-----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, TlAvq/sQIw/PUXxIS1uekpd/1crQ+rKSY5vH5Nwn+GEt4moBC9xX/njAIYt5+HNf XOP4JPS3jwFvf10O3nNnQA== /in/edgar/work/0001012870-00-005019/0001012870-00-005019.txt : 20000930 0001012870-00-005019.hdr.sgml : 20000930 ACCESSION NUMBER: 0001012870-00-005019 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER ACCESS TECHNOLOGY CORP CENTRAL INDEX KEY: 0001120155 STANDARD INDUSTRIAL CLASSIFICATION: [3825 ] IRS NUMBER: 770302527 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-43866 FILM NUMBER: 731209 BUSINESS ADDRESS: STREET 1: 2403 WALSH AVENUE CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4087276600 MAIL ADDRESS: STREET 1: 2403 WALSH AVENUE CITY: SANTA CLARA STATE: CA ZIP: 95051 S-1/A 1 0001.txt AMENDMENT # 1 TO FORM S-1 As filed with the Securities and Exchange Commission on September 28, 2000 Registration No. 333-43866 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 1 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- COMPUTER ACCESS TECHNOLOGY CORPORATION (Exact Name of Registrant as Specified in its Charter) --------------- California (prior to reincorporation in Delaware) 3825 77-0302527 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
2403 Walsh Avenue, Santa Clara, California 95051, (408) 727-6600 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Dan Wilnai President and Chief Executive Officer Computer Access Technology Corporation 2403 Walsh Avenue, Santa Clara, California 95051, (408) 727-6600 (Name and address, including zip code, and telephone number, including area code, of agent for service) Copies to: DONALD J. BOUEY, ESQ. LAIRD H. SIMONS III, ESQ. SHANE M. BYRNE, ESQ. KATHERINE TALLMAN SCHUDA, ESQ. JASON W. KUHNS, ESQ. PAMELA A. SERGEEFF, ESQ. MATTHEW R. GEMELLO, ESQ. FENWICK & WEST LLP MICHELLE C. BRATHWAITE, ESQ. Two Palo Alto Square BROBECK, PHLEGER & HARRISON LLP Palo Alto, California 94306 One Market--Spear Tower (650) 494-0600 San Francisco, California 94105 (415) 442-0900
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
Proposed Proposed Maximum Title of Each Class of Maximum Aggregate Securities Amount to be Offering Price Offering Registration to be Registered Registered Per Share Price(1) Fee(2) - ------------------------------------------------------------------------------------------ Common Stock, $0.001 par value........................ 4,025,000 $14.00 56,350,000 $14,876 - ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee. (2) $13,814 of the Registration Fee was previously paid. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell securities, and we are not soliciting offers to buy these + +securities, in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2000 [COMPUTER ACCESS TECHNOLOGY CORPORATION LOGO] 3,500,000 Shares Common Stock Computer Access Technology Corporation is offering 3,500,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol "CATZ." We anticipate that the initial public offering price will be between $12.00 and $14.00 per share. -------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 8. --------------
Per Share Total ----- ----- Public Offering Price............................................ $ $ Underwriting Discounts and Commissions........................... $ $ Proceeds to Computer Access Technology Corporation............... $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Computer Access Technology Corporation has granted the underwriters a 30- day option to purchase up to an additional 525,000 shares of common stock to cover over-allotments. -------------- Robertson Stephens CIBC World Markets SG Cowen Needham & Company, Inc. The date of this Prospectus is , 2000. [Description of Inside Cover Graphics] The background of the inside front cover page of the prospectus is a graphic likeness of the CATC Trace screen. The CATC logo is centered at the top of the page. Below and to the left of the CATC logo is the Bluetooth wireless technology standard logo. Below the Bluetooth logo is the USB standard logo. Below the USB logo is a photograph of the CATC Merlin analyzer. Below and to the right of the CATC logo is a photograph of a CATC Trace screen. A graphic, depicting the projection of the CATC Trace screen from the Merlin analyzer, extends from the Merlin photograph to the CATC Trace screen photograph. Below the CATC Trace screen is the IEEE 1394 standard logo. The bottom on the inside front cover page is centered text that reads "Enabling Global Connectivity." You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2000 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS
Page ---- Summary.................................................................. 4 Risk Factors............................................................. 8 Note Regarding Forward-Looking Statements................................ 19 Use of Proceeds.......................................................... 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Consolidated Financial Data..................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 25 Business................................................................. 35 Management............................................................... 48 Related Party Transactions............................................... 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 63 Shares Eligible for Future Sale.......................................... 67 Underwriting............................................................. 69 Legal Matters............................................................ 72 Experts.................................................................. 72 Where You Can Find Additional Information................................ 72 Index to Consolidated Financial Statements............................... F-1
--------------------- Our trademarks and service marks include CATC, CATC Trace, CATC Detective, CATC Traffic Generator, CATC HPT, CATC Inspector, CATC UHT, CATC FireInspector, CATC USB4DOS, CATC NetMate, CATC NetMate Plus, CATC Chief, CATC UPT, CATC Merlin and CATC Advisor. Trademarks, trade names and service marks of other companies appearing in this prospectus are the property of their respective holders. Use or display by us of other parties' trade names, trademarks or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of our company by, the trade name, trademark or servicemark owners. 3 SUMMARY This summary highlights information found in greater detail elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" and our consolidated financial statements and accompanying notes before you decide to buy our common stock. Our Business We are a leading provider of advanced verification systems and connectivity products for various existing and emerging digital communications standards such as Universal Serial Bus, or USB, IEEE 1394, or 1394, Bluetooth wireless technology and IEEE 802.3, or Ethernet. Our verification systems consist of development and production products that accurately monitor, communications traffic and diagnose operational problems. Utilizing our easy to use, color- coded software, the CATC Trace, our development products generate, capture, filter and analyze high speed communications traffic, allowing our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws in their product design. Our production products are used in manufacturing to ensure that products comply with standards and operate with other devices as well as assist system manufacturers in downloading software on to new computers. Our connectivity products are electronic systems that enable reliable, uninterrupted service for broadband Internet access. These connectivity products also allow for simple installation and incorporate an application specific integrated circuit, or ASIC, and our proprietary embedded software and software drivers. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. Our customers include industry leaders such as 3Com, Apple, Compaq, Hewlett- Packard, Intel, Lucent, Microsoft, Motorola, NEC, Philips, Sony, Sun Microsystems and Toshiba. In addition, we sell our products through a network of distributors and value-added resellers including Dynacolor, Enable Engineering, Nohau Electronik and Toyo. The rise of the Internet and the widespread availability of broadband transmissions have created a growing demand for direct access to information from a variety of digital devices. Devices such as personal computers, Internet appliances, mobile phones, personal digital assistants and digital cameras, must communicate with one another. Communication among digital devices, or connectivity, occurs over a variety of physical media, or channels, such as copper wire, fiber optic cable and wireless technologies. Digital devices communicate by sending electronic signals through a channel according to a specified protocol. A protocol is the set of detailed rules that governs both the channel and the device hardware and software, and regulates the manner in which the signals are sent. The channel and the protocol are both typically specified in a formal communications standard. For communication to be successful, each device must recognize and follow the same standard. As the number of devices and communications channels has increased, the number of new and more complex communications standards has continued to increase. Our objective is to be the leading provider of advanced verification systems and connectivity products for designers, manufacturers and users of computer, telecommunications and consumer 4 electronic technologies for existing and emerging communications standards. Our strategy includes the following key elements: . Expand our product offerings and establish first mover advantage for emerging communications standards. . Heighten awareness of the CATC brand by broadening our reputation as an expert in communications standards. . Leverage strategic relationships with leaders in the computer, telecommunications and consumer electronic industries to gain early access to new standards and technologies. . Expand our distribution channels by increasing our marketing and sales forces both domestically and internationally. . Leverage the modular architecture of our hardware and software technology to accelerate the development and introduction of our new products for emerging communications standards. Corporate Information We were incorporated in California in February 1992. We plan to reincorporate in Delaware prior to this offering. Our principal executive offices are located at 2403 Walsh Avenue, Santa Clara, California 95051, and our telephone number is (408) 727-6600. Our web site can be found at catc.com. Information contained in our web site does not constitute a part of this prospectus. 5 The Offering Common stock offered by CATC....................... 3,500,000 shares Common stock to be outstanding after the offering.. 18,080,080 shares Use of proceeds.................................... For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds" for more information regarding our planned use of the proceeds from the offering. Proposed Nasdaq National Market symbol............. CATZ
- -------------------- The number of shares of common stock to be outstanding after this offering is based on 14,580,080 shares of common stock outstanding as of June 30, 2000. It does not include: . 1,356,250 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.46 per share; . 3,456,250 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including the estimated number of shares available for future grant under our 1994 stock option plan and 2000 stock option/stock issuance plan to be transferred to our 2000 stock incentive plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding shares of common stock; and . 312,500 additional shares available for future issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding shares of common stock. Except as set forth in the financial statements or as otherwise specified in this prospectus, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . assumes a 1.25 for 1 split of our common stock prior to this offering; . reflects our reincorporation into Delaware prior to this offering. 6 Summary Consolidated Financial Data (in thousands, except per share data)
Six Month Year Ended December Period Ended 31, June 30, --------------------- ------------- 1997 1998 1999 1999 2000 ------ ------ ------- ------ ------ Consolidated Statement of Income Data: Revenue.................................... $4,169 $6,771 $12,506 $5,289 $8,782 Gross profit............................... 3,405 5,334 9,370 4,052 6,614 Income from operations..................... 1,424 1,165 2,884 1,213 2,424 Net income................................. $ 924 $ 537 $ 1,262 $ 611 $1,255 Net income per share Basic.................................... $ 0.06 $ 0.04 $ 0.09 $ 0.04 $ 0.09 ====== ====== ======= ====== ====== Diluted.................................. $ 0.06 $ 0.04 $ 0.08 $ 0.04 $ 0.08 ====== ====== ======= ====== ====== Weighted average shares outstanding Basic.................................... 14,286 14,286 14,286 14,286 14,359 Diluted.................................. 14,507 15,079 15,084 15,226 15,508
June 30, 2000 ------------------- Actual As Adjusted ------- ----------- Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments.......... $ 6,319 $47,534 Working capital............................................ 7,925 49,140 Total assets............................................... 12,018 53,233 Total debt................................................. -- -- Total stockholders' equity................................. 8,269 49,484
