4.01 Committees of Directors. 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 one (1) or more Directors, to serve at the pleasure of the Board. The Board may designate one or more Directors as alternate members of any committee. Any such committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; 15 (b) the filling of vacancies on the Board of Directors or on any committee; (c) the fixing of compensation of the Directors for serving on the Board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation (as defined in Section 166 of the Code), except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of any other committees of the Board of Directors or the members thereof. Section 4.02 Meetings and Actions of Committees. Meetings and action of ----------------------------------------------- committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.05 (place of meetings and telephonic meetings), Section 3.07 (regular meetings), Section 3.08 (special meetings and notice),Section 3.09 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment) and Section 3.13 (action without meeting), with such changes in the context of those sections as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meetings of committees may be determined by resolution of the Board of Directors as well as the committee, special meetings of committees may also be called by resolution of the Board of Directors and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. 16 ARTICLE V OFFICERS -------- Section 5.01 Officers. The officers of the corporation shall be a --------------------- Chairman of the Board or a President, or both, Secretary, and a treasurer who shall be the Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, one or more Vice-President, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.03 of this Article V. Any number of offices may be held by the same person, except that the post of Secretary and President shall not be held by the same individual. Section 5.02 Election of Officers. The officers of the corporation, --------------------------------- except such officers as may be appointed in accordance with the provisions of Section 5.03 or Section 5.05 of this Article V, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. Section 5.03 Subordinate Officers, Etc. The Board of Directors may -------------------------------------- appoint, and may empower the President, or Chairman of the Board if there be no president, to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may determine. Section 5.04 Removal and Resignation of Officers. ------------------------------------------------ (a) Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. (b) Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect upon the receipt of such notice or at any later time specified therein; and, unless otherwise specified therin, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the 17 corporation under any contract to which the officer is a party. Section 5.05 Vacancies in Offices. A vacancy in any office because of --------------------------------- death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to such office. Section 5.06 Chairman of the Board. The Chairman of the Board, if such an ---------------------------------- officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. Section 5.07 President. Subject to such supervisory powers which may be ---------------------- given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 5.08 Vice President(s). In the absence or disability of the ------------------------------ President, the Vice President(s), if any, in order of their rank as fixed by the Board of Directors, or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice President(s) shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, the Bylaws, the President, or the Chairman of the Board if there is no President. Section 5.09 Secretary. ---------------------- (a) The Secretary shall keep or cause to be kept at the principal executive office, or such other place as the 18 Board of Directors may designate, a book of minutes of all meetings and actions of Directors, committees of Directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at Director's and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. (b) the Secretary shall keep or cause to be kept at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. (c) The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 5.10 Chief Financial Officer. ------------------------------------ (a) The Treasurer shall be the corporation's Chief Financial Officer. (b) The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all reasonable times to inspection by any Director upon demand. (c) The Chief Financial Officer shall cause to be deposited all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall cause the funds of the corporation to be disbursed as he may be properly directed from time to time, shall render to the President and Directors an account of all of his transactions as Chief Financial Officer and of the financial condition of the corporation whenever requested, and shall have other such powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 19 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, --------------------------------------- EMPLOYEES, AND OTHER AGENTS --------------------------- Section 6.01 Definitions: Agents, Proceedings and Expenses. For the ---------------------------------------------------------- purposes of this Article, "agent" means any person who is or was a Director, officer, employee or other agent of this corporation, or is or was serving at the request of this corporation as a Director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 6.04 or Section 6.05(c) of this Article VI. Section 6.02 Actions Other Than by the Corporation. This corporation -------------------------------------------------- shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if that person acted in good faith and in a manner that person reasonably believed to be in the best interests of this corporation, and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of --------------- itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 6.03 Actions by the Corporation. This --------------------------------------- 20 corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that that person is or was an agent of this corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this corporation, and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. No indemnification shall be made under Section 6.03: (a) In respect of any claim, issue or matter as to which that person shall have been adjudged to be liable to this corporation in the performance of that person's duty to this corporation, unless and only to the extent that the court in which that action was brought shall determine upon application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; (b) of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (c) of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. Section 6.04 Successful Defense by Agent. To the extent that an agent of ---------------------------------------- this corporation has been successful on the merits in defense of any proceeding referred to in Section 6.02 or Section 6.03 of this Article VI, or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 6.05 Required Approval. Except as provided in Section 6.04 of ------------------------------ this Article, any indemnification under this Article shall be made by this corporation only if authorized upon a determination that indemnification of the agent in the specific case is proper because the agent has met the applicable standard of conduct set forth in Section 6.02 or Section 6.03 of this Article VI, by: (a) a majority vote of a quorum consisting of 21 Directors who are not parties to the proceeding; (b) approval by the affirmative vote of the holders of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote (for this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon); or (c) the court in which the proceeding is or was pending, upon application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this corporation. Section 6.06 Advance of Expenses. Expenses incurred in defending any -------------------------------- proceeding may be advanced by this corporation before the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay the amount of the advance unless it shall be determined ultimately that the agent is entitled to be indemnified as authorized in this Article VI. Section 6.07 Other Contractual Rights. Nothing contained in this Article ------------------------------------- VI shall affect any right to indemnification to which persons other than Directors and officers of this corporation or any subsidiary hereof may be entitled by contract or otherwise. Section 6.08 Limitations. No indemnification or advance shall be made ------------------------ under this Article VI, except as provided in Section 6.04 or Section 6.05(c), in any circumstance where it appears: (a) that it would be inconsistent with a provision of the Articles, the Bylaws, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 22 Section 6.09 Insurance. The corporation may, upon a determination by the ---------------------- Board of Directors, purchase and maintain insurance on behalf of any agent of the corporation against any liability which might be asserted against or incurred by the agent in such capacity, or which might arise out of the agent's status as such, whether or not this corporation would have the power to indemnify the agent against that liability under the provisions of this Article VI. Section 6.10 Fiduciaries of Corporate Employee Benefit Plan. This Article ----------------------------------------------------------- VI does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this corporation as defined in Section 6.01 of this Article VI. Nothing contained in this Article VI shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law. Section 6.11 Amendment to California Law. In the event that California ---------------------------------------- Law regarding indemnification of directors, officers, employees and other agents of corporation, as in effect at the time of adoption of these Bylaws, is subsequently amended to in any way increase the scope of permissible indemnification beyond that set forth herein, the indemnification authorized by this Article VI shall be deemed to be coextensive with the maximum afforded by the California Law as so amended. ARTICLE VII CORPORATE LOANS AND GUARANTEES ------------------------------ TO DIRECTORS, OFFICERS AND EMPLOYEES ------------------------------------ Section 7.01 Limitation on Corporate Loans and Guarantees. Except as --------------------------------------------------------- provided in Section 7.02 of this Article VII this corporation shall not make any loan of money or property to, or guarantee any obligations of, (a) any Director or officer of the corporation or of its parent or any subsidiary, or (b) any person, upon the security of shares of this 23 corporation or of its parent, unless the loan or guaranty is otherwise adequately secured except by the vote of the holders of a majority of the shares of all classes, regardless of limitations or restrictions on voting rights, other than shares held by the benefited Director, officer or person. Section 7.02 Permissible Corporate Loans and Guarantees. This corporation ------------------------------------------------------- may lend money to, or guarantee any obligation of, or otherwise assist, any officer or other employee of this corporation or of any subsidiary, including any officer or employee who is also a Director, pursuant to an employee benefit plan (including, without limitation, a stock purchase or stock option plan) available to executives or other employees, whenever the Board determines that such loan or guaranty could benefit the corporation. If such plan includes officers or Directors, it shall be approved or ratified by the affirmative vote of the holders of a majority of the shares of this corporation entitled to vote, by written consent, or represented at a duly held meeting at which a quorum is present, after disclosure of the right under such plan to include officers or Directors is made. Such loan or guaranty or other assistance may be with or without interest and may be unsecured or secured in such manner as the Board shall approve, including, without limitation, a pledge of shares of the corporation. This corporation may advance money to a Director or officer of the corporation or of its parent or any subsidiary for expenses incurred in the performance of the duties of such Director or officer, provided that in the absence of such advance such Director or officer would be entitled to be reimbursed for such expenses by such corporation, its parent or any subsidiary. ARTICLE VIII GENERAL CORPORATE MATTERS ------------------------- Section 8.01 Record Date for Purposes Other Than Notice and Voting. (a) ------------------------------------------------------------------ For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than for the purposes prescribed by Section 2.11 of Article II of these Bylaws), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action. Only shareholders 24 of record on the date so fixed are entitled 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 fixed as aforesaid, except as otherwise provided in the California General Corporation Law. (b) If the Board of Directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such action, whichever is later. Section 8.02 Checks, Drafts, Evidences of Indebtedness. All checks, ------------------------------------------------------ drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 8.03 Corporate Contracts and Instruments; How Executed. The Board -------------------------------------------------------------- of Directors, except as otherwise provided in these Bylaws, may authorize any officer or agent to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. However, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 8.04 Certificates for Shares. A certificate or certificates for ------------------------------------ shares of the capital stock of the corporation shall be issued to each shareholder when any such shares are fully paid, and the Board of Directors may authorize the issuance of certificates for shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the Chairman of the Board or Vice Chairman of the Board or the President or a Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. 