The as adjusted balance sheet data appearing above gives effect to our receipt of the net proceeds from the sale of 3,500,000 shares of common stock at an assumed initial public offering price of $13.00 per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses. 7 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition would likely suffer. In these circumstances, the market price of our common stock could decline and you might lose all or part of the money you paid to buy our common stock. Risks Related to Our Business Our future operating results are unpredictable and are likely to fluctuate from quarter to quarter and, if we fail to meet the expectations of securities analysts or investors, our stock price would likely decline significantly. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a number of factors, some of which are wholly or partially outside of our control. Many of these risks are described under the following risk factors. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause our quarterly or annual operating results to fluctuate include: . the amount and timing of our operating expenses and capital expenditures; . changes in the volume of our product sales and pricing concessions on volume sales; . the timing, reduction, deferral or cancellation of customer orders or purchases; . seasonality in some of our target markets; . the effectiveness of our product cost reduction efforts; . variability of our customers' product lifecycles; . changes in the average selling prices of our products; and . cancellations, changes or delays of deliveries to us by our manufacturers and suppliers. If our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock would likely decline significantly. If we fail to keep up with rapid technological change and evolving industry standards, our products could become less competitive or obsolete. The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Our products may cease to be competitive if we fail to introduce new products or product enhancements that address these changes, meet new customer requirements and support new standards. To continue to introduce new products or product enhancements on a timely basis, we must: . identify emerging technological trends in our target markets, including new communications standards; . accurately define and design new products or product enhancements to meet market needs; 8 . develop or license the underlying core technologies necessary to create new products and product enhancements; and . respond effectively to technological changes and product introductions by others. If we are unable to identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis, our competitors could gain market share or our new products or product enhancements might not gain market acceptance. Further, we might not be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. We depend upon widespread market acceptance of our USB products, and our revenue will decline if the market does not continue to accept these products. We currently derive a substantial majority of our revenue from sales of our USB products. Revenue from sales of our USB products accounted for approximately 89.7% of our revenue in the year ended December 31, 1999 and 91.6% of our revenue in the six month period ended June 30, 2000. We expect that revenue from these products will continue to account for a substantial portion of our revenue for the foreseeable future. If the market does not continue to accept our USB products, our revenue will decline significantly. Factors that may affect the market acceptance of our current USB products include the continued growth of the markets for USB compliant devices as well as the performance and pricing of our USB products and the availability, functionality and price of competing products. Companies must also modify their products to support new versions of USB as they are developed, such as USB 2.0. Many of these factors are beyond our control. In addition, in order to maintain widespread market acceptance, we must continue to differentiate ourselves from the competition through our technical expertise, product offerings and brand name recognition. Failure of our USB products to maintain market acceptance would adversely impact our revenue. If we devote resources to developing products for communications standards that ultimately are not widely accepted, our business could be harmed. We may incur significant expenses and dedicate significant time and resources in developing products for other emerging communications standards that may not gain broad acceptance. The failure of a standard to gain widespread acceptance, or our failure to be first to market with products that address a particular standard, would likely harm our business. If we fail to maintain and expand our relationships with the core or promoter companies in our target markets, we may have difficulty developing and marketing our products. It is important to our success to maintain and expand our relationships with companies that are leaders in developing new communications standards in our target markets. We believe that we need to work closely with these core or promoter companies to gain valuable insights into the market demands for new products, to obtain early access to new communications standards as they are developed and to help us design new products. We will need to maintain our relationships with leading technology and infrastructure companies, as well as expand our relationships with leaders in markets that are new for us. Generally, we do not enter into formal contracts that obligate these companies to work or share their technology with us. Industry leaders could choose to work with other companies as they develop new communications standards in the future. If we fail to maintain and expand our industry relationships, we could lose the opportunity for first-mover advantage with respect to emerging standards and it would be more difficult for us to develop and market products that address these standards. 9 If our target markets do not accept our products for emerging communications standards, our revenue growth could suffer. Our future growth depends upon our ability to sell advanced verification systems and connectivity products for emerging communications standards such as Bluetooth wireless technology. However, our products may not gain widespread acceptance by customers. The success of our products depends upon volume production of computer, communications and consumer electronic products that use a particular standard and the acceptance of these products by customers. The markets for emerging standards products have only recently begun to develop and are rapidly evolving. As a result, it is difficult to predict their potential size or future growth rate. There is significant uncertainty as to whether these markets ultimately will develop at all or, if they do develop, whether they will develop rapidly. If the markets for a particular emerging communications standard fail to develop or develop more slowly than expected, or if our products do not achieve widespread market acceptance by customers in these markets, our business would be significantly harmed. Delays in the development of new products or product enhancements could harm our operating results and our competitive position. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as accurate anticipation of technological and market trends. We have in the past experienced delays in product development, and delays may occur again in the future. To the extent that we do not introduce the first product for an emerging standard or customers defer or cancel orders with the expectation of a new product or product enhancement release, our operating results could suffer. Product development delays may result from numerous factors, including: . changing product specifications and customer requirements; . difficulties in hiring and retaining necessary technical personnel; . difficulties in allocating engineering resources and overcoming resource limitations; . difficulties with contract manufacturers; . changing market or competitive product requirements; and . unanticipated engineering complexities. If we are unable to meet the design and market introduction schedules for our new products or product enhancements, our operating results may suffer. Variations in our revenue may cause fluctuations in our operating results. We may experience a delay in generating or recognizing revenue for a number of reasons. Historically, we have had little backlog and our revenue in any quarter has depended upon orders booked and shipped in that quarter. Furthermore, our customers may delay scheduled delivery dates and cancel orders without significant penalty. In addition, even if we ship orders, generally accepted accounting principles may require us to defer recognition of revenue from those orders until a later date. Because we budget our operating expenses on anticipated revenue trends and a high percentage of our expenses is fixed in the short term, any delay in generating forecasted revenue could have a significant negative impact on our operating results. 10 Shifts in our product mix may result in declines in gross margins. Our gross margins vary among our products, with our gross margins generally being higher on our advanced verification systems than on our connectivity products. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products and our ability to reduce product costs. Decreases in average selling prices of our products may reduce gross margins and revenue. The average selling prices of our products may decrease in the future in response to product introductions by us or our competitors, or as a result of other factors, including discounts given on volume purchase orders or pricing pressures. In that event, we would need to continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so would likely cause our revenue and gross margins to decline. Continued competition in our markets may lead to a reduction in our prices, revenue and market share. The markets for advanced verification and connectivity products for emerging communications standards are highly competitive. We compete with multiple companies in various markets, including 3A International in the markets for products for the 1394 standard. Any of our competitors may develop technologies that more effectively address our targeted markets at a lower cost. In addition, these competitors may enter into strategic alliances or business combinations that increase their ability to innovate and address our markets. We may also face competition from other equipment manufacturers, such as Finisar, National Instruments, Rhode & Schwartz and Tektronix. Many of these companies have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. We expect that more companies, including some of our customers, will enter our markets. If these companies develop products that compete with our products or form alliances with or acquire companies offering competing products, even if those products do not have capabilities comparable to our products, they would be significant competitors and their activities could cause us to reduce our prices. Increased competition could result in significant price erosion, reduced revenue, lower margins and loss of market share, any of which would significantly harm our business. We depend on contract manufacturers for substantially all of our manufacturing requirements and if these manufacturers fail to provide us with adequate supplies of high-quality products, our competitive position, reputation and business could be harmed. We currently rely on four contract manufacturers for all of our manufacturing requirements except for the final assembly, testing and quality assurance on our lower volume, higher margin products. We do not have long-term contracts with any of these manufacturers. As a result, our manufacturers could refuse to continue to manufacture all or some of our products that we require or change the terms under which they manufacture our products. We have experienced delays in product shipments from some of our contract manufacturers in the past, which in turn forced us to delay product shipments to our customers. We may in the future experience similar delays or other problems, such as inferior quality and insufficient quantity of products, any of which could significantly harm our business. Our contract manufacturers may not be able to meet our future requirements for timely delivery of products of sufficient quality and quantity. We intend to introduce 11 new products and product enhancements regularly, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer. If we are unable to forecast our supply needs accurately, our costs may increase or we may not be able to ship products in a timely manner. We purchase components used in the manufacture of our products from several key sources. We depend on these sources to deliver necessary components in a timely manner based on twelve-month rolling forecasts that we provide. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may develop excess inventory, which would increase our costs. If we underestimate our component requirements, we may not be able to fulfill customer orders. We depend on sole source suppliers for several key components of our products, and we may lose sales if they fail to meet our needs. We obtain some parts, components and packaging used in our products from sole sources of supply. For example, we obtain field programmable gate array integrated circuits from Altera, ASICs from LSI Logic through Wyle Electronics and micro-controllers from Intel. If suppliers are unable to meet our demand for sole source components at reasonable costs and if we are unable to obtain an alternative source or the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products would be harmed. In addition, because we rely on purchase orders rather than long-term contracts with our suppliers, including our sole source suppliers, we cannot predict with certainty our ability to obtain components in the longer term. If we are unable to obtain components or receive a smaller allocation of components than is necessary to manufacture products in quantities sufficient to meet demand, customers could choose to purchase competing products. If our distributors and value-added resellers do not actively sell our products, our product sales may decline. We sell a substantial portion of our products through distributors and value- added resellers, including Toyo, our distributor in Japan, which accounted for approximately 18.8% of our revenue in the year ended December 31, 1999 and approximately 12.9% of our revenue in the six month period ended June 30, 2000. Our distributors and resellers generally offer products from multiple manufacturers. Accordingly, there is a risk that these distributors and resellers may give higher priority to selling products from other suppliers and reduce their efforts to sell our products. Our distributors and resellers may not market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our distributors and resellers may on occasion build inventories in anticipation of substantial growth in sales and, if growth does not occur as rapidly as anticipated, may decrease the quantity of products ordered from us in subsequent quarters. A slowdown in orders from our distributors could reduce our revenue in any given quarter and give rise to fluctuations in our operating results. 12 In addition, our sales to Toyo are made on the basis of purchase orders rather than a long-term commitment. Our sales to our other distributors are made either by purchase orders or under one year agreements. The loss of any one of our major distributors, or the delay of significant orders from these distributors, could result in decreased revenue. If we are unable to hire and retain additional sales, marketing, engineering and finance personnel, our growth will be impaired. To grow our business successfully and maintain a high level of quality, we will need to recruit, retain and motivate additional highly skilled sales, marketing, engineering and finance personnel. If we are not able to hire and retain a sufficient number of qualified employees, our growth will be impaired. In particular, as a company focused on the development of complex products, we will need to hire additional hardware and software developers and engineers and project managers of various experience levels in order to keep pace with technological change and develop products that meet the needs of rapidly evolving markets. Competition for skilled employees, particularly in the San Francisco Bay Area, is intense. We may have even greater difficulty recruiting potential employees after this offering if prospective employees perceive the equity component of our compensation package to be less valuable after this offering than before this offering. The loss of key management personnel, on whose knowledge, leadership and technical expertise we rely, would harm our ability to execute our business plan. Our success depends heavily upon the continued contributions of our key management personnel, whose knowledge, leadership and technical expertise would be difficult to replace. All of our executive officers and key personnel are employees at will. We maintain no key person insurance on any of our personnel. If we were to lose the services of any of our key personnel, our ability to execute our business plan would be harmed. In addition, employees who leave our company may subsequently compete against us. If we fail to manage our growth effectively, our business could suffer. Our ability to offer products and implement our business plan successfully in a rapidly evolving market requires an effective planning and management process. We increased our headcount by 45.0% in the six month period ended June 30, 2000. This growth may place a significant strain on our management systems, infrastructure and other resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures. For example, we intend to migrate our operations to a new enterprise resource planning system that affects almost every facet of our business operations. Typically, these conversions negatively affect a company's near-term ability to conduct business due to problems such as historical data conversion errors, personnel training time associated with the new system, delays in implementation or unforeseen technical problems during conversion. If problems arise during this transition, we could experience delays in or lack of shipping, an inability to support our existing customer base, delays in paying vendors, delays in collecting from customers, an inability to place or receive product orders or other operational problems. If this were to occur, our profitability or financial position could be negatively impacted. If we are not able to manage our growth effectively and efficiently, the quality of our products, our ability to retain key personnel and our operating results could suffer. 13 Our products may contain defects that cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers. Highly complex products such as our verification systems and connectivity products frequently contain defects when they are first introduced or as new versions are released. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation might be damaged and customers might be reluctant to buy our products. As a result, our ability to retain existing customers or attract new customers could be harmed. In addition, these defects could interrupt or delay sales to our customers. We may have to invest significant capital and other resources to alleviate these problems. If any of these problems remain undiscovered until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. If we are unable to expand our direct sales operations and our distributor and value-added reseller channels or successfully manage our expanded sales organization, our ability to increase our revenue will be harmed. Historically, we have relied on a limited direct sales organization, supported by third-party resellers, to sell our products domestically and on third-party distributors to sell our products internationally. We intend to develop and expand our direct sales organization in North America and our indirect distribution channels internationally. We may not be able to expand our direct sales organization successfully, and the cost of any expansion may exceed the revenue generated from expansion. In addition, if we fail to develop relationships with significant distributors or resellers, or if these distributors or resellers are not successful in their sales or marketing efforts, sales of our products may decrease. Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results. We expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that might otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may buy businesses, product lines or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute the percentage ownership of our existing stockholders, incur substantial debt or assume contingent liabilities. To date, we have not acquired any other business or technologies. Potential acquisitions also involve numerous risks, including: . problems in assimilating the purchased operations, technologies or products; . costs or accounting charges associated with the acquisition; . diversion of management's attention from our existing business; . adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which we have little or no prior experience; and . potential loss of key employees of purchased businesses. 14 Economic, political and other risks associated with international sales and operations could adversely affect our sales. Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We recognized approximately 42.4% of our revenue from sales to international customers in the year ended December 31, 1999 and 33.4% in the six month period ended June 30, 2000. We anticipate that revenue from international operations will continue to represent a substantial portion of our revenue. In addition, several of our manufacturers' facilities and suppliers are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including: . changes in foreign currency exchange rates; . changes in a specific country's or region's political or economic conditions, particularly in emerging markets; . trade protection measures and import or export licensing requirements; . potentially negative consequences from changes in tax laws; . difficulty in staffing and managing widespread operations; . differing labor regulations; . differing protection of intellectual property; and . unexpected changes in regulatory requirements. New accounting pronouncements may cause our operating results to fluctuate. In various areas, including revenue recognition and stock-based compensation, accounting standards and practices continue to evolve. The SEC is preparing to issue interpretive guidance relating to SAB 101, and the FASB continues to address revenue recognition and other related accounting issues. We believe we comply with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas would likely affect our results of operations. Our headquarters and our contract manufacturers are located in Northern California, Asia and other areas where natural disasters may occur. Currently, our corporate headquarters and some of our contract manufacturers are located in Northern California and our other contract manufacturers are located in Asia. Northern California and Asia historically have been vulnerable to natural disasters and other risks, such as earthquakes, fires, floods, power loss and telecommunication failure, which at times have disrupted the local economy and posed physical risks to our and our manufacturers' properties. We also maintain facilities in San Diego, California and Netanya, Israel. We do not have redundant, multiple site capacity in the event of a natural disaster. Any failure to protect our intellectual property adequately may significantly harm our business. To date, we protect our proprietary processes, software, know-how and other intellectual property and related rights through copyrights, trademarks and maintenance of trade secrets, including entering into confidentiality agreements. Our success and ability to compete depend in part 15 on our proprietary technology. We currently do not have any patents. Although we anticipate filing applications for one or more patents, patents may not issue as a result of these or other patent applications. Any patents that ultimately issue may be successfully challenged by others or invalidated, or may not provide us with a significant competitive advantage. Third parties may breach confidentiality agreements or other protective contracts into which we have entered, and we may not be able to enforce our rights in the event of these breaches. We may be required to spend significant resources to monitor and police our intellectual property rights, including pursuing remedies in court. We recently sent letters to two companies demanding that they cease infringing our copyrights. We believe that this matter is in the process of being resolved in our favor. However, in the future, we may not be able to detect infringement and may lose competitive position in our markets before we do so. In addition, competitors may design around our technologies or develop competing technologies. The laws of other countries in which we market our products might offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which could significantly harm our business. Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products. Our industry is characterized by uncertain and conflicting intellectual property claims and frequent intellectual property litigation, especially regarding patent rights. To date, we have not received any letters, and we do not have any other reason to believe, that our products infringe any other party's intellectual property rights. However, we cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States have not been publicly disclosed until the patent is issued, and we may not be aware of filed patent applications that relate to our products or technology. If patents are later issued in connection with these applications, we may be liable for infringement. From time to time, other parties may assert patent, copyright and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, including claims arising through our contractual indemnification of our customers, regardless of their merit or resolution, would likely be costly and time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all. Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products. In the United States, our products must comply with various laws or regulations and standards defined by the Federal Communications Commission, or FCC. The jurisdiction of the FCC extends to the entire telecommunications industry and many of our customers and their products. Internationally, products that we develop also will be required to comply with regulations established by local authorities in various countries. Failure to comply with regulations established by regulatory authorities or to obtain timely domestic or foreign regulatory approvals or certificates could significantly harm our business. 