25 In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Section 8.05 Lost Certificates. Except as hereinafter provided in this ------------------------------ Section 8.05, no new certificate for shares shall be issued in lieu of an old certificate unless the old certificate is surrendered to the corporation and cancelled at the same time. The Board of Directors may, if any share certificate or certificate for any other security is lost, stolen or destroyed, authorize issuance of a new certificate in lieu thereof, upon such terms and conditions as the Board may require, including provision for indemnification of the corporation secured by a bond of other adequate security sufficient to protect the corporation against any claim that may be made against it, including, but not limited to, any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 8.06 Representation of Shares of Other Corporations. The Chairman ----------------------------------------------------------- of the Board, the President, or any Vice President, or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer. Section 8.07 Construction and Definitions. Unless the context requires ----------------------------------------- otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural includes the singular, and the term "person" includes both a corporation and a natural person. 26 ARTICLE IX RECORDS AND REPORTS ------------------- Section 9.01 Maintenance and Inspection of Share Register. --------------------------------------------------------- (a) The corporation shall keep at its principal executive office, or as determined by resolution of the Board of Directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. (b) A shareholder or shareholders of the corporation holding at least five percent (5%), in the aggregate, of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours upon giving the corporation written notice five (5) business days' prior to the date of inspection, and/or (ii) obtaining from the transfer agent of the corporation, upon written demand and upon the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of Directors, and their shareholdings as of the most recent record date for which such list has been compiled, or as of a date specified by the requesting shareholder or shareholders subsequent to the date of demand. Such list shall be made available to such shareholder or shareholders by the transfer agent on or before the later of the fifth (5th) business day after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.01 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making such demand. Section 9.02 Maintenance and Inspection of Bylaws. ------------------------------------------------- The corporation shall keep at its principal executive office, or, if its principal executive office is not in the State of California, at its principal business office in California, the original or a copy of the Bylaws as amended 27 to date, which shall be open to inspection by any shareholder upon the written demand of any such shareholder at all reasonable times during usual business hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, the Secretary shall, upon written request of any shareholder, furnish to such shareholder a copy of the Bylaws as amended to date. Section 9.03 Maintenance and Inspection of Other Corporate Records. The ------------------------------------------------------------------ accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. Such minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 9.04 Inspection by Directors. Every Director shall have the ------------------------------------ absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a Director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 9.05 Annual Report to Shareholders. Until such time as there are ------------------------------------------ one hundred (100) or more shareholders in this corporation, the annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing such annual or other periodic reports to the shareholders of the corporation as they 28 consider appropriate. Section 9.06 Financial Statements. --------------------------------- (a) A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, which have been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months after their respective dates, and each such statement shall be exhibited at all reasonable times to any shareholder requesting an examination. A copy of said statement shall be mailed to any shareholder upon written request. (b) If a shareholder or shareholders holding at least five percent (5%), in the aggregate, of the outstanding shares of any class of stock of the corporation make a written request to the corporation for an income statement of the corporation for the three (3)-month, six (6)-month or nine (9)-month period of the current fiscal year having ended more than thirty (30) days prior to the date of the request, and a balance sheet of the corporation as of the end of such period, the Chief Financial Officer shall cause such statement and to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of such request. If the corporation has not sent to each requesting shareholder or shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed within thirty (30) days after such request. (c) The corporation shall also, upon written request, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared and a balance sheet as of the end of such period. (d) The quarterly income statements and balance sheets referred to in this Section 9.06 shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. Section 9.07 Annual Statement of General Information. The corporation ---------------------------------------------------- shall each year during the 29 calendar month in which its Articles of Incorporation were originally filed with the California Secretary of State, or at any time during the immediately preceding five (5) calendar months, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of Directors, the names and complete business or residence addresses of all incumbent Directors, the names and complete business or residence addresses of the Chief Executive Officer, Secretary and Chief Financial Officer, the street address of its principal executive office or principal business office in this state (if any), and the general type of business constituting the principal business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Code. ARTICLE X OWNERSHIP AND TRANSFER OF SHARES -------------------------------- Select one of the two following sections number 10.01 Section 10.01 Stock. [Intentionally Deleted] ------------------- Section 10.02 Price or Consideration for Shares. ----------------------------------------------- (a) The authorized shares provided for in Section 10.01 shall be issued for such consideration as shall be determined by the Board of Directors. The Board of Directors is empowered to periodically review the set price of the shares and modify said price or consideration subject to the shareholders' approval. (b) The consideration for which shares will issue may consist of money paid, labor performed, services actually rendered to the corporation or for its benefit or in its formation or reorganization, debts or securities cancelled, and tangible and intangible property actually received by either the issuing corporation or by a wholly owned subsidiary, or any one or combination of these. The full agreed upon price or consideration for shares must be paid prior to a concurrently with the issuance of the shares unless the shares are issued in accordance with a stock 30 subscription or purchase agreement in which case the terms of payment delineated in said stock subscription or purchase agreement shall be controlling. Section 10.03 Grant of Preemptive Rights. [Intentionally Deleted] ----------------------------------------- Section 10.04 Restrictions on Transfer of Shares. Before a shareholder ------------------------------------------------ can make a valid sale or transfer of any of the shares of the corporation, such shareholder must first offer said shares to the corporation and then to the other shareholders in the following manner: (a) The offering shareholder shall deliver written notice to the Secretary of the Corporation stating the price, terms and conditions of such proposed sale or transfer, the number of shares to be sold or transferred and his or her intention to so sell or transfer such shares. The corporation shall have thirty (30) days after receipt of said notice to purchase said shares pursuant to the price, terms and conditions stated in the notice, provided, however, that the corporation shall not at any time be permitted to purchase all of its outstanding voting shares. Should the corporation fail to exercise its option to purchase the offered shares within thirty (30) days from receipt of notice, or prior thereto decline to purchase the shares, the Secretary of the Corporation shall mail or deliver to each of the other shareholders, within five days of the close of the thirty day period or notice or decline to purchase, a copy of the notice given by the selling shareholder to the Secretary. Within thirty (30) days after the mailing or delivering of the copies of the notice to the shareholders, any shareholder or shareholders desiring to acquire all or apart of the offered shares must deliver to the Secretary by mail, or otherwise, a written offer or offers, expressed to be immediately acceptable, to purchase a specified number of said shares at the price and terms stated in the seller's notice. (b) If the total number of shares specified in the offers to purchase exceeds the number of shares offered to be sold, each offering shareholder shall be entitled to 31 purchase such proportion of the offered shares as the number of shares of the corporation he holds bears to the total number of shares held by all of the shareholders offering to purchase the shares. (c) If all of the shares offered to be sold or transferred are not disposed of pursuant to the apportionment plan outlined in paragraph (b), each shareholder wishing to purchase shares in a number in excess of his proportionate share, shall be entitled to purchase such proportion of those shares which remain undisposed of, as the total number of shares which he holds bears proportionately to the total number of shares held by all of the shareholders desiring to purchase shares in excess of those to which they are entitled under such apportionment. (d) If within the above delineated period, offers to purchase all of the offered shares are not presented, the corporation shall purchase from the shareholder desiring to sell or transfer such shares all of the shares upon which timely offers to purchase have not been made, provided, however, that the sale or transfer of such shares be made for the fair market value of said shares as determined by the Board of Directors. (e) The provisions of this Section 10.04 shall terminate upon the earliest to occur of (i) the first date on which shares of the Common Stock - -------- are held of record by more than five hundred (500) persons, (ii) a firm commitment underwritten public offering, pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the corporation's Common Stock, (iii) a sale, transfer or other disposition of all or substantially all of the corporation's assets or outstanding voting securities or the sale of at least voting control of the corporation is effected through a merger, reorganization, consolidation or recapitalization or (iv) December 31, 2002. ARTICLE XI AMENDMENTS ---------- Section 11.0l Amendments by Shareholders. New Bylaws may be adopted or ---------------------------------------- these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. Section 11.02 Amendment By Directors. Subject to the rights of the ------------------------------------ shareholders as provided in Section 11.01 of this Article XI, to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the Board of Directors. 32 EX-4.1 4 STOCK CERTIFICATE EXHIBIT 4.1 EXH. 4.1 STOCK CERTIFICATE [certificate] [design] [logo] NUMBER ISE LABS INC.-Registered Trademark- SHARES INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA This Certifies that CUSIP 450173 10 9 ------------------- is the record holder of --------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE OF ISE LABS, INC.