16 Risks Related to this Offering Our stock price may be volatile, and you might not be able to resell your shares at or above the initial public offering price. There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. This initial public offering price might vary from the market price of our common stock after the offering. If you purchase shares of our common stock, you might not be able to resell those shares at or above the initial public offering price. Many factors could cause the market price of our common stock to rise and fall, including: . changes in market valuations of other technology companies; . changes in financial estimates by securities analysts; . variations in our operating results that cause us to fail to meet analysts' or investors' expectations; . announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . additions or departures of key personnel; . future sales of equity or debt securities; and . general economic, industry and market conditions. In addition, the stock market, and the stocks of technology companies in particular, have experienced extreme volatility that often has been unrelated or disproportionate to the performance of these companies. Similar market fluctuations in the future might cause our stock price to decline regardless of our performance. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become involved in securities class action litigation, it could result in substantial costs and a diversion of management's attention and resources from our business. Because a limited number of existing stockholders will together own a majority of our stock, the voting power of other stockholders, including purchasers in this offering, might be limited. We anticipate that our executive officers, directors, and entities affiliated with them will beneficially own approximately % of our outstanding common stock after this offering. As a result, if some of these existing stockholders choose to act together, they will have the ability to control matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any business combinations. These actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could harm the market price of our stock. We might be unable to meet our future capital requirements, and if we issue additional equity or debt securities to do so, our stockholders could experience additional dilution. We might be required to seek additional funding to meet our capital requirements, particularly if we elect to acquire complementary businesses, products or technologies. If we are required to raise additional funds, we might not be able to do so on favorable terms, if at all. In addition, if we issue 17 new securities, stockholders might experience dilution or the holders of new securities might have rights, preferences or privileges senior to those of existing stockholders. If we are unable to raise additional capital on acceptable terms, we might not be able to develop or enhance our products, take advantage of future opportunities or respond to competition. Substantial future sales of our common stock in the public market could depress our stock price. Our current stockholders hold a substantial number of shares of our common stock, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional securities. You should read "Shares Eligible for Future Sale" for a full discussion of shares that might be sold in the public market in the future. You will experience immediate and substantial dilution in the book value of your shares. If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $10.26 per share, based on an assumed initial public offering price of $13.00 per share. This dilution arises because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. You will experience additional dilution upon the exercise of outstanding stock options to purchase our common stock. As of June 30, 2000, we had options outstanding to purchase 1,356,250 shares of common stock with a weighted average exercise price of $0.46 per share. The provisions of our charter documents might inhibit potential acquisition bids that a stockholder might believe are desirable, and the market price of our common stock could be lower as a result. Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: . providing that only one of the three classes of directors is elected each year; . limiting the ability of our stockholders to remove directors without cause; . eliminating the ability of our stockholders to act by written consent; . limiting the ability of our stockholders to call special meetings of stockholders; and . establishing notice requirements for stockholders to nominate directors or submit proposals for consideration at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control. Any of these provisions might prevent the market price of our common stock from increasing in response to actual or rumored takeover attempts. We have broad discretion in how we use the proceeds of this offering, and we might not use these proceeds effectively. Our management has broad discretion in the use of the net proceeds of this offering and could spend the net proceeds in ways that do not yield a favorable return or to which stockholders object. We currently intend to use the proceeds for general corporate purposes, including capital expenditures, hiring additional personnel and working capital as well as the acquisition of complementary businesses or technologies, although no acquisitions are currently planned. These acquisitions could prove to be unprofitable and harm our business. Until we need to use the net proceeds of this offering, we plan to invest them in short-term, interest-bearing, investment grade securities. 18 NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Forward-looking statements relate to future events or to our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "could," "believe," "estimate," "predict," "potential" or similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including factors more fully described in the "Risk Factors" section and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events or results. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur. USE OF PROCEEDS We estimate the net proceeds from the sale of the 3,500,000 shares of our common stock in this offering will be $41.2 million, assuming an initial public offering price of $13.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters' overallotment option is exercised in full, we estimate that we will receive approximately $47.6 million in net proceeds from this offering. We intend to use the net proceeds for general corporate purposes. We expect that these purposes will include capital expenditures, primarily for the implementation of a new enterprise resource planning system and for the purchase of equipment, hiring additional personnel and working capital. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, products or services. Management will retain broad discretion in the allocation of the net proceeds of the offering. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. This would reduce the amount of the net proceeds available for one or more of the uses indicated above. We currently have no agreements or commitments with respect to any acquisition or investment, and we are not involved in any negotiations with respect to any such transaction. Pending these uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY We have never declared or paid dividends on our common stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors that our board of directors deems relevant, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. 19 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000: . on an actual basis; and . on an as adjusted basis giving effect to the sale in this offering of 3,500,000 shares of common stock at an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
June 30, 2000 ----------------- As Actual Adjusted ------- -------- (in thousands) Stockholders' equity: Common stock, $0.001 par value, 100,000,000 shares authorized, and 14,580,080 shares issued and outstanding, 18,080,080 shares issued and outstanding, as adjusted..... $ 15 $ 18 Additional paid-in capital................................. 5,691 46,903 Deferred stock-based compensation.......................... (1,442) (1,442) Retained earnings.......................................... 4,005 4,005 ------- ------- Total stockholders' equity............................... 8,269 49,484 ------- ------- Total capitalization..................................... $ 8,269 $49,484 ======= =======
This table excludes the following: . 1,356,250 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.46 per share; . 3,456,250 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including the estimated number of shares available for grant under our 1994 stock option plan and our 2000 stock option/stock issuance plan to be transferred to our 2000 stock incentive plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding shares of common stock; and . 312,500 additional shares available for future issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding shares of common stock. This table should be read in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to our consolidated financial statements appearing elsewhere in this prospectus. 20 DILUTION If you buy shares of our common stock in this offering, your investment will be diluted to the extent of the difference between the public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock after this offering. Our net tangible book value as of June 30, 2000 was approximately $8.3 million, or approximately $0.57 per share of common stock. Net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2000. After giving effect to the sale of 3,500,000 shares of our common stock, at an assumed initial public offering price of $13.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2000 would have been $49.5 million, or $2.74 per share. This represents an immediate increase in net tangible book value of $2.17 per share to existing stockholders and an immediate and substantial dilution of $10.26 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share................ $13.00 Net tangible book value per share as of June 30, 2000........ $0.57 Increase per share attributable to new investors ............ 2.17 ----- As adjusted net tangible book value per share after the offering...................................................... 2.74 ------ Net tangible book value dilution per share to new investors.... $10.26 ======
This table excludes all options outstanding as of June 30, 2000. To the extent that any of these options are exercised at an exercise price less than the offering price, there would be further dilution to new investors. For additional information regarding these options, see "Capitalization" and Note 4 of the notes to our consolidated financial statements. Assuming the exercise in full of the underwriters' over-allotment option, our as adjusted net tangible book value as of June 30, 2000 would have been approximately $3.00 per share, representing an immediate increase in net tangible book value of $2.43 per share to our existing stockholders and an immediate and substantial dilution in net tangible book value of $10.00 per share to new investors. The following table sets forth, as of June 30, 2000, the total consideration paid, the total shares purchased and the average price per share paid by existing stockholders and by new investors in this offering at an assumed initial public offering price of $13.00 per share, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders....... 14,580,080 80.6% $ 1,123,000 2.4% $0.08 New investors............... 3,500,000 19.4 45,500,000 97.6 ---------- ----- ----------- ----- Total..................... 18,080,080 100.0% $46,623,000 100.0% ========== ===== =========== =====
This table excludes the following: . 1,356,250 shares issuable upon exercise of stock options outstanding as of June 30, 2000 at a weighted average exercise price of $0.46 per share; 21 . 3,456,250 additional shares available for future grant or issuance under our 2000 stock incentive plan, which will become effective on the closing of this offering, including the estimated number of shares available for grant under our 1994 stock option plan and our 2000 stock option/stock issuance plan to be transferred to our 2000 stock incentive plan, which number of shares will be increased annually by an aggregate of 4% of our outstanding shares of common stock; and . 312,500 additional shares available for future grant or issuance under our 2000 employee stock purchase plan, which will become effective on the closing of this offering, which number of shares will be increased annually by an aggregate of 1% of our outstanding shares of common stock. 22 SELECTED CONSOLIDATED FINANCIAL DATA You should read the following consolidated financial data in conjunction with our consolidated financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of income data for the year ended December 31, 1997 to 1999 and the six month period ended June 30, 2000, and the consolidated balance sheet data as of December 31, 1998 and 1999 and June 30, 2000, are derived from the audited consolidated financial statements included in this prospectus. The consolidated statement of income data for the year ended December 31, 1996, and the consolidated balance sheet data as of December 31, 1996 and 1997, are derived from audited consolidated financial statements not included in this prospectus. The consolidated statement of income data for the year ended December 31, 1995 and the six month period ended June 30, 1999, and the consolidated balance sheet data as of December 31, 1995, are unaudited. Our unaudited consolidated financial statements have been prepared by us on a basis consistent with our audited consolidated financial statements and, in management's opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a presentation of the consolidated results of operations for these periods. Our historical results are not necessarily indicative of results to be expected for future periods.