-Registered Trademark- Transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [SEAL] - ------------------------ ------------------------ TRANSFER AGENT AUTHORIZED SIGNATURE PRESIDENT ------------------------ SECRETARY EX-10.12 5 DEED OF TRUST (NON-CONSTRUCTION) & ASSIGNMENT Exhibit 10.12 RECORDING REQUESTED BY, AND WHEN RECORDED, MAIL TO: SANWA BANK CALIFORNIA MOUNTAIN VIEW OFFICE 601 SHOWERS DRIVE P.O. BOX 670 MOUNTAIN VIEW, CA 94040 ATTN: - -------------------------------------------------------------------------------- DEED OF TRUST (NON-CONSTRUCTION) & ASSIGNMENT OF RENTS THIS DEED OF TRUST (the "Deed of Trust") is made this 22nd day of August, 1994, by and between ISE LABS, INC., a California Corporation (the "TRUSTOR") whose address is 2095 Ringwood Avenue, San Jose, CA 95131, FIRST BANCORP, a California corporation (the "TRUSTEE") and SANWA BANK CALIFORNIA, a California corporation (the "BENEFICIARY"). WITNESSETH THAT THE TRUSTOR IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS TO THE TRUSTEE, its successors and assigns, IN TRUST, WITH POWER OF SALE: All that property now or hereafter acquired in Santa Clara County, State of California, described in the attached Exhibit "A" (herein referred to as the "Property"); TOGETHER WITH, and including, without limitation: all of the buildings and improvements now or hereafter erected on the Property; all of the easements, rights, rights-of-way, privileges, franchises and appurtenances now or hereafter belonging to, or in any way appertaining, or in any way being a means of access, to said Property; all rents, issues, profits, royalties, revenue, income and other benefits of or arising from the use or enjoyment of all or any portion of the Property or the buildings and improvements now or hereafter erected thereon (subject however to the right, reserved to the TRUSTOR, to collect, receive and retain such rents, issues, profits, royalties, revenue, income and other benefits prior to any default hereunder or under the note referenced below or other evidence of debt secured hereby); all gas, oil, water and mineral rights, profits and stock now or hereafter derived from, appurtenant to, or pertaining to the Property (and any and all shares of stock evidencing the same); all crops now or hereafter grown on the Property; and all equipment, machinery, appliances and fixtures (including replacements and additions thereto) now or hereafter erected thereon; and All of the foregoing shall be deemed to be and shall remain a part of the Property encumbered by this Deed of Trust, and all of the foregoing, together with the Property, are hereinafter referred to as the "Premises"; FOR THE PURPOSE OF SECURING, in such order of priority as the BENEFICIARY, in its absolute discretion, may determine: 1. Payment of an indebtedness in the principal sum of $2,520,000.00 as evidenced by a certain promissory note dated August 22, 1994, executed by ISE LABS, INC. and payable to the BENEFICIARY or order (herein referred to as the "Note"), and any and all amendments, modifications, extensions or renewals of the Note (whether evidenced by the Note or otherwise); together with the payment of interest on such indebtedness and the payment of all other sums (with interest as therein provided) according to the terms of the Note (and any and all amendments, modifications, extensions, or renewals thereof); 2. Payment of all other sums, with interest as herein provided, becoming due or payable, under the provisions of this Deed of Trust, to the TRUSTEE or the BENEFICIARY; 3. Due, prompt and complete observance, performance and discharge of each and every condition, obligation, covenant and agreement contained in this Deed of Trust, the Note and any document or instrument modifying or amending this Deed of Trust or the Note or otherwise evidencing, securing or pertaining to the indebtedness evidenced by the Note; 4. Payment of such additional sums (with interest thereon) as may hereafter be borrowed from the BENEFICIARY, or its successors or assigns, by the TRUSTOR or the then record owner of the Premises and evidenced by one or more instruments (other than the Note) which are by their terms secured by this Deed of Trust. TO PROTECT AND MAINTAIN THE SECURITY OF THIS DEED OF TRUST, THE TRUSTOR AGREES: 1. Payment of Obligations When Due. The TRUSTOR shall promptly pay, when due and in lawful money of the United States of America which shall be legal tender for public and private debts at the time of payment, each and every indebtedness and obligation for which this Deed of Trust has been given as security as provided hereinabove; and the TRUSTOR shall promptly perform, observe and discharge each and every condition, obligation, covenant and agreement for which this Deed of Trust has been given as security provided herein. 2. Maintenance of Premises. The TRUSTOR shall maintain and keep the Premises in good condition and repair and shall not commit or permit waste of the whole or part of any item consisting of a part of the Premises. The TRUSTOR shall not alter, remove or demolish any buildings, improvements, machinery, equipment, appliances or fixtures nor or hereafter on the Property without the prior written consent of the BENEFICIARY. The TRUSTOR shall promptly repair, replace or restore (in good, workmanlike manner and in compliance with all laws, ordinances, governmental rules and regulations, easements, agreements, covenants, conditions and restrictions affecting the Premises) all buildings, improvements, machinery, equipment, appliances and fixtures now or hereafter on the Property, in the event of damage to or destruction of such buildings, improvements, machinery, equipment, appliances and fixtures. The TRUSTOR shall not commit, suffer or permit any act upon the Premises in violation of law, ordinance, governmental rules and regulations, easements, agreements, covenants, conditions and restrictions affecting the Premises or use of the Premises. The TRUSTOR shall cultivate, irrigate, fertilize, fumigate, spray, prune and do any other acts which from the character or use of the Property may be reasonably necessary. In the performance of all acts required of the TRUSTOR under the above paragraphs describing maintenance of the Premises, the TRUSTOR shall promptly pay when due all expenses incurred therefor and shall promptly pay, discharge or otherwise release all claims for labor performed and materials furnished therefor. 3. Environmental Compliance. A. Definitions. For purposes of this section, the following terms are defined as follows: (i) "Environmental Claims" shall mean all claims, however asserted, by any governmental authority or other person alleging potential liability or responsibility for violation of any Environmental Law or for release or injury to the environment or threat to public health, personal injury (including sickness, disease or death), property damage, natural resources damage, or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedial or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon (i) the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non-accidental placement, spills, leaks, discharges, emissions or releases) of any Hazardous Materials at, in or from the Property, or (ii) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. (ii) "Environmental Laws" shall mean all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authorities, in each case relating to environmental, health, safety and land use matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right- to-Know Act, the California Hazardous Waste Control Law, the California Solid Waste Management, Resource, Recovery and Recycling Act, the California Water Code and the California Health and Safety Code. (iii) "Hazardous Materials" shall mean all those substances which are regulated by, or which may form the basis of liability under any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. B. Environmental Representations and Warranties. The TRUSTOR hereby represents and warrants that the operations and activities of the TRUSTOR on or at the Premises comply, and during the term of this Deed of Trust will at all times comply, in all respects with all Environmental Laws; the TRUSTOR has obtained licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for its ordinary operations on or at the Premises, all such Environmental Permits are in good standing, and the TRUSTOR is in compliance with all material terms and conditions of such Environmental Permits; neither the TRUSTOR nor the Property or operations are subject to any outstanding written order from or agreement with any governmental authority nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material; there are no Hazardous Materials or other conditions or circumstances existing, or arising from operations prior to the date of this Deed of Trust, with respect to the Property that would reasonably be expected to give rise to Environmental Claims. In addition, (i) the TRUSTOR does not have or maintain on the Premises any underground storage tanks which are not properly registered or permitted under applicable Environmental Laws or which are leaking or disposing of Hazardous Materials off-site, and (ii) the TRUSTOR has notified all of its employees of the existence, if any, of any health hazard arising from the conditions of their employment on or at the Premises and have met all notification requirements under Title III of CERCLA and all other Environmental Laws. C. Environmental Compliance. The TRUSTOR shall: (i) Conduct its operations on or at the Premises and keep and maintain the Property in compliance with all Environmental Laws. (ii) Give prompt written notice to the BENEFICIARY, but in no event later than 10 days after becoming aware, of the following: (a) any enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the TRUSTOR or any of its affiliates or the Property pursuant to any applicable Environmental Laws, (b) all other Environmental Claims in connection with the Property, and (c) any environmental or similar condition or any real property adjoining or in the vicinity of the Property that could reasonably be anticipated to cause such the Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of the Property under any Environmental Laws. (iii) Upon the written request of BENEFICIARY, the TRUSTOR shall submit to the BENEFICIARY, at the TRUSTOR's sole cost and expense, at reasonable intervals, a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice required pursuant to this Section. (iv) At all times indemnify and hold harmless the BENEFICIARY from and against any and all liability arising out of any Environmental Claims. 4. Insurance. The TRUSTOR shall provide, maintain and keep policies of insurance (with companies and in form, content, policy limits and terms satisfactory to the BENEFICIARY, with loss payable to the BENEFICIARY) insuring the Premises against: fire (with an extended coverage endorsement), public liability, loss of rents or business interruption, flood damage (if the Property is located in a flood hazard area and if such insurance is available) and such other hazards and coverages, including earthquake, as the BENEFICIARY from time to time may reasonably require. The TRUSTOR shall promptly pay when due all premiums for such insurance, shall deliver copies of all such insurance policies, renewals of such policies and premium receipts therefor to the BENEFICIARY, and shall do all things necessary to obtain prompt settlement or disposition of any claim or loss covered under such policies. All such policies shall name the BENEFICIARY as an additional insured and shall include such endorsements as the BENEFICIARY shall deem necessary to protect its interest in the Premises. All such policies shall not be cancelable nor subject to substantial change without at least thirty (30) days' prior written notice to, and approval by, the BENEFICIARY, and the BENEFICIARY shall receive at least thirty (30) days' prior written notice of the termination of any such policy. Without waiving or curing any default in the performance of any obligation under this Deed of Trust and/or without waiving notice of any such default, the BENEFICIARY may, in its absolute discretion: apply the proceeds of such insurance upon any indebtedness or obligation secured under this Deed of Trust; and/or, in such order, in such manner and according to such terms and conditions as the BENEFICIARY may determine, release all or portions of such proceeds to the TRUSTOR for the repair, replacement, or restoration of the Premises. 5. Payment of Taxes and Assessments. The TRUSTOR shall pay and discharge, at least ten (10) days prior to delinquency: all taxes, assessments and charges of every kind and nature (including real personal property taxes); all general and special assessments, including common area maintenance assessments and assessments on appurtenant water stock; all levies and all permit, inspection and license fees; all water and sewer rents, connection fees and charges and all other public and private charges whether of a like or different nature) imposed upon or assessed against the TRUSTOR or the Premises, or any part thereof or upon the revenues, rents, issues, income, or profits thereof or upon the inventory of goods maintained or stored thereon or therein. The TRUSTOR shall, within ten (10) days following such payment or discharge and upon the request of the BENEFICIARY, provide the BENEFICIARY with receipts therefor. Notwithstanding the foregoing, the TRUSTOR shall have the right to contest the validity or amount of any such tax, assessment or charge; provided that the validity or amount thereof is contested diligently and in good faith and provided further that the TRUSTOR shall protect the Premises against any lien arising out of any such tax, assessment or charge, or out of any such contest thereof, by obtaining a bond, in form, substance, amount, and issued by a surety, satisfactory to the BENEFICIARY. 6. Litigation. The TRUSTOR shall appear in and defend any action or proceeding purporting to affect the security of this Deed of Trust and/or the rights and/or powers of the BENEFICIARY and/or the TRUSTEE hereunder, and the TRUSTOR shall pay all costs and expenses (including costs of evidence of title and attorneys' fees) in any action or proceeding in which the BENEFICIARY or the TRUSTEE may so appear and/or in any suit brought by the BENEFICIARY to foreclose this Deed of Trust, to enforce any obligation secured by this Deed of Trust and/or prevent the breach thereof. 