Six Month Period Ended Year Ended December 31, June 30, ------------------------------------ ------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------- ------ ------ (in thousands, except per share data) Consolidated Statement of Income Data: Revenue..................... $ 689 $2,258 $4,169 $6,771 $12,506 $5,289 $8,782 Cost of revenue............. 315 395 764 1,437 3,136 1,237 2,168 ------ ------ ------ ------ ------- ------ ------ Gross profit................ 374 1,863 3,405 5,334 9,370 4,052 6,614 ------ ------ ------ ------ ------- ------ ------ Operating expenses: Research and development.. 394 782 1,210 2,572 3,538 1,751 1,882 Sales and marketing....... 273 289 431 800 1,194 572 1,103 General and administrative........... 140 152 340 345 434 171 433 Amortization of deferred stock-based compensation............. -- -- -- 452 1,320 345 772 ------ ------ ------ ------ ------- ------ ------ Total operating expenses............... 807 1,223 1,981 4,169 6,486 2,839 4,190 ------ ------ ------ ------ ------- ------ ------ Income (loss) from operations................. (433) 640 1,424 1,165 2,884 1,213 2,424 Interest income............. 24 18 56 80 138 54 156 ------ ------ ------ ------ ------- ------ ------ Income (loss) before provision for income taxes...................... (409) 658 1,480 1,245 3,022 1,267 2,580 Provision for income taxes.. 2 20 556 708 1,760 656 1,325 ------ ------ ------ ------ ------- ------ ------ Net income (loss)........... $ (411) $ 638 $ 924 $ 537 $ 1,262 $ 611 $1,255 ====== ====== ====== ====== ======= ====== ====== Net income (loss) per share...................... Basic..................... $(0.03) $ 0.04 $ 0.06 $ 0.04 $ 0.09 $ 0.04 $ 0.09 ====== ====== ====== ====== ======= ====== ====== Diluted................... $(0.03) $ 0.04 $ 0.06 $ 0.04 $ 0.08 $ 0.04 $ 0.08 ====== ====== ====== ====== ======= ====== ====== Weighted average shares outstanding................ Basic..................... 14,286 14,286 14,286 14,286 14,286 14,286 14,359 ====== ====== ====== ====== ======= ====== ====== Diluted................... 14,286 14,379 14,508 15,079 15,084 15,226 15,508 ====== ====== ====== ====== ======= ====== ======
23
December 31, --------------------------------- June 30, 1995 1996 1997 1998 1999 2000 ----- ------ ------ ------ ------ -------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short- term investments.................. $ 366 $ 480 $1,816 $2,215 $4,195 $ 6,319 Working capital.................... 412 981 1,883 3,005 5,773 7,925 Total assets....................... 462 1,268 2,727 3,926 7,654 12,018 Total debt......................... -- -- -- -- -- -- Total stockholders' equity......... 409 1,047 1,971 3,202 6,027 8,269
24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and accompanying notes. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives and intentions. Our actual results may differ materially from those indicated in these forward-looking statements. See "Note Regarding Forward-Looking Statements." Factors that could cause or contribute to these differences include but are not limited to those discussed in "Risk Factors" and elsewhere in this prospectus. Overview We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards such as USB, 1394, Bluetooth wireless technology and Ethernet. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. Our verification systems consist of development and production products that accurately monitor communications traffic and diagnose operational problems to ensure standards compliance and interoperability as well as assist system manufacturers in downloading software onto new computers. Our connectivity products enable reliable, uninterrupted service for broadband Internet access. We currently outsource most of the manufacturing of our verification systems and connectivity products so that we may concentrate our resources on the design, development and marketing of our existing and new products. We were formed in February 1992 and offered our first verification system in 1996 and our first connectivity product in 1996. Our product offerings have expanded to include a range of analyzers, testers and connectivity products, including FireInspector, our 1394 bus and protocol analyzer; NetMate Plus, a USB connectivity product; UPT, a USB production product; Advisor, our fourth generation USB bus and protocol analyzer; and Merlin, a Bluetooth wireless protocol analyzer. We report our revenue and gross profit in three business segments: development, production and connectivity products. In the year ended December 31, 1999, our revenue from our development products was $6.2 million, from production products was $4.6 million and from connectivity products was $1.7 million. In the six month period ended June 30, 2000, our revenue from our development products was $4.0 million, from production products was $2.8 million and from connectivity products was $2.0 million. Historically, we have generated a majority of our revenue across all segments from products for the USB standard. Revenue from our USB products accounted for approximately 89.7% of our revenue in the year ended December 31, 1999 and 91.6% in the six month period ended June 30, 2000. We sell our products on a purchase order basis. We have adopted Statement of Position, or SOP, 97-2, Software Revenue Recognition. Under SOP 97-2, we recognize revenue to resellers and end users upon shipment provided that there is persuasive evidence of an arrangement, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is probable. When we have shipped products but some elements essential to the functionality of the products have not been completed, revenue and associated cost of revenue are deferred until all remaining elements have been delivered. As a result, our revenue trends are dependent on the timing of delivery of these essential elements. As of June 30, 2000, revenue of $1.7 million had been 25 deferred, which we expect to recognize in the six month period ending December 31, 2000. Our products are typically sold with a one year parts and labor repair warranty. Provisions for warranty costs are recorded at the time products are shipped. Product returns to date have not been significant. We sell our products to technology, infrastructure and application companies through our direct sales force and indirectly through our distributors and value-added resellers. Historically, a significant portion of our revenue has been derived from customers outside of the United States, and we expect this trend to continue. For the six month period ended June 30, 2000, approximately 33.4% of our revenue was derived from international customers, of which 12.9% was derived from customers in Japan, 7.3% was derived from customers in other parts of Asia, and 12.1% was derived from customers in Europe. In the year ended December 31, 1999, approximately 42.4% of our revenue was derived from international customers, of which 18.8% was derived from customers based in Japan, 9.7% was derived from customers based in other parts of Asia, and 12.1% was derived from customers based in Europe. All of our revenue and accounts receivable are denominated in U.S. dollars. Competition, the development of emerging communications standards and technological change have influenced and are likely to continue to influence our quarterly and annual revenue and results of operations. Our product development and marketing strategies are focused on working closely with the promoter companies and communications standards groups to gain early access to new communications standards and technologies, and establishing first mover advantage for our products. We invest significantly in the research and development and marketing of our products for emerging communications standards, often before these standards have gained widespread industry acceptance and in advance of generating substantial revenue related to these investments. Additionally, the rate and timing of customer orders may vary significantly from month to month. Accordingly, if sales of our products do not occur when we expect and we are unable to predict or adjust our estimates on a timely basis, our expenses may increase as a percentage of revenue. Results of Operations The following table presents selected consolidated financial data for the periods indicated as a percentage of revenue:
Six Month Period Year Ended Ended June December 31, 30, ------------------- ------------ 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- Consolidated Statement of Income Data: Revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue............................. 18.3 21.2 25.1 23.4 24.7 ----- ----- ----- ----- ----- Gross profit................................ 81.7 78.8 74.9 76.6 75.3 ----- ----- ----- ----- ----- Operating expenses: Research and development.................. 29.0 38.0 28.3 33.1 21.4 Sales and marketing....................... 10.3 11.8 9.5 10.8 12.6 General and administrative................ 8.2 5.1 3.5 3.2 4.9 Amortization of deferred stock-based compensation............................. -- 6.7 10.5 6.5 8.8 ----- ----- ----- ----- ----- Total operating expenses................ 47.5 61.6 51.8 53.6 47.7 ----- ----- ----- ----- ----- Income from operations...................... 34.2 17.2 23.1 23.0 27.6 Interest income............................. 1.3 1.2 1.1 1.0 1.8 ----- ----- ----- ----- ----- Income before provision for income taxes.... 35.5 18.4 24.2 24.0 29.4 Provision for income taxes.................. 13.3 10.5 14.1 12.4 15.1 ----- ----- ----- ----- ----- Net income.................................. 22.2% 7.9% 10.1% 11.6% 14.3% ===== ===== ===== ===== =====
26 Results of Operations for the Six Month Period Ended June 30, 2000 and 1999 Revenue. Our revenue was $8.8 million in the six month period ended June 30, 2000 and $5.3 million in the six month period ended June 30, 1999, representing an increase of 66.0%. This increase was due to increases in unit volume shipments to existing customers, expansion of our customer base and growth in our connectivity product segment. This increase does not include $1.7 million of revenue from our development products, which was deferred. Revenue from international customers represented approximately 33.4% of our revenue in the six month period ended June 30, 2000 and 40.0% of our revenue in the six month period ended June 30, 1999. Revenue from international customers decreased as a percentage of revenue as domestic revenue grew at a faster rate than revenue from international customers. However, revenue dollars from international customers increased 38.3%. We expect that revenue generated from international customers will continue to account for a significant percentage of our revenue. Cost of Revenue and Gross Profit. Cost of revenue is comprised of costs for the outsourced manufacturing of our products, along with our internal costs for high-level assembly and final testing, and amortization of deferred stock-based compensation related to production personnel. Our gross profit was $6.6 million in the six month period ended June 30, 2000 and $4.1 million in the six month period ended June 30, 1999, representing an increase of 63.2%. This increase was due to revenue growth of 66.0% from 1999 to 2000. Our gross margin was 75.3% in the six month period ended June 30, 2000 and 76.6% in the six month period ended June 30, 1999. This decrease was the result of an increase in the percentage of lower gross margin products in the product mix for the six month period ended June 30, 2000. Without the amortization of deferred stock-based compensation, our gross margin would have been 76.6% for the six month period ended June 30, 2000 and 78.5% for the six month period ended June 30, 1999. Research and Development. Research and development expenses are comprised of salaries and related personnel expenses of employees engaged in research, design and development activities, and also include related supplies, software license fees for technologies used in research and development, equipment expenses, depreciation and amortization. Our research and development expenses were $1.9 million in the six month period ended June 30, 2000 and $1.8 million in the six month period ended June 30, 1999, representing an increase of 7.5%. This increase was due to an increase in personnel-related costs. Research and development expenses represented 21.4% of revenue in the six month period ended June 30, 2000 and 33.1% of revenue in the six month period ended June 30, 1999. The decrease in research and development expenses as a percentage of revenue was due to increased revenue. Our research and development expenses in dollars may increase to support the growth of our business. Sales and Marketing. Sales and marketing expenses are comprised of salaries and related personnel expenses of employees engaged in sales and marketing activities, expenses related to conferences and trade shows and also include expenses related to consultants and professional services. Our sales and marketing expenses were $1.1 million in the six month period ended June 30, 2000 and $572,000 in the six month period ended June 30, 1999, representing an increase of 92.8%. This increase was primarily due to an increase in sales and marketing personnel and related expenses. Sales and marketing expenses represented 12.6% of revenue in the six month period ended June 30, 2000 and 10.8% of revenue in the six month period ended June 30, 1999. The increase in sales and marketing expenses as a percentage of revenue was primarily due to the deferral of $1.7 million in revenue in the six month period ended June 30, 2000. Our sales and marketing expenses in dollars may increase to support the growth of our business. 27 General and Administrative. General and administrative expenses are comprised of salaries and related personnel expenses of employees engaged in general and administrative activities, and also include expenses related to consultants and professional services. Our general and administrative expenses were $433,000 in the six month period ended June 30, 2000 and $171,000 in the six month period ended June 30, 1999, representing an increase of 153.2%. General and administrative expenses represented 4.9% of revenue in the six month period ended June 30, 2000 and 3.2% of revenue in the six month period ended June 30, 1999. The increases in dollars and as a percentage of revenue resulted from the increase in general and administrative personnel and related expenses, administrative costs and expenses related to consultants and professional services. Our general and administrative expenses in dollars and as a percentage of revenue may increase as we incur additional costs as a public company, implement a new enterprise resource planning system and hire additional personnel. Amortization of Deferred Stock-based Compensation. Deferred stock-based compensation is the difference between the deemed fair value of our common stock at the date of grant of options and the exercise price of those options. This amount is amortized over the vesting period of the applicable options, generally 48 months, on an accelerated basis, and is presented, net of amortization, as a reduction of stockholders' equity. Amortization of deferred stock-based compensation was $884,000 in the six month period ended June 30, 2000, of which $112,000 was included in cost of revenue. Amortization of deferred stock-based compensation was $444,000 in the six month period ended June 30, 1999, of which $99,000 was included in cost of revenue. We had deferred stock-based compensation of $1.4 million as of June 30, 2000, which we expect to be amortized over the next four years. In addition, based on stock option grants to existing employees and new hires subsequent to June 30, 2000, we expect to record additional deferred stock-based compensation of at least $8.8 million in the third quarter of 2000 which will be amortized over the next four years. Interest Income. Interest income is comprised of interest earned on invested cash. Interest income was $156,000 in the six month period ended June 30, 2000 and $54,000 in the six month period ended June 30, 1999. This increase resulted from additional excess cash balances and investment of excess cash balances at higher interest rates. Provision for Income Taxes. Our provision for income taxes was $1.3 million in the six month period ended June 30, 2000 and $656,000 in the six month period ended June 30, 1999, representing an increase of 102.0%. This increase relates to an increase in our income before provision for income taxes and before amortization of deferred stock-based compensation. Our effective tax rate was 51.4% in the six month period ended June 30, 2000 and 51.8% in the six month period ended June 30, 1999. The decrease in our effective tax rate relates to permanent non-deductible expenses related to amortization of deferred stock-based compensation. Our effective tax rate after excluding the effect of amortization of deferred stock-based compensation was 38.3% in the six month period ended June 30, 2000 and in the six month period ended June 30, 1999. Results of Operations in the Year Ended December 31, 1999, 1998 and 1997 Revenue. Our revenue was $12.5 million in the year ended December 31, 1999, $6.8 million in the year ended December 31, 1998 and $4.2 million in the year ended December 31, 1997. These amounts represent an increase of 84.7% from 1998 to 1999 and 62.4% from 1997 to 1998. The increase in revenue from 1998 to 1999 was due to increases in unit volume shipments to existing customers, expansion of our customer base and growth in our connectivity product segment. The increase in revenue from 1997 to 1998 was due to the growth in our development product and 28 production product segments. Revenue from international customers represented 42.4%, of our revenue in the year ended December 31, 1999, 42.7% of our revenue in the year ended December 31, 1998 and 44.7% of our revenue in the year ended December 31, 1997. Revenue from international customers decreased as a percentage of revenue from 1997 to 1999 as domestic revenue grew at a faster rate than revenue from international customers. Cost of Revenue and Gross Profit. Our gross profit was $9.4 million in the year ended December 31, 1999, $5.3 million in the year ended December 31, 1998 and $3.4 million in the year ended December 31, 1997. These amounts represent increases of 75.7% from 1998 to 1999 and 56.7% from 1997 to 1998. These dollar increases were the result of increased unit sales from year to year. Our gross margin was 74.9% in the year ended December 31, 1999, 78.8% in the year ended December 31, 1998 and 81.7% in the year ended December 31, 1997. The decrease in gross margin from 1998 to 1999 was due to a shift in our product mix to lower margin connectivity products as well as pricing discounts given on volume purchase orders. The decrease in gross margin from 1997 to 1998 was due to the amortization of deferred stock-based compensation. Excluding amortization of deferred stock-based compensation, our gross margin would have been 76.9% for the year ended December 31, 1999, 82.4% for the year ended December 31, 1998 and 81.7% for the year ended December 31, 1997. Research and Development. Our research and development expenses were $3.5 million in the year ended December 31, 1999, $2.6 million in the year ended December 31, 1998 and $1.2 million in the year ended December 31, 1997. These amounts represent increases of 37.6% from 1998 to 1999 and 112.6% from 1997 to 1998. Research and development expenses represented 28.3% of revenue in the year ended December 31, 1999, 38.0% of revenue in the year ended December 31, 1998 and 29.0% of revenue in the year ended December 31, 1997. The dollar increase in 1999 was primarily due to an increase in personnel related costs. The decrease as a percentage of revenue in 1999 was due to revenue growth of approximately 84.7% over the same period. The increase in dollars and as a percentage of revenue in 1998 resulted from a significant increase in development efforts for products from which anticipated revenue was and will continue to be recognized in subsequent periods. Sales and Marketing. Our sales and marketing expenses were $1.2 million in the year ended December 31, 1999, $800,000 in the year ended December 31, 1998 and $431,000 in the year ended December 31, 1997. These amounts represent increases of 49.3% from 1998 to 1999 and 85.6% from 1997 to 1998. Sales and marketing expenses represented 9.5% of revenue in the year ended December 31, 1999, 11.8% of revenue in the year ended December 31, 1998 and 10.3% of revenue in the year ended December 31, 1997. The increases in dollars in 1999 and 1998, and as a percentage of revenue in 1998, resulted from an increase in personnel- related costs and marketing efforts such as compliance workshops, tradeshows and market communications. The decrease as a percentage of revenue in 1999 was due to revenue growth of 84.7% from 1998 to 1999. General and Administrative. Our general and administrative expenses were $434,000 in the year ended December 31, 1999, $345,000 in the year ended December 31, 1998 and $340,000 in the year ended December 31, 1997. These amounts represent increases of 25.8% from 1998 to 1999 and 1.5% from 1997 to 1998. General and administrative expenses represented 3.5% of revenue in the year ended December 31, 1999, 5.1% of revenue in the year ended December 31, 1998 and 8.2% of revenue in the year ended December 31, 1997. The dollar increase in 1999 resulted from the addition of management and administrative personnel and related expenses, including general business costs. The decrease as a percentage of revenue from 1998 to 1999 was due to revenue growth of 29 approximately 84.7% from 1998 to 1999, and the decrease as a percentage of revenue from 1997 to 1998 was due to revenue growth of approximately 62.4% from 1997 to 1998. Amortization of Deferred Stock-based Compensation. Amortization of deferred stock-based compensation was $1.6 million in the year ended December 31, 1999, of which $243,000 was included in cost of revenue during that period. Amortization of deferred stock-based compensation was $694,000 in the year ended December 31, 1998, of which $242,000 was included in cost of revenue during that period. There was no amortization of deferred stock-based compensation in 1997. Interest Income. Interest income was $138,000 in the year ended December 31, 1999, $80,000 in the year ended December 31, 1998 and $56,000 in the year ended December 31, 1997. These increases resulted from additional excess cash balances and investment of excess cash balances at higher interest rates. Provision for Income Taxes. Provision for income taxes was $1.8 million in the year ended December 31, 1999, $708,000 in the year ended December 31, 1998 and $556,000 in the year ended December 31, 1997. These amounts represent increases of 148.6% from 1998 to 1999 and 27.3% from 1997 to 1998. Our effective tax rate increased from 56.9% in 1998 to 58.2% in 1999, and from 37.6% in 1997 to 56.9% in 1998 due to an increase in our income before provision for income taxes and before amortization of deferred stock-based compensation. Our effective tax rate after excluding the effect of amortization of stock-based compensation was 38.4% in the year ended December 31, 1999, 36.5% in the year ended December 31, 1998 and 37.6% in the year ended December 31, 1997. 30 Quarterly Results of Operations The following table sets forth our historical unaudited quarterly consolidated statement of income data for the six quarters ended June 30, 2000 as well as such data expressed as a percentage of revenue for each quarter. This quarterly information has been prepared on a basis consistent with our audited consolidated financial statements and, we believe, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information shown. Our quarterly operating results have fluctuated and may continue to fluctuate significantly as a result of a variety of factors. Operating results for any quarter are not necessarily indicative of results for any future quarter or for a full year.