7. Performance of Obligations by Beneficiary or Trustee. Should the TRUSTOR fail to make any payment, perform any obligation or do any act set forth in or secured by this Deed of Trust, the BENEFICIARY or the TRUSTEE (at the request of the BENEFICIARY), without obligation to do so, without notice to or demand upon the TRUSTOR and without releasing the TRUSTOR from making such future payments, performing such future obligations or doing such future acts, may make such payment, perform such obligation or do such act in such manner and to such extent as the BENEFICIARY or the TRUSTEE may deem necessary to protect the security of this Deed of Trust. For any and all such purposes, the BENEFICIARY and/or the TRUSTEE are authorized to enter upon the Premises, and, if the Premises consists of agricultural property, the BENEFICIARY and/or the TRUSTEE are authorized to prepare for harvest, harvest, remove, and sell any crops that may be growing upon the Premises and apply the proceeds thereof to the indebtedness secured by this Deed of Trust. Without limiting the foregoing, the BENEFICIARY or the TRUSTEE may pay, purchase, contest or compromise any encumbrance, charge or lien which, in the sole judgment of the BENEFICIARY or the TRUSTEE, appears to be prior or superior to this Deed of Trust. In exercising any such power, the BENEFICIARY or the TRUSTEE may pay all necessary expenses incurred therefor and employ legal counsel and pay its fees. The TRUSTOR agrees to and shall pay, immediately without demand, all sums so expended by the BENEFICIARY or the TRUSTEE, with interest, from the date of expenditure, at a rate which is three percent (3%) per annum in excess of the rate otherwise payable on such date according to the terms of the Note. 8. Condemnation. Any Award of damages or other form of compensation awarded in connection with any condemnation for public use of, or injury to, the Property and/or the buildings and improvements now or hereafter erected thereon (or any part thereof) are hereby assigned and shall be paid directly to the BENEFICIARY, to be used, held, paid, applied or released in the absolute discretion of the BENEFICIARY and without regard to the adequacy of its security, in the same manner and with the same effect as provided herein for the disposition of insurance proceeds. In this regard, the TRUSTOR hereby waives the benefit of any statute, rule or law which may be contrary thereto, and the TRUSTOR hereby agrees to execute such further assignments therefor as the BENEFICIARY may require. 9. Acceptance of Late and Partial Payments. The acceptance by the BENEFICIARY of the payment of any sum secured by this Deed of Trust after its due date shall not constitute a waiver of the right to require prompt payment when due of all other and future sums so secured, or to declare a default as herein provided for any failure to so pay, or to proceed with foreclosure or sale for any other default then existing. The acceptance by the BENEFICIARY of the payment of a portion of any sum secured by this Deed of Trust at such time that such sum in its entirety is due and payable shall neither cure nor excuse the default caused by failure to pay the whole of such installment or affect any notice of default recorded prior to such acceptance, unless such notice of default is expressly revoked in writing by the BENEFICIARY. Such acceptance shall not constitute a waiver of the BENEFICIARY's rights to require full payment when due of all other and future sums so secured. 10. General Rights of the Beneficiary and the Trustee. At any time or from time to time, without liability therefor, without notice and without affecting the liability of any person (including the TRUSTOR) for the payment of any indebtedness, or the performance of any obligation secured by this Deed of Trust or the lien of this Deed of Trust on the Premises or any portion thereof: A. The BENEFICIARY may: (i) release any person liable for the payment of any such indebtedness or for the performance of any such obligation; (ii) extend the time or otherwise alter the terms of payment of any such indebtedness; (iii) accept additional security therefor of any kind, including deeds of trust and mortgages; and/or (iv) alter, substitute and/or release any portion of the Premises securing such indebtedness; B. The TRUSTEE may: (i) upon the written consent of the BENEFICIARY, consent to the making of any map or plot of the Property; (ii) join in granting any easements or creating any restrictions on the Property and/or (iii) join in any extension agreement or any agreement subordinating the lien or charge of this Deed of Trust. 11. Reconveyance of this Deed of Trust. Upon written request of the BENEFICIARY stating that all indebtedness secured by this Deed of Trust has been paid, upon surrender of this Deed of Trust and all instruments or documents evidencing such indebtedness to the TRUSTEE for cancellation and retention and upon payment to the TRUSTEE of its fees, costs and expenses incurred or to be incurred thereby, the TRUSTEE shall reconvey, without warranty, the Premises then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto". 12. Assignment of Rents. The TRUSTOR absolutely and unconditionally hereby assigns, transfers, conveys, and sets over to the BENEFICIARY all of the rents, royalties, issues, profits, revenue, income, and other benefits of the Premises arising from the use or enjoyment of all or any portion thereof or from any lease or agreement pertaining thereto (hereinafter collectively referred to as the "Rents"); reserving to the TRUSTOR only the right, prior to any default by the TRUSTOR hereunder, to collect, receive and retain the Rents as they become due and payable, but not otherwise. The TRUSTOR shall, at the request of the BENEFICIARY, execute such further assignments to the BENEFICIARY of any or all such leases, agreements and Rents as the BENEFICIARY may require. Upon any such default by the TRUSTOR hereunder, the BENEFICIARY may, at any time and without notice (either in person, by agent or representative, or by a receiver appointed by a court) and without regard to the adequacy of any security for the indebtedness and/or obligations secured by this Deed of Trust: enter upon and take possession of the Premises or any part thereof, in its own name or in the name of the TRUSTOR; sue for or otherwise collect the Rents (including those past due and unpaid) and apply such Rents (less costs and expenses of operations and collection, including attorneys' fees and expenses) to the payment of such indebtedness secured under this Deed of Trust in such order and proportions as the BENEFICIARY in its absolute discretion may determine. The entering upon and taking possession of the Premises and the collection and application of the Rents shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. 13. Sale by Trustee of the Premises. Upon a default in the payment of any indebtedness, or the performance of any obligation, secured by this Deed of Trust, or in the event that any representation, covenant or warranty contained in this Deed of Trust or in any other document evidencing or securing the loan for which any such indebtedness is evidenced shall be or become untrue, the BENEFICIARY may (without notice to or demand upon the TRUSTOR): declare all indebtedness secured by this Deed of Trust immediately due and payable; and/or execute and record (or cause the TRUSTEE to execute and record) a notice of default and election to cause the Premises to be sold to satisfy the indebtedness and obligations secured hereby; and/or commence an action to foreclose this Deed of Trust and/or take any other action permitted by law to enforce its rights and remedies hereunder as it may deem to be appropriate. Upon the recordation of such notice of default, the BENEFICIARY shall deposit this Deed of Trust and all notes and documents evidencing such indebtedness and/or such obligations with the TRUSTEE. After the lapse of such time as may then be required by law following the recordation of the notice of default, and after the notice of the sale of the Premises has been given by the TRUSTEE as then required by law, the TRUSTEE (without demand on the TRUSTOR) shall sell the Premises at the time and place fixed in such notice of sale, either as a whole or in separate parcels, and in such order as the TRUSTEE may determine, at public auction to the highest bidder for cash in lawful money of the United States of America, payable at the time of sale. The TRUSTEE may postpone the sale of all or any portion of the Premises by public announcement at such time and place of sale and from time to time thereafter may postpone such sale by public announcement at the time and place fixed by the preceding postponement. The TRUSTEE shall deliver to the purchaser a deed conveying the Premises (or such portion thereof) so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including the TRUSTOR, the TRUSTEE, or the BENEFICIARY, may purchase at such sale. Upon such sale by the TRUSTEE, and after deducting all costs, expenses, and fees of the TRUSTEE and of this Trust (including the cost of evidence of title in connection with the sale), the TRUSTEE shall apply the proceeds from the sale to the payment of: the indebtedness and obligations secured by this Deed of Trust, whether evidenced by the Note or otherwise; sums representing advances made or expenditures made and incurred by, and not then repaid to, the BENEFICIARY or the TRUSTEE under this Deed of Trust or under any document evidencing or securing any indebtedness secured hereby, together with accrued interest thereon at the rate specified in the section of this Deed of Trust entitled "Performance of Obligations by Beneficiary or Trustee"; all other sums then secured by this Deed of Trust, together with interest as provided in any document pertaining thereto; and the remainder, if any, to the person or persons legally entitled thereto. If this Deed of Trust or the Note secured hereby provides for any charge for prepayment of any indebtedness secured hereby, the TRUSTOR agrees to pay said charge if any of such indebtedness shall be paid prior to the normal due date thereof stated in such Note or in this Deed of Trust; this result shall obtain even if and notwithstanding the TRUSTOR shall have defaulted in the payment thereof or in the performance of any obligation hereunder, and the BENEFICIARY, by reason of such default, shall have declared all indebtedness secured hereby immediately due and payable. 14. Acceleration of Indebtedness Upon Sale of the Premises. In the event the TRUSTOR, or any successor in interest to the TRUSTOR in the Premises secured by this Deed of Trust, sells, conveys, alienates, assigns, transfers, or disposes of the Premises, or any part thereof or any interest therein, or becomes divested of its title or any interest therein 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 BENEFICIARY, then the BENEFICIARY may, at its election, declare the Note and such other indebtedness and obligations secured by this Deed of Trust, irrespective of the maturity date specified in the Note or in any written agreement pertaining to the Note and/or such other indebtedness and obligations, immediately due and payable without notice. No waiver of this right shall be effective unless in writing. Consent by the BENEFICIARY to one such transaction shall not constitute or be deemed to be a waiver of the rights of the BENEFICIARY provided herein, or a waiver of the requirement of the prior written consent of the BENEFICIARY, as to future or succeeding transactions. 15. Acceleration of Indebtedness Upon Change in Ownership, Control, or Membership of Trustor. If the TRUSTOR is a corporation, trust, limited or general partnership, or joint venture, and there shall occur a sale, conveyance, transfer, disposition or encumbrance (whether voluntary or involuntary, or otherwise), or should an agreement be entered into to do so, with respect to more than ten percent (10%) of the issued and outstanding capital stock of the TRUSTOR (if a corporation), of the beneficial interest of the TRUSTOR (if a trust), or of any general or limited partnership or joint venture interest (if the TRUSTOR is a general or limited partnership or joint venture), or if there shall occur a change in any general partner or joint venturer, or a change affecting the ownership, control, or membership of the TRUSTOR (if the TRUSTOR is a general or limited partnership or a joint venture), then the BENEFICIARY may, at its election, declare the Note and such other indebtedness and obligations secured by this Deed of Trust, irrespective of the maturity date specified in the Note or in any written agreement pertaining to the Note and/or such other indebtedness and obligations, immediately due and payable, without notice, unless the BENEFICIARY shall have given its prior written consent thereto. Consent to one such transaction shall not constitute or be deemed to be a waiver of the right to require such consent as to future or succeeding transactions. 16. Acceleration of Indebtedness Upon an Event of Bankruptcy or Insolvency. The TRUSTOR agrees that the BENEFICIARY may, at its election, declare the Note and such other indebtedness and obligations secured by this Deed of Trust, irrespective of the maturity date specified in the Note or in any written agreement pertaining to the Note and/or such other indebtedness and obligations, immediately due and payable, without notice: if any proceeding under the Bankruptcy Code, or under any present or future federal, state or other statute, law or regulation pertaining to bankruptcy, insolvency or other relief for debtors shall be instituted by or against the TRUSTOR or any other person who may be liable (by way of guaranty, assumption, endorsement or otherwise) upon the Note and/or such other indebtedness and obligations secured hereby; and/or if a receiver, trustee or custodian shall be appointed for the TRUSTOR or such other person shall make an assignment for the benefit of creditors and if such proceeding or receiver, trustee or custodian shall not be dismissed, or such assignment shall not be voided, within sixty (60) days of such institution, appointment or making. 