Three Month Period Ended ----------------------------------------------------- Dec. Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30, 1999 1999 1999 1999 2000 2000 -------- -------- --------- ------ -------- -------- (in thousands and as a percentage of revenue) Consolidated Statement of Income Data: Revenue.................. $2,098 $3,191 $3,157 $4,060 $4,338 $4,444 Cost of revenue.......... 381 856 767 1,132 1,005 1,163 ------ ------ ------ ------ ------ ------ Gross profit............. 1,717 2,335 2,390 2,928 3,333 3,281 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development........... 856 895 851 936 937 945 Sales and marketing.... 220 352 325 297 492 611 General and administrative........ 84 87 99 165 170 263 Amortization of deferred stock-based compensation.......... 153 192 209 765 389 383 ------ ------ ------ ------ ------ ------ Total operating expenses............ 1,313 1,526 1,484 2,163 1,988 2,202 ------ ------ ------ ------ ------ ------ Income from operations... 404 809 906 765 1,345 1,079 Interest income.......... 27 27 36 48 67 89 ------ ------ ------ ------ ------ ------ Income before provision for income taxes........ 431 836 942 813 1,412 1,168 Provision for income taxes................... 244 412 466 638 711 614 ------ ------ ------ ------ ------ ------ Net income............... $ 187 $ 424 $ 476 $ 175 $ 701 $ 554 ====== ====== ====== ====== ====== ====== As a Percentage of Revenue: Revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.......... 18.2 26.8 24.3 27.9 23.2 26.2 ------ ------ ------ ------ ------ ------ Gross profit............. 81.8 73.2 75.7 72.1 76.8 73.8 ------ ------ ------ ------ ------ ------ Operating expenses: Research and development........... 40.8 28.1 27.0 23.1 21.6 21.3 Sales and marketing.... 10.5 11.0 10.3 7.3 11.3 13.7 General and administrative........ 4.0 2.7 3.1 4.1 3.9 5.9 Amortization of deferred stock-based compensation.......... 7.3 6.0 6.6 18.8 9.0 8.6 ------ ------ ------ ------ ------ ------ Total operating expenses............ 62.6 47.8 47.0 53.3 45.8 49.5 ------ ------ ------ ------ ------ ------ Income from operations... 19.2 25.4 28.7 18.8 31.0 24.3 Interest income.......... 1.3 0.8 1.1 1.2 1.5 2.0 ------ ------ ------ ------ ------ ------ Income before provision for income taxes........ 20.5 26.2 29.8 20.0 32.5 26.3 Provision for income taxes................... 11.6 12.9 14.8 15.7 16.3 13.8 ------ ------ ------ ------ ------ ------ Net income............... 8.9% 13.3% 15.0% 4.3% 16.2% 12.5% ====== ====== ====== ====== ====== ======
31 Our revenue increased in each quarter of 1999 and 2000, other than the three month period ended September 30, 1999, primarily as a result of new product releases and increased demand for our existing products from existing and new customers. Revenue increased 50.5% from the three month period ended March 31, 1999 to the three month period ended September 30, 1999, but decreased 1.1% from the three month period ended June 30, 1999 to the three month period ended September 30, 1999, due to a large order and shipment of our production products to a major customer in the three month period ended June 30, 1999. Revenue increased 6.9% from the three month period ended December 31, 1999 to the three month period ended March 31, 2000 and 2.4% from the three month period ended March 31, 2000 to the three month period ended June 30, 2000, primarily due to the deferral of $372,000 of revenue in the three month period ended March 31, 2000 and $1.4 million of revenue in the three month period ended June 30, 2000. We expect to recognize this deferred revenue in the six month period ending December 31, 2000. Gross margins have fluctuated from quarter to quarter primarily due to shifts in our product mix, pricing discounts given on volume purchase orders and amortization of deferred stock-based compensation. Gross profit increased in each of the last three quarters of 1999 and the three month period ended March 31, 2000, primarily due to revenue growth. In the three month period ended December 31, 1999, net income decreased primarily due to an increase in amortization of deferred stock-based compensation. We believe that period to period comparisons of our operating results should not be relied upon as an indication of our future performance. In the past, our results of operations have fluctuated significantly, and we expect similar quarterly fluctuations in the future as a result of a number of factors beyond our control. Among other things, these factors include the rate of growth in the market for our products, changes in the demand for our products, customer buying habits and product volume and mix. Our anticipated research and development, sales and marketing and general and administrative expenses are based, in part, on future projections of revenues. It is difficult for us to reduce our expenses quickly in response to any short fall in revenue. As a result, any downturn in revenue would likely have a disproportionately adverse effect on our operating results. If our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock would likely decline significantly. Liquidity and Capital Resources Our operating cash flow requirements have generally increased reflecting the expanding scope and level of our activities. Since our inception, we have financed our operations primarily through cash flows from operating activities. In the six month period ended June 30, 2000, cash provided by operating activities of $2.3 million primarily consisted of net income of $1.3 million, amortization of deferred stock-based compensation of $884,000 and an increase in deferred revenue of $1.7 million, offset by an increase in accounts receivable of $826,000 and a decrease in accrued expenses of $232,000. Cash used in investing activities of $1.4 million related to purchases of short-term investments of $1.2 million and capital expenditures of $136,000. Cash provided by financing activities of $103,000 related to proceeds received from the exercise of stock options. In 1999, cash provided by operating activities of $2.2 million primarily consisted of net income of $1.3 million and amortization of deferred stock- based compensation of $1.6 million, offset by an increase in accounts receivable of $1.2 million. Cash used in investing activities of $173,000 related to capital expenditures. 32 In 1998, cash provided by operating activities of $552,000 primarily consisted of net income of $537,000 and amortization of deferred stock-based compensation of $694,000, offset by an increase in accounts receivable of $581,000. Cash used in investing activities of $153,000 related to capital expenditures. In 1997, cash provided by operating activities of $1.4 million primarily consisted of net income of $924,000 and an increase in accrued expenses of $486,000, offset by an increase in inventories of $186,000. Cash used in investing activities of $58,000 related to capital expenditures. As of June 30, 2000, we had cash, cash equivalents and short-term investments of $6.3 million, working capital of $7.9 million and no debt. At that date, we had no capital lease obligations, and we had future minimum lease payments under our operating lease of $349,000. We believe that the net proceeds from the sale of the common stock in this offering, together with funds generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. If we are required to raise additional funds, we may not be able to do so on acceptable terms or at all. In addition, if we issue new securities, stockholders might experience dilution or the holders of the new securities may have rights, preferences or privileges senior to those of existing stockholders. Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. As of June 30, 2000, all of our investments were in money market funds, certificates of deposit or high quality commercial paper. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and that the corresponding derivative gains or losses be reported either in the statement of income or as a deferred item depending on the type of hedge relationship that exists with respect to these derivatives. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal years commencing after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--An Amendment of FASB Statement No. 133, which deferred the effective date of SFAS No. 133 until the quarter ending March 31, 2001. 33 Accordingly, we will adopt SFAS No. 133 in the quarter ending March 31, 2001. We have not determined whether the adoption of this pronouncement will have a material impact on our financial condition or results of operations. In December 1999, the SEC issued SAB No. 101, Revenue Recognition in Financial Statements. SAB 101 summarizes certain areas of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date for implementation of SAB 101 until the fourth quarter of fiscal 2000. We believe that our current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation-An Interpretation of APB Opinion No. 25. This interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occur after December 15, 1998, or January 12, 2000. We believe that this interpretation will not have a material effect on our financial position or results of operations. In various areas, including revenue recognition and stock-based compensation, accounting standards and practices continue to evolve. The SEC is preparing to issue interpretive guidance relating to SAB 101, and the FASB continues to address revenue recognition and other related accounting issues. We believe we comply with all of the rules and related guidance as they currently exist. However, any changes to generally accepted accounting principles in these areas would likely affect our results of operations. 34 BUSINESS Overview We are a leading provider of advanced verification systems and connectivity products for existing and emerging digital communications standards. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. We have expertise in the USB, USB 2.0, 1394, Bluetooth and Ethernet standards and are actively engaged with our customers throughout their development and production processes. Utilizing our easy to use, color-coded software, the CATC Trace, our development products generate, capture, filter and analyze high speed communications traffic, allowing our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws in their product design. Our production products are used in manufacturing to ensure that products comply with standards and operate with other devices as well as assist system manufacturers in downloading software on to new computers. Our connectivity products are electronic systems that enable reliable, uninterrupted service for broadband Internet access. These connectivity products also allow for simple installation and incorporate an ASIC and our proprietary embedded software and software drivers. Our customers include industry leaders such as 3Com, Apple, Compaq, Hewlett- Packard, Intel, Lucent, Microsoft, Motorola, NEC, Philips, Sony, Sun Microsystems and Toshiba. In addition, we sell our products through a network of distributors and value-added resellers, including Dynacolor, Enable Engineering, Nohau Electronik and Toyo. Industry Background The Demand for Digital Communications is Growing The growth in the demand for digital information has accelerated the need for communications among multiple electronic devices and in various markets, including computers, telecommunications, consumer electronics and others, such as aerospace, automotive, industrial automation, medical instrumentation and robotics. This growing demand centers on widespread, broadband transmissions of digital information, including Internet access, data storage and rich media content. Communication among digital devices, or connectivity, occurs over a variety of physical media, such as copper wire and fiber optic cable, and wireless technologies with rapidly fluctuating frequencies. Computer technology initially provided connectivity only among internal devices, such as the processor, memory and storage, and with external peripheral devices, such as the keyboard, mouse and printer. Today, computer technology also enables connectivity among multiple computing devices and across networks, such as local area networks, wide area networks, storage area networks, home area networks, personal area networks and the Internet. Telecommunications technology also currently enables connectivity among multiple devices, such as telephones, fax machines, pagers and personal digital assistants. Consumer electronics technology is progressively enabling connectivity among devices, such as Internet appliances, digital cameras, audio systems and televisions. 