17. Successor Trustees. The BENEFICIARY, acting alone, may, from time to time, by instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder. Such instrument, executed, acknowledged and recorded in the manner required by law, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall (without conveyance from the preceding Trustee) succeed to all of the title, estate, rights, powers and duties of such preceding Trustee. Such instrument must contain the name of the original Trustor, Trustee and Beneficiary hereunder, the book and page where this Deed of Trust is recorded and the name and address of the new Trustee. If a notice of default has been recorded, this power of substitution cannot be exercised until after the costs, fees, and expenses of the then acting Trustee have been paid to such Trustee, who shall endorse receipt thereof upon such instrument or substitution. 18. Cumulative Remedies; Additional Security. No remedy herein conferred upon or reserved to the parties to this Deed of Trust is intended to be exclusive of any other remedy provided herein or by law. Each such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. No delay or omission of the TRUSTEE or the BENEFICIARY in the exercising of any right or power accruing upon any event of default hereunder shall impair such right or power or any other right or power, nor shall such delay or omission be construed or deemed to be a waiver of any default or any acquiescence therein. If there exists additional security for the indebtedness and obligations secured by this Deed of Trust, the BENEFICIARY, it its election and without limiting or affecting any of its rights or remedies hereunder, may exercise any of the rights and remedies to which the BENEFICIARY may be entitled hereunder--either concurrently with whatever rights or remedies the BENEFICIARY may have in connection with such other security or in such order and in such manner as the BENEFICIARY may deem fit--without waiving any rights or remedies with respect to any other security. 19. Partial Invalidity of this Deed of Trust. In the event any one or more of the provisions of this Deed of Trust, the Note, or any other document evidencing the indebtedness and obligations secured hereby shall for any reason be held to be invalid, illegal and/or unenforceable in any respect, such invalidity, illegality and/or unenforceability shall not affect any other provision of this Deed of Trust, the Note, or any such other document, and such other provisions shall remain binding and enforceable and shall continue in effect. 20. Application of California Law. This Deed of Trust has been executed and delivered in the State of California and is to be construed, enforced and governed according to and by the laws of California. 21. Miscellaneous Provisions. A. This Deed of Trust applies to, inures to the benefit of and binds all parties hereto and their respective heirs, legatees, devisees, administrators, executors, successors and assigns. The term "Beneficiary" as used herein shall mean the owner and holder, including pledgees, of the Note or any other indebtedness secured hereby, whether or not named as the Beneficiary herein. B. The headings and captions of the paragraphs of this Deed of Trust are for reference purposes only and shall not be construed or deemed to define or limit any of the terms and provisions contained thereunder. Whenever in this Deed of Trust the context so requires, the gender used includes the masculine, feminine, and/or neuter and the number so used includes the singular and/or the plural. C. Any Trustor who is married hereby expressly agrees that recourse may be had against such person's separate property, but without thereby creating any lien or charge thereon for any deficiency after sale of the Premises as herein provided. D. The pleading of any statute of limitations as a defense to any and all indebtedness and/or obligations secured by this Deed of Trust is hereby waived to the fullest extent permissible by law. E. In the event of the passage, after the date of this Deed of Trust, of any law deducting from the value of real property, for tax purposes, any lien or charge thereon, or changing in any way the laws now existing for the taxation of deeds of trust or indebtedness secured by deeds of trust for federal, state or local purposes, or changing the manner of collection of any such taxes as to affect this Deed of Trust or the indebtedness secured hereby, the TRUSTOR agrees to pay such tax arising from such new law; and if the TRUSTOR fails to do so or if it would be illegal for the TRUSTOR to do so, the BENEFICIARY may, at its election and without demand or notice, declare the entire indebtedness secured by this Deed of Trust (together with accrued interest thereon) immediately due and payable. F. The TRUSTEE accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. The TRUSTEE is not obligated to notify any party to this Deed of Trust of a pending sale under any other deed of trust or of any action or proceeding in which the TRUSTOR, the BENEFICIARY and/or the TRUSTEE is a party, unless brought by the TRUSTEE hereunder. G. The TRUSTOR requests that a copy of any notice of default or any notice of sale thereunder be mailed to the TRUSTOR at the address first referenced and set forth herein, or at such other address as the TRUSTOR may, from time to time, notify the TRUSTEE by certified United States mail. IN WITNESS WHEREOF, this Deed of Trust is executed as of the date first hereinabove written. TRUSTOR: 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 ATTACH NOTARY ACKNOWLEDGEMENTS - -------------------------------------------------------------------------------- CERTIFICATE OF ACKNOWLEDGMENT STATE OF CALIFORNIA ) ) ss COUNTY OF SANTA CLARA ) On August 30, 1994 before me, Belinda M. Wortham, Notary Public personally appeared Saeed A. Malik, Alex M. Barrios and Laurence F. Jorstad proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to be that they executed the same in their authorized capacity(ies), and that by their signature(s) on the instrument the person(s), or the [??^^] the instrument. WITNESS my hand and official seal. [SEAL OF BELINDA M. WORTHAM] Signature /s/ Belinda M. Wortham -------------------------- - -------------------------------------------------------------------------------- EXHIBIT "A" DESCRIPTION OF REAL PROPERTY DEED OF TRUST All that real property located in Santa Clara County, California, legally described as follows: Order No. 7440703 LEGAL DESCRIPTION The land referred to in this Report is situated in the State of California, City of San Jose, County of Santa Clara County Records, and is described as follows: All of Parcel 1 as shown upon that certain map entitled, "Parcel Map, being Parcel 8 of that Parcel Map of International Business Park consisting of twelve sheets recorded January 28, 1977 in Map Book 388, pages 16 thru 27, and Parcel 1 as filed for record January 16, 1980, in Book 457 of maps, at page 34, and lying within the City of San Jose, California" which map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on May 12, 1981 in Book 484 of maps, at page 12. Excepting therefrom that portion thereof lying below a depth of 500 feet, measured vertically from the contour of the surface of said property, as excepted in the Deed from Southern Pacific Industrial Development Company, a Texas corporation to Ringwood Avenue, WDT, a California general partnership, recorded August 1, 1983 in Book H 768 of Official Records, page 300. Also excepting therefrom the underground water or rights thereto with no right of surface entry, as quitclaimed to San Jose Water Works, a California Corporation, recorded on May 22, 1985 in Book J 353, of Official Records, page 153. Assessors Parcel No. 244-22-025 EX-10.13 6 EQUIPMENT PURCHASE LINE OF CREDIT AGREEMENT Exhibit 10.13 [LOGO OF SANWA BANK APPEARS HERE] EQUIPMENT PURCHASE LINE OF CREDIT AGREEMENT This Equipment Purchase Line of Credit Agreement ("Agreement") is made and entered into this 22nd day of August, 1994 by and between SANWA BANK CALIFORNIA (the "Bank") and ISE LABS, INC. (the "Borrower"). SECTION I DEFINITIONS 1.01. Certain Defined Terms. Unless elsewhere defined in this Agreement the following terms shall have the following meanings (such meanings to be generally applicable to the singular and plural forms of the terms defined): A. "Advance" shall mean an advance to the Borrower under any line of credit facility or similar facility provided for in Section II of this Agreement which provides draws by the Borrower against an established credit line. B. "Business Day" shall mean a day, other than a Saturday or Sunday, on which commercial banks are open for business in California. C. "Collateral" shall mean the property in which the Bank is granted a security interest pursuant to provisions of the section herein entitled "Collateral", together with any other personal or real property in which the Bank may be granted a lien or security interest to secure payment of the Obligations. D. "Debt" shall mean all liabilities of the Borrower less Subordinated Debt. E. "Effective Tangible Net Worth" shall mean the Borrower's stated net worth plus Subordinated Debt but less all intangible assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items). F. "Environmental Claims" shall mean all claims, however asserted, by any governmental authority or other person alleging potential liability or responsibility for violation of any Environmental Law or for release or injury to the environment or threat to public health, personal injury (including sickness, disease or death) property damage, natural resources damage, or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedies or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon (i) the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non- accidental placement, spills, leaks, discharges, emissions or releases) of any Hazardous Materials at, in, or from property owned, operated or controlled by the Borrower, or (ii) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. G. "Environmental Laws" shall mean all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authorities, in each case relating to environmental, health, safety and land use matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Topic Substances Control Act, the Emergency Planning and Community Right- to-Know Act, the California Hazardous Waste Control law, the California Solid Waste Management, Resource, Recovery and Recycling Act, the California Water Code and the California Health and Safety Code. H. "Equipment" shall mean in connection with the Equipment Purchase Facility contained in Section II of this Agreement, equipment as defined in the California Uniform Commercial Code. I. "Equipment Value" shall mean, in connection with the Equipment Purchase Facility contained in Section II of this Agreement, the lesser of: (i) the invoice cost of the Equipment (excluding taxes, license fees, transportation costs, insurance premiums and installation and connection expenses, fees and costs); (ii) the book value of the Equipment or (iii) the liquidation value of the Equipment as determined by the Bank. J. "ERISA" shall mean the Employment Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. K. "Event of Default" shall have the meaning set forth in the section herein entitled "Events of Default". L. "Hazardous Material" shall mean all those substances which are regulated by, or which may form the basis of liability under any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constiment, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. M. "Indebtedness" shall mean, with respect to the Borrower, (i) all indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a credit against loss and (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles, reported as capital leases in respect of which the Borrower is liable, contingently or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss. N. "Obligations" shall mean all amounts owing by the Borrower to the Bank pursuant to this Agreement including, but not limited to, the unpaid principal amount of Advances. O. "Permitted Liens" shall mean: (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith, provided proper reserves are maintained therefor in accordance with generally accepted accounting procedure; (iii) liens of materialmen, mechanics, warehousemen, or carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure Indebtedness outstanding in the date hereof or permitted to be incurred pursuant to this Agreement; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; and (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets. P. "Reference Rate" shall mean an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference (1) rate and as to which loans may be made by the Bank at, below or above such reference rate. Q. "Subordinated Debt" shall mean such liabilities of the Borrower which have been subordinated to those owed to the Bank in a manner acceptable to the Bank. 1.02. Accounting Terms. All references to financial statements, assets, liabilities, and similar accounting items not specifically defined herein shall mean such financial statements or such items prepared or determined in accordance with generally accepted accounting principles consistently applied and, except where otherwise specified, all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 1.03 Other Terms. Other terms not otherwise defined shall have the meanings attributed to such terms in the California Uniform Commercial Code. SECTION II CREDIT FACILITIES 2.01 Commitment to Lend. Subject to the terms and conditions of this Agreement and so long as no Event of Default occurs, the Bank agrees to extend to the Borrower the credit accommodations that follow. 2.02 Equipment Purchase Facility. The Bank agrees to make loans and Advances to the Borrower, upon the Borrower's written request therefor made prior to the Expiration Date (as defined below in this Section 2.02), to assist the Borrower in purchasing items of Equipment. Each Advance made hereunder shall be (in an amount not to exceed 80% of the Value of the items of Equipment being purchased; provided however, that at no time shall the total aggregate outstanding principal amount of Advances made under this Equipment Purchase Facility exceed the sum of $2,000,000.00. This Equipment Purchase Facility is on a non-revolving basis and any amounts repaid under the Equipment Purchase Facility may not be reborrowed. A. Purpose. Advances made under the Equipment Purchase Facility shall be used to purchase equipment. B. Interest Rate. Interest shall accrue on the outstanding principal balance of Advances under this Equipment Purchase Facility at a variable rate equal to the Bank's Reference Rate, as it may change from time to time (the "Variable Rate"). The Variable 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. C. 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. D. Repayment of Principal. Unless sooner due in accordance with he terms of this Agreement, on August 1, 1995 the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal balance of all Advances then outstanding, together with all accrued and unpaid interest thereon. Any payment received by the Bank shall, at the Bank's option, first be applied to pay any late fees or other fees then due and unpaid, and then to interest then due and unpaid and the remainder thereof (if any) shall be applied to reduce principal. E. Making Line Advances/Notice of Borrowing. Each Advance made hereunder shall be conclusively deemed to have been made at the request of and for the benefit of the Borrower (i) when credited to any deposit account of the Borrower maintained with the Bank or (ii) when paid in accordance with the Borrower's written instructions. Subject to any other requirements set forth in this Agreement, Advances shall be made by the Bank upon written notice received from the Borrower in form acceptable to the Bank, which notice shall be received not later than 2:30 p.m. (California Time) on the date specified for such Advance, which date shall be a Business Day. Requests for Advances received after such time may, at the Bank's option, be deemed to be a request for an Advance to be made on the next succeeding Business Day. F. Security Interest in Equipment. Upon the Bank's request, the Borrower shall execute and deliver to the Bank, prior to the making of any Advance under this Equipment Purchase Facility, such documents and instruments (in form and substance satisfactory to the Bank) which the Bank may require with respect to such Advance and the perfection of the Bank's security interest in the Equipment pertaining to such Advance. G. Late Fee. If any payment of principal or interest, or any portion thereof, under this Equipment Purchase Facility 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. H. Conversion to Term Loan. It is hereby agreed that the Borrower may, by giving written notice to the Bank at least five (5) days prior to August 1, 1995, convert the principal balance outstanding under the Equipment Purchase facility as of the Expiration Date to be payable on a term loan basis. The term loan (the "Converted Term Loan") shall be in the amount of such outstanding principal balance and shall be evidenced by a promissory note or credit agreement (the "Term Agreement") containing the following payment terms: The Converted Term Loan shall be for an amount not greater than the outstanding principal balance on the date the Borrower elects the term loan conversion. The principal will be payable monthly in 60 equal installments and interest will be payable monthly at Reference Rate. Accrued and unpaid interest under the Equipment Purchase facility shall be paid to the Bank concurrently with the Borrower's execution of the Term Agreement. Interest shall accrue and principal and interest shall be paid in accordance with the terms and provisions of the Term Agreement. I. Expiration of the Equipment Purchase Facility. Unless earlier terminated in accordance with the terms of this Agreement, the Bank's commitment to make Advances to the Borrower hereunder shall automatically expire on August 1, 1995 (the "Expiration Date"). J. Line Account. The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Equipment Purchase Facility (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within thirty (30) days after the Borrower's receipt of any such statement which it deems to be incorrect. K. Amounts Payable on Demand. If the Borrower fails to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower's failure to pay such amount, create an Advance in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under this Equipment Purchase Facility. In addition, the Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under the Equipment Purchase Facility is not made when due to charge, from time to time, against any or all of the Borrower's deposit accounts with the Bank any amounts so due. (2) SECTION III COLLATERAL 3.01. Grant of Security Interest. To secure payment and performance of all the Borrower's Obligations under this Agreement and the performance of all the terms, covenants and agreements contained in this Agreement (and any and all modifications, extensions and renewals of the Agreement) and in any other document instruments or agreement evidencing or related to the Obligations or the Collateral, and also to secure all other liabilities, loans, guarantees, covenants and duties owed by the Borrower to the Bank, whether or not evidenced by this or by any other agreement, absolute or contingent, due or to become due, now existing or hereafter and howsoever created, the Borrower hereby grants to the Bank a security interest in and to all of the following property: A. Equipment. All goods and equipment ("Equipment") now owned or hereafter acquired by the Borrower or in which the Borrower now has or may hereafter acquire any interest including, but not limited to, all machinery, furniture, furnishings, fixtures, tools, supplies and motor vehicles of every kind and description and all additions, accessions, improvements, replacements and substitutions thereto and thereof. B. Inventory. All inventory ("Inventory") now owned or hereafter acquired by the Borrower including, but not limited to, all raw materials, work in process, finished goods, merchandise, parts and supplies of every kind and description, including inventory temporarily out of the Borrower's custody or possession, together with all returns on accounts. C. Accounts and Contract Rights. All accounts and contract rights now owned or hereafter created or acquired by the Borrower, including but not limited to, all receivables and all rights and benefits due to the Borrower under any contract or agreement. D. General Intangibles. All general intangibles now owned or hereafter created or acquired by the Borrower, including but not limited to, goodwill, trademarks, trade styles, trade names, patents, patent applications, software, customer lists and business records. E. Chattel Paper and Documents. All documents, instruments and chattel paper now owned or hereafter acquired by the Borrower. F. Monies and Other Property in Possession. All monies, and property of the Borrower now or hereafter in the possession of the Bank or the Bank's agents, or any one of them, including, but not limited to, all deposit accounts, certificates of deposit, stocks, bonds, indentures, warrants, options and other negotiable and non-negotiable securities and instruments, together with all stock rights, rights to subscribe, liquidating dividends, cash dividends, payments, dividends paid in stock, new securities or other property to which the Borrower may become entitled to receive on account of such property. 3.02. Continuing Lien & Proceeds. The Bank's security interest in the Collateral shall be a continuing lien and shall include all proceeds and products of the Collateral including, but not limited to, the proceeds of any insurance thereon as well as all accounts, contract rights, documents, instruments and chattel paper resulting from the sale or disposition of any Equipment. 3.03. Exclusion of Consumer Debt. The Obligations and performance secured hereby shall not include any indebtedness of the Borrower incurred for personal, family or household purposes except to the extent any disclosure required under any consumer protection law (including but not limited to the Truth in Lending Act) or any regulation thereto, as now existing or hereafter amended, is or has been given. SECTION IV CONDITIONS PRECEDENT 4.01. Conditions Precedent to the Initial Extension of Credit and/or First Advance. The obligation of the Bank to make the initial extension of credit and/or the first Advance hereunder is subject to the conditions precedent that the Bank shall have received before the date of such extension of credit and/or the first Advance all of the following, in form and substance satisfactory to the Bank. A. Authority to Borrow. Evidence relating to the duly given approval and authorization of the execution, delivery and performance of this Agreement, all other documents, instruments and agreement s required under this Agreement and all other actions to be taken by the Borrower hereunder or thereunder. B. Loan Fees. Evidence that any required loan fees and expenses as set forth above with respect to each credit facility have been paid or provided for by the Borrower. C. Audit. The opportunity to conduct an audit of the Borrower's books, records and operations and the Bank shall be satisfied as to the condition thereof. D. Miscellaneous Documents. Such other documents, instruments, agreements and opinions as are necessary, or as the Bank may reasonably require, to consummate the transactions contemplated under this Agreement, all fully executed. 4.02. Conditions Precedent All Extensions of Credit and/or Advances. The obligation of the Bank to make any extensions of credit and/or each Advance to or on account of the Borrower (including the initial extension of credit and/or the first Advance) shall be subject to the further conditions precedent that, as of the date of each extension of credit or Advance and after the making of such extension of credit or Advance. A. Representations and Warranties. The representations and warranties set forth in the Section entitled "Representations and Warranties" herein and in any other document, instruments, agreements or certificate delivered to the Bank hereunder are true and correct. B. Collateral. The security interest in the Collateral has been duly authorized, created and perfected with first priority and is in full force and effect and the Bank has been provided with satisfactory evidence of all filings necessary to establish such perfection and priority. C. Event of Default. No event has occurred and is continuing which constitutes, or, with the Lapse of time or giving of notice or both, would constitute an Event of Default. D. Subsequent Approvals, Etc. The Bank shall have received such supplemental approvals, opinions or documents as the Bank may reasonably request. 4.03. Reaffirmation of Statements. For the purposes hereof, the Borrower's acceptance of the proceeds of any extension of credit and the Borrower's execution of any document or instrument evidencing or creating any Obligation hereunder shall each be deemed to constitute this Borrower's representation and warranty that the statements set forth above in this Section are true and correct. (3) SECTION V REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: 5.01. Status. The Borrower is a corporation duly organized and validly existing under the laws of the State of California and is properly licensed, qualified to do business and in good standing in and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business. 5.02. Authority. The execution, delivery and performance by the Borrower of this Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not; (i) violate any provision of any law, rule, regulation, writ, judgment or injunction presently in effect affecting the Borrower; (ii) result in a breach of or constitute a default under any material agreement to which the Borrower is a party or by which it or its properties may be bound or affected; or (iii) require any consent or approval of its stockholders or violate any provision of its articles of incorporation or by-laws. 5.03. Legal Effect. This Agreement constitutes, and any document, instrument or agreement required hereunder when delivered will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5.04. Fictitious Trade Styles. The Borrower currently uses no fictitious trade styles in connection with its business operations. The Borrower shall notify the Bank within thirty (30) days of the use of any fictitious trade style at any future date, indicating the trade style and state(s) of its use. 5.05. Financial Statements. All financial statements, information and other data which may have been and which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been and will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the Borrower's financial condition and, as applicable, the other information disclosed therein. Since the most recent submission of any such financial statement, information or other data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 5.06. Litigation. Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition, operations or the Collateral. 5.07. Title to Assets. The Borrower has good and marketable title to all of its assets (including, but not limited to, the Collateral) and the same are not subject to any security interest, encumbrance, lien or claim of any third person except for Permitted Liens. 5.08. ERISA. If the Borrower has a pension, profit sharing or retirement plan subject to ERISA, such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 5.09. Taxes. The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than taxes which are currently payable without penalty or interest or those which are being duly construed in good faith. 