35 Communications Standards are Becoming Increasingly Complex Digital devices communicate by sending electronic signals through a physical transmission channel according to a specified protocol. A protocol is the set of detailed rules that governs both the channel and the device hardware and software and regulates the manner in which the signals are sent. The channel and the protocol are both typically specified in a formal communications standard. For communication to be successful, each device must recognize and follow the same standard. Early communications standards were relatively simple, typically involving low speed communications between two simple devices connected directly by copper wire. Current standards are increasingly complex, typically involving high speed communications among multiple sophisticated devices indirectly linked to other devices and across various physical media, including copper wire and fiber optic cables, and wireless technologies with rapidly fluctuating frequencies. As a result, standards that were expressed initially in only a few pages of text may now extend to over a thousand pages. The specifications for these standards are broadly available, which facilitate interoperability of hardware and software products from different manufacturers. A standard is typically introduced by several leading technology and infrastructure companies. These core or promoter companies comprise the nucleus of independent communications standards groups, which are sometimes referred to as implementers' forums, trade associations or special interest groups. These groups assist in the development, implementation and promotion of and compliance with the standards. As commercial interest in a particular standard increases, the communications standards group typically expands to include system and device manufacturers and service providers. The promoter companies typically remain closely associated with the standard throughout its lifecycle. A standard is implemented over a lifecycle that includes three overlapping phases: development, production and market deployment. The development phase covers the development and production of the semiconductors and software, including embedded software, protocol stacks and device drivers, that are the building blocks for products and applications. During the production phase, system and device manufacturers apply these building blocks to construct their unique products and applications. The market deployment phase covers the introduction and sale of products and applications in the marketplace. Similarly, products that use or are associated with a particular standard follow their own unique lifecycle from development through production, deployment and operation. Emerging Standards Promote Digital Communications Many communications standards are emerging to meet the growing demand for digital connectivity in the computer, telecommunications, consumer electronics and other industries. The characteristics of each standard, including its principal uses, physical medium, transmission speed and distance covered, vary greatly. Examples of emerging standards include the following: Universal Serial Bus. The Universal Serial Bus standard, or USB, enables low and medium speed connectivity between computers and peripheral devices, including keyboards, mice, printers, scanners, joysticks and cameras, using plug and play technology. USB was introduced in 1995 and replaces the serial, parallel, mouse and keyboard ports. The specifications for the second version of USB, or USB 2.0, were released in April 2000. The promoter group for USB 2.0 consists of Compaq, Hewlett-Packard, Intel, Lucent, Microsoft, NEC and Philips and, as of September 15, 2000, the USB Implementers Forum had over 600 member companies. USB enables connectivity through 36 copper wires at speeds of up to twelve megabits per second, or Mbps, over distances of up to five meters. This speed increases to up to 480 Mbps in USB 2.0. According to Dataquest, an independent market research firm, the number of USB-enabled peripherals is expected to grow from 27 million in 1999 to 494 million by 2003. Dataquest estimates that the percentage of USB-enabled personal computers produced in a given year is expected to grow from nine percent in 2000 to 95% in 2003. IEEE 1394. The IEEE 1394a standard, commonly known as 1394, FireWire or i.Link, enables high speed connectivity among computers, peripheral devices and consumer electronic devices, including audio systems, television sets, digital cameras, video recorders, video players and game consoles. 1394 was introduced in 1987 and was ratified by the Institute of Electrical and Electronics Engineers in 1995. The promoter group includes Apple, Canon, Compaq, IBM, Intel, Microsoft, NEC, Philips, Sony, Sun Microsystems and Yamaha and, as of September 15, 2000, the 1394 Trade Association had over 140 member companies. 1394 enables connectivity through copper wire at speeds of up to 400 Mbps over distances of up to four and one-half meters. This speed increases to up to 3.2 billion bits per second, or Gbps, over distances of up to 100 meters, in the 1394b standard that is currently awaiting ratification. According to Cahners In-Stat Group, an independent market research firm, the number of 1394-enabled personal computers and peripheral devices shipped is expected to grow from nearly eight million in 1999 to over 100 million by 2004. Bluetooth Wireless Technology. The Bluetooth standard, or Bluetooth wireless technology, enables low speed, wireless connectivity among computers, telecommunication devices, such as mobile telephones, and consumer electronics devices, such as personal digital assistants and headphones. Bluetooth wireless technology was introduced in 1998. The promoter group consists of 3Com, Ericsson, IBM, Intel, Lucent, Microsoft, Motorola, Nokia and Toshiba and, as of September 15, 2000, the Bluetooth Special Interest Group had over 1,800 member companies. Bluetooth wireless technology operates through radio waves with rapidly fluctuating frequencies at speeds of up to one Mbps over distances of up to 100 meters. According to Cahners In-Stat Group, the number of Bluetooth- enabled products is expected to grow from under 100,000 in 1999 to 1.4 billion unit shipments in 2005. InfiniBand Architecture. The InfiniBand standard enables high speed connectivity both inside computers and among computers and storage devices in storage area networks. InfiniBand was introduced in 1999 and is expected to replace both the Peripheral Connect Interface, or PCI standard, for internal computer communications and the emerging Fibre Channel standard for communications in storage area networks. The promoter group consists of Compaq, Dell, Hewlett-Packard, IBM, Intel, Microsoft and Sun and, as of September 15, 2000, the InfiniBand Trade Association had over 170 members. The specifications for this standard are expected to be released in 2000. InfiniBand operates over both copper wire and fiber optic cable at speeds of up to 6 Gbps over distances of up to ten meters for copper wire and ten kilometers for fiber optic cable. According to International Data Corporation, an independent market research firm, the percentage of InfiniBand enabled servers produced in a given year is expected to grow from less than one percent in 2001 to over 80% in 2004. Other Standards. There are many other emerging communications standards at different stages in their respective lifecycles such as Digital Subscriber Line, or DSL, IEEE 802.11, or wireless Ethernet, and IEEE 802.3, or Gigabit Ethernet. Emerging Communications Standards Create Market Needs The emergence of new communications standards creates two primary market needs. Manufacturers need advanced verification systems at each phase of the standard's lifecycle and at 37 each stage of the product lifecycle to accurately monitor communications traffic, assure standards compliance and diagnose operational problems. These verification systems must generate, capture, filter and analyze high speed communications traffic to identify both persistent and intermittent errors and to ensure product quality and interoperability. Manufacturers and service providers also need connectivity products to bridge old and new communications standards. These connectivity products must translate data between standards and transmit these data at full speed without creating bottlenecks. Both verification systems and connectivity products must be easy to use, reliable and flexible. As communications standards become more complex, satisfying these needs requires increasingly advanced expertise. The CATC Solution We are a leading provider of advanced verification systems and connectivity products for various existing and emerging digital communications standards. We believe that we have the following competitive advantages: . Expertise in Communications Standards. We have expertise in the USB, USB 2.0, 1394, Bluetooth and Ethernet standards and are actively engaged with our customers throughout their development and production processes. Our customers capitalize on our expertise to reduce development and production times, improve product reliability and ensure interoperability of their products. Our verification systems allow our customers to quickly discover and remedy standards violations, persistent and intermittent errors and flaws and inconsistencies in their product design and production. By working closely with our customers' engineers during their product development, production, deployment and operation, we are able to enhance our systems to meet our customers' specific needs. . Ease of Use. We design our products for ease of use by our customers. Our verification systems include a proprietary graphical user interface, the CATC Trace, that provides an orderly and intuitive representation and analysis of communications traffic, thereby reducing our customers' training and operation time. The CATC Trace also facilitates the sharing of traffic analyses among our customers' engineers. We believe that the CATC Trace is the de facto standard in our markets for viewing digital communications information. In addition, our connectivity products enable quick and easy connectivity between USB and Ethernet networks. . Accuracy and Reliability. We design our verification systems to provide our customers with the accuracy and reliability necessary to ensure that their products conform to emerging communications standards. Our product design enables our customers to view and analyze communications traffic accurately without affecting the data flow. This design architecture has been applied and refined over time and, as a result, our products are highly reliable. . Vertically Integrated Technology. Our connectivity products incorporate vertically integrated technologies, including an ASIC and our proprietary embedded software and software drivers. By controlling all design elements of our connectivity products, we are able to assure full standards compliance and create products with better functionality, stability and reliability. Strategy Our objective is to be the leading provider of advanced verification systems and connectivity products for designers, manufacturers and users of computer, telecommunications and consumer 38 electronics technologies for existing and emerging communications standards. Our strategy includes the following key elements: . Pursue Emerging Standards. We intend to expand our product offerings to address emerging communications standards. We have traditionally identified attractive opportunities and established a first-mover advantage. For example, we identified the USB, USB 2.0 and Bluetooth standards as significant opportunities and developed verification systems for these standards. We introduced the first commercial verification system for USB developers, our Detective analyzer, the first for Bluetooth developers, our Merlin analyzer, and the first for USB 2.0 developers, our Advisor analyzer. We intend to continue identifying attractive opportunities in emerging standards. . Heighten Brand Awareness. We intend to heighten awareness of the CATC brand by broadening our reputation as an expert in communications standards and extending our expert status to new standards. We have traditionally been early to market with verification systems for emerging communications standards. By rapidly establishing our expert status with new standards, we achieve brand awareness among the communications standards groups and other manufacturers and developers in our target markets. We plan to expand our role as a regular sponsor of, and presenter at, industry conventions, seminars and trade shows. We also intend to continue to increase our participation in communications standards groups and as invited experts at design workshops. We believe that these steps will increase our brand recognition and product acceptance. . Leverage Strategic Relationships. We intend to continue to leverage our strategic relationships to gain access to emerging communications standards and specifications before they become widely available or accepted, as well as to product roadmaps and additional market opportunities. For example, we will continue to leverage our relationship with Philips Semiconductors, one of our stockholders, to gain insight into emerging communications standards. In addition, we recently entered into an agreement with an affiliate of Agilent Technologies to jointly develop an analyzer for the InfiniBand standard. Concurrently with this offering, Agilent will purchase shares of our common stock. We will continue to work closely with the promoter companies involved in establishing new communications standards. We intend to enhance our strategic relationships with these companies in the computer, telecommunications and consumer electronics industries. We also plan to develop strategic relationships with promoter companies in other industries. . Expand Distribution Channels. We intend to increase our marketing and sales forces in both domestic and foreign markets. In addition, we plan to pursue relationships with additional distributors and value-added resellers. To date, we have concentrated our efforts primarily in the computer industry. In the future, we intend to expand our marketing and sales efforts in the telecommunications, consumer electronics and other industries. We believe that these strategies will increase the penetration of our products into new and existing markets worldwide. . Reduce Development Time. We intend to continue to leverage the modular architecture of our hardware and software technology to reduce our development time for new products and successive product generations. We also intend to continue investing heavily in research and development to establish and extend our technological leadership. 39 Products We offer advanced design and production verification systems for the USB, USB 2.0, 1394 and Bluetooth standards, as well as production and commercial connectivity products for the USB and Ethernet standards. We currently sell all of the products listed below. Development Products Our development products are advanced verification systems that assist hardware and software manufacturers in the efficient design of reliable and interoperable systems and devices. All of these systems utilize our proprietary graphical user interface, the CATC Trace, which displays communications traffic in searchable, color-coded packets. We believe that the CATC Trace is widely- used in our markets for viewing digital communications information. Our development products consist of the following:
Name Type Introduction Date Merlin Wireless protocol analyzer First quarter of 2000 - -------------------------------------------------------------------------------- Advisor Bus and protocol analyzer First quarter of 2000 - -------------------------------------------------------------------------------- Chief Bus and protocol analyzer First quarter of 1999 - -------------------------------------------------------------------------------- FireInspector Bus and protocol analyzer Second quarter of 1998 - -------------------------------------------------------------------------------- Inspector Bus and protocol analyzer First quarter of 1997 - -------------------------------------------------------------------------------- Traffic Generator Host emulator Second quarter of 1996 - -------------------------------------------------------------------------------- Detective Bus and protocol analyzer First quarter of 1996 - --------------------------------------------------------------------------------
Merlin. Merlin, our first generation Bluetooth wireless