5.10. Environmental Compliance. The operations of the Borrower comply, and during the term of this Agreement will at all times comply, in all respects with all Environmental Laws; the Borrower has obtained licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for its ordinary operations, all such Environmental Permits are in good standing, and the Borrower is in compliance with all material terms and conditions of such Environmental Permits; neither the Borrower nor any of its present properties or operations are subject to any outstanding written order from or agreement with any governmental authority nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material; there are no Hazardous Materials or other conditions or circumstances existing, or arising from operations prior to the date of this Agreement, with respect to any property of the Borrower that would reasonably be expected to give rise to Environmental Claims; provided however, that with respect to property leased from an unrelated third party, the foregoing representation is made to the best knowledge of the Borrower. In addition, (i) the Borrower does not have or maintain any underground storage tanks which are not properly registered or permitted under applicable Environmental Laws or which are leaking or disposing of Hazardous Material off-site, and (ii) the Borrower has notified all of its employees of the existence, if any, of any health hazard arising from the conditions of their employment and have met all notification requirements under Title III of CERCLA and all other Environmental Laws. SECTION VI COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower shall, unless the Bank otherwise consents in writing: 6.01. Preservation of Existence; Compliance with Applicable Laws. Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization; and conduct its business in accordance with all applicable laws, rules and regulations. 6.02. Maintenance of Insurance. Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. All such insurance shall be in form and amount and with companies satisfactory to the Bank. With respect to insurance covering properties in which the Bank maintains a security interest or lien, such insurance shall be in an amount not less than the full replacement value thereof, at the Bank's request, shall name the Bank as loss payee pursuant to a loss payable endorsement satisfactory to the Bank and shall not be altered or canceled except upon ten (10) days' prior written notice to the Bank. Upon the Bank's request, the Borrower shall furnish the Bank with the original policy or binder of all such insurance. 6.03. Maintenance of Collateral and Other Properties. Except for Permitted Liens, the Borrower shall keep and maintain the Collateral free and clear of all levies, liens, encumbrances and security interests (including but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest; comply with all laws, statutes and regulations pertaining to the Collateral and its use and operation; execute, file and record such statements, notices and agreements, take such actions and obtain such certificates and other documents as necessary to perfect, evidence and constitute the Bank's security interest in the Collateral and the priority thereof; maintain accurate and complete records of the Collateral which show all sales, claims and allowances; and properly care for, house, store and maintain the Collateral in good condition, free of misuse, abuse and deterioration, other than normal wear and tear. The Borrower shall also maintain and preserve all its properties in good working order and condition in accordance with the general practice of other businesses of similar character and size, ordinary wear and tear excepted. 6.04. Location and Maintenance of Equipment. (4) A. Location. The Equipment shall at all times be in the Borrower's physical possession, shall not be held for sale or lease and shall be kept only at the following locations(s): 2095 Ringwood Avenue, San Jose, CA 95131. The Borrower shall not desicrate, abandon or remove, or permit the removal of, the Equipment, or any part thereof, from the locations(s) shown above or remove or permit to be removed any accessories now or hereafter placed upon the Equipment. B. Equipment Schedules. Upon the Bank's demand, the Borrower shall immediately provide the Bank with a complete and accurate description of the Equipment including, as applicable, the make, model, identification number and serial number of each item of Equipment. In addition, the Borrower shall immediately notify the Bank of the acquisition of any new or additional Equipment or the replacement of any existing Equipment and shall supply the Bank with a complete description of any such additional or replacement Equipment. C. Maintenance of Equipment. The Borrower shall, at the Borrower's sole cost and expense, keep and maintain the Equipment in a good state of repair and shall not destroy, misuse, abuse, illegally use or be negligent in the care of the Equipment or any part thereof. The Borrower shall not remove, destroy, obliterate, change, cover, paint, deface or alter the name plates, serial numbers, labels or other distinguishing numbers or identification marks placed upon the Equipment or any part thereof by or on behalf of the manufacturer, any dealer or rebuilder thereof, or the Bank. The Borrower shall allow the Bank and its representatives free access to and the right to inspect the Equipment at all times and shall comply with the terms and conditions of any leases covering the real property on which the Equipment is located and any orders, ordinances, laws, regulations or rules or any federal, state or municipal agency or authority having jurisdiction of such real property or the conduct of business of the persons having control or possession of the Equipment. D. Fixtures. The Equipment is not now and shall not at any time hereafter be so affixed to the real property on which it is located as to become a fixture or a part thereof. The Equipment is now and shall at all times hereafter be and remain personal property of the Borrower. 6.05. Location of Inventory. The Inventory (i) is now and shall at all times hereafter be of good and merchantable quality and free from defects; (ii) is not now and shall not at any time hereafter be served with a bailee, warehouseman or similar party without the Bank's prior written consent and, in such event, the Borrower will concurrently therewith cause any such bailee, warehouseman or similar party to issue and deliver to the Bank in form acceptable to the Bank, warehouse receipts in the Bank's name evidencing the storage of Inventory; (iii) shall at all times be in the Borrower's physical possession; (iv) shall not be held by others on consignment, sale on approval, or sale or return: and (v) shall be kept only at the following locations(s): 2095 Ringwood Avenue, San Jose, CA 95131. 6.06. Payment of Obligations and Taxes. Make timely payment of all assessments and taxes and all of its liabilities and obligations including, but not limited to, trade payables, unless the same are being contested in good faith by appropriate proceedings with the appropriate court or regulatory agency. For purposes hereof, the Borrower's issuance of a check, draft or similar instrument without delivery to the intended payee shall not constitute payment. 6.07. Inspection Rights. At any reasonable time and from time to time permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and to discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower now or at any time hereafter maintains any records (including, but not limited to, computer generated records and computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records it may request, all at the Borrower's expense, the amount of which shall be payable immediately upon demand. In addition, the Bank may, at any reasonable time and from time to time conduct inspections and audits of the Collateral and the Borrower's accounts payable, the cost and expenses of which shall be paid by the Borrower to the Bank upon demand. 6.08. Reporting Requirement. Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: A. Interim Statements. Not later than 45 days after the end of each quarter, the Borrower's financial statement as of the end of such quarter. B. Receivables and Payables Agings. Not later than 45 days after the end of each quarter, an aging of accounts receivable and an aging of accounts payable. C. Other Reporting Requirements. Borrower to provide; (i) a CPA reviewed financial statement within 30 days of filing Borrower's Schedule 1020, but not later than March 1st of each calendar year, beginning October 1994; and (ii) by March 1st of each calendar year, an annual certification by the Chief Financial Officer that the company is in compliance with all loan covenants and conditions. D. Other Information. Promptly upon the Bank's request, such other information pertaining to the Borrower, the Collateral, or any Guarantor as the Bank may reasonably request. 6.09. Payment of Dividends. The Borrower shall not declare or pay any dividends on any class of stock now or hereafter outstanding except dividends payable solely in the corporation's capital stock. 6.10. Redemption or Repurchase of Stock. The Borrower shall not redeem or repurchase any class of the corporation's stock now or hereafter outstanding. 6.11. Additional Indebtedness. Not after the date hereof, create, incur or assume, directly or indirectly, any liability or indebtedness other than (i) indebtedness owed or to be owed to the Bank or (ii) indebtedness to trade creditors incurred in the ordinary course of the Borrower's business. 6.12. Loans. Not make any loans or advances or extend credit to any third person, including, but not limited to, directors, officers, shareholders, partners, employees, affiliated entities or subsidiaries of the Borrower, except for credit extended in the ordinary course of the Borrower's business as presently conducted. 6.13. Liens and Encumbrances. Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust or other lien (including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, or execute or allow to be filed any financing arrangement continuation thereof affecting any such properties, except for Permitted Liens or as otherwise provided in this Agreement without prior written approval from Sanwa Bank. 6.14. Transfer Assets. Not sell, contract for sale, transfer, convey, assign, lease or sublet any of its assets including, but not limited to, the Collateral, except in the ordinary course of business as presently conducted by the Borrower and then, only for full, fair and reasonable consideration. 6.15. Change in the Nature of Business. Not make any material change in the financial structure or in the nature of its business as existing or conducted as of the date of this Agreement. 6.16. Financial Condition. Maintain at all times: A. Net Worth. A minimum Effective Tangible Net Worth of not less than $5,000,000.00. B. Debt to Net Worth Ratio. A Debt to Effective Tangible Net Worth ratio of not more than 2.00 to 1.00. C. Quick Ratio. A rate of liquid assets to current liabilities of not less than 1.00 to 1.00. D. Additional Financial Requirement. The following additional financial requirement: A minimum Debt Service Coverage Ratio of 1.50 to 1.00 measured annually at fiscal year end. For purposes of the foregoing, the term "Debt Service Coverage Ratio" is defined as net after tax profit plus depreciation divided by the current portion of long term debt. (5) 6.17. Compensation of Employees. Compensate its employees for services rendered at an hourly rate at least equal to minimum hourly rate prescribed by any applicable federal or state law or regulation. 6.18. Other Restrictions. Borrower to be profitable annually. 6.19. Environmental Compliance. The Borrower shall: A. Conduct its operations and keep and maintain all of its properties in compliance with all Environmental Laws. B. Give prompt written notice to the Bank but in no event later than 10 days after becoming aware, of the following: (i) any enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Borrower or any of its affiliates or any of their respective properties pursuant to any applicable Environmental Laws, (ii) all other Environmental Claims, and (iii) any environmental or similar condition on any real property adjoining or in the vicinity of the property of the Borrower or its affiliates that could reasonably be anticipated to cause such property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such property under any Environmental Laws. C. Upon the written request of the Bank, the Borrower shall submit to the Bank, at the Borrower's sole cost and expense, at reasonable intervals, a report providing an update of the names of any environmental, health or safety compliance, hazard or liability issue identified in any notice required pursuant to this Section. D. At all times indemnify and hold harmless the Bank from and against any and all liability arising out of any Environmental Claims. 6.20. Notice. Give the Bank prompt written notice of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and which affects the Collateral; (iii) any change in its place of business or the acquisition of more than one place of business; (iv) any proposed or actual change in its name, identity or business nature; (v) any change in the location of the Equipment or Inventory; and (vi) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower. SECTION VII EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default under this Agreement. 7.01. Non-Payment. The Borrower shall fail to pay any Obligations within 10 days of when due. 7.02. Performance Under This and Other Agreements. The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Borrower (whether owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other document, instrument or agreement, which failure shall constitute and be an immediate Event of Default if not paid when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default. 7.03. Representations and Warranties: Financial Statements. Any representation of warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any Guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 7.04. Insolvency. The Borrower or any Guarantor shall: (1) 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 bankruptcy 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 bankrupt; (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; or (vii) any receiver, custodian or trustee shall have been appointed for all or a substantial part of its properties assets or businesses and shall not be discharged within 30 days after the date of such appointment. 7.05. Execution. Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 30 days after the issuance or attachment of such writ or lien. 7.06. Revocation or Limitation of Guaranty. Any Guaranty 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. 7.07. Suspension. 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. 7.08. Change in Ownership. There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 10% of the issued and outstanding capital stock of the Borrower. 7.09. Impairment of Collateral. There shall occur any injury or damage to all or any part of the Collateral or all or any part of the Collateral shall be lost, stolen or destroyed, which changes cause the Collateral, in the sole and absolute judgement of the Bank, to become unacceptable as to character and value. SECTION VIII REMEDIES ON DEFAULT Upon the occurrence of any Event of Default, the Bank may, at its sole election, without demand and upon only such notice as may be required by law: 8.01. Acceleration. Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or under any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 8.02. Cease Extending Credit. Cease making Advances or otherwise extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 8.03. Termination. Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank or the Bank's rights and remedies under this Agreement of under any other document, instrument or agreement. 8.04. Segregate Collections. Require the Borrower to segregate all collections and proceeds of the Collateral so that they are capable of identification and to deliver such collections and proceeds to the Bank, in kind, without commingling, at such times and in such manner as required by the Bank. (6) 8.05. Records of Collateral. Require the Borrower to periodically deliver to the Bank records and schedules showing the status, condition and location of the Collateral and such contracts or other matters which affect the Collateral. In connection herewith, the Bank may conduct such audits or other examination of such records, including, but not limited to, verification of balances owing by any account debtor of the Borrower, as the Bank, in its sole and absolute discretion, deems necessary. 8.06. Notification of Account Debtors. A. Notify any or all of the Borrower's Account Debtors, or any buyers or transferees of the Collateral or other persons of the Bank's interest in the Collateral and the proceeds thereof and instruct such person(s) to thereafter make any payment due the Borrower directly to the Bank. B. The Borrower hereby irrevocably and unconditionally appoints the Bank as its attorney-in-fact to: (i) endorse the Borrower's name on any notes, acceptances, checks, drafts, money orders or other evidence of payment that may come into the Bank's possession; (ii) sign the Borrower's name on any invoice or bill of lading relating to any of the Collateral; (iii) notify post office authorities to change the address for delivery of mail addressed to the Borrower to such address as the Bank may designate and take possession of and open mail addressed to the Borrower and remove therefrom, proceeds of and payments on the Collateral; and (iv) demand, receive and endorse payment and give receipts, releases and satisfactions for and sue for all money payable to the Borrower. All of the preceding may be done either in the name of the Bank or in the name of the Borrower with the same force and effect as the Borrower could have done had this Agreement not been entered into. C. Require the Borrower to indicate on the face of all invoices (or such other documentation as may be specified by the Bank relating to the sale, delivery or shipment of goods giving ???? to the account) that the account has been assigned to the Bank and that all payments are to be made directly to the Bank at such address as the Bank may designate. 8.07. Compromise. Grant extensions, compromise claims and settle any account for less than the amount owing thereunder, all without notice to the Borrower or any obligor on or guarantor of the Obligations. 8.08. Protection of Security Interest. Make such payments and do such acts as the Bank, in its sole judgement, considers necessary and reasonable to protect its security interest or lien in the Collateral. The Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgement, deems to be prior or superior to its security interest. Further, the Borrower hereby agrees to pay to the Bank, upon demand therefor, all expenses and expenditures (including attorneys' fees) incurred in connection with the foregoing. 8.09. Foreclosure. Enforce any security interest or lien given or provided for under this Agreement or under any security agreement, mortgage, deed of trust or other document relating to the Collateral, in such manner and such order, as to all or any part of the Collateral, as the Bank, in its sole judgement, deems to be necessary or appropriate and the Borrower hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest or lien, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Borrower's records pertaining thereto, or the Bank may require the Borrower to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgement to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of any obligor on or any guarantor of the Obligations and shall be immediately paid to the Bank. 8.10. Application of Proceeds. All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation of the Bank's lien in the Collateral, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, selling or disposing of the Collateral; next, to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligations; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Borrower. 8.11. Non-Exclusivity of Remedies. Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. SECTION IX MISCELLANEOUS PROVISIONS 9.01. Default Interest Rate. If an Event of Default has occurred and is continuing, the Bank, at its option, may require the Borrower to pay to the Bank interest on any Indebtedness or amount payable under this Agreement at a rate which is 3% in excess of the rate or rates otherwise then in effect under this Agreement. 9.02. Reliance. Each warranty, representation, covenant and agreement contained in this Agreement shall be conclusively presume to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants or agreements which the Borrower shall now or hereafter give, or cause to be given, to the Bank. 9.03. Dispute Resolution. A. Disputes. It is understood and agreed that, upon the request of any party to this Agreement, 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 Agreement, 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, (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 (7) 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 of Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorney's 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 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 justiee from the panal 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 of 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 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 communicate a waiver of the right of any party to submit the controversy or claim to arbitration. 9.04. Waiver of Jury. The Borrower and the Bank hereby expressly and voluntarily waive any and all rights, whether arising under the California constitution, any rules of the California Code of Civil Procedure, common law or otherwise, to demand a trial by jury in any action, manner, claim or cause of action whatsoever arising out of or in any way related to this Agreement or any other agreement, document or transaction contemplated hereby. 9.05. Restructuring Expenses. In the event the Bank and the Borrower negotiate for, or enter into, any restructuring, modification or refinancing of the Indebtedness under this Agreement for the purposes of remedying an Event of Default, The Bank, may require the Borrower to reimburse all of the Bank's costs and expenses incurred in connection therewith, Including, but not limited to reasonable attorney's fees and the costs of any audit or appraisals required by the Bank to be performed connection with such restructuring, modification or refinancing. 9.06. Attorney's Fees. In the event of any suit, mediation, arbitration or other action in relation to this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder, the prevailing party, in addition to all other sums to which it may be entitled, shall be entitled to reasonable attorney's fees. 9.07. Notices. All notices, payments, requests, information and demands wich either party hereto may desire, or may be required to give or make to the other party shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed to the address set forth below such party's signature to this Agreement or to such other address as maybe specified from time to time in writing by either party to the other. 9.08. Waiver. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder or under any other document, instrument or agreement mentioned herein constitute a waiver of any other default of the same or any other term or provision. 9.09. Conflicting Provisions. To the extent that any of the terms or provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions combined herein shall control. Otherwise, such provisions shall be considered cumulative. 9.10. Binding Effect; Assignment. This Agreement shall be binding upon and more to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the Bank's prior written consent. The Bank may sell, assign or grant participations in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower and any guarantor. 9.11. Jurisdiction. This Agreement, any notes issued hereunder, the rights of the parities hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and consumed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 9.12. Headings. The headings set forth herein are solely for the purpose of identification and have no legal significance. 9.13. Entire Agreement. This Agreement 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 or pertaining to the transactions contemplated hereunder that are not incorporated or referenced in this Agreement or in such documents, instruments and agreements are superseded hereby. (8) IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA ISE LABS, INC. By: By: /s/ Saeed A. Malik ------------------------------- ----------------------------------- Name/Title Saeed A. Malik, President Address: By: /s/ Alex M. Barrios ----------------------------------- Mountain View Office Alex M. Barrios, Vice President 601 Showers Drive P.O. Box 670 By: /s/ Lawrence F. Jorstad Mountain View, CA 94040 ----------------------------------- Lawrence F. Jorstad, Vice President Address: 2095 Ringwood Avenue San Jose, CA 95131 (9) [LOGO OF SANWA BANK CALIFORNIA APPEARS HERE] LOAN DISBURSEMENT INSTRUCTIONS ($2,000,000.00 Equipment Purchase Facility) Date: August 22, 1994 Loan Number: ------------- The undersigned hereby instructs Sanwa Bank California to disburse the proceeds of this loan as shown below: DISBURSEMENT AMOUNT 1. Credited to the following account: NOT PRESENTLY DISBURSED $-0- ---------------------------- ----------- --------------------------------------------------------------- 2. Pay off the following loan with Sanwa Bank California: $ -------- ----------- --------------------------------------------------------------- 3. Paid to the following third party as indicated: $ --------------- ----------- --------------------------------------------------------------- =========== TOTAL: $-0- ----------- 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 (1) EX-10.14 7 FINANCE/CAPITAL LEASE LINE OF CREDIT EXHIBIT 10.14 [LETTERHEAD OF COMERICA LEASING CORPORATION] March 30, 1998 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 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. [LETTERHEAD OF COMERICA LEASING CORPORATION] Mr. Richard Bradford March 30, 1998 Page Two Lease Termination The Lessee has the option to purchase Option: the 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 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 Divisions of Comerica Bank as a named insured for physical damage risks. [LETTERHEAD OF COMERICA LEASING CORPORATION] 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-23.2 8 CONSENT OF PRICE WATERHOUSE (ISE LABS, INC.) 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 May 21, 1998 EX-23.3 9 CONSENT OF PRICE WATERHOUSE (ALPHATEC USA, INC.) 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 May 21, 1998 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 6-MOS OCT-31-1997 OCT-31-1998 NOV-01-1996 NOV-01-1997 OCT-31-1997 APR-30-1998 4,969 7,694 0 0 13,870 14,194 1,127 1,466 78 232 19,130 21,736 66,346 86,583 17,124 21,972 70,843 88,496 27,853 37,221 0 0 0 0 0 0 18 18 23,504 29,925 70,843 88,496 35,532 40,538 35,532 40,538 17,950 19,065 17,950 19,065 8,326 9,450 0 0 741 1,695 9,319 10,358 3,579 3,937 5,740 6,421 0 0 0 0 0 0 5,740 6,421 0.33 0.37 0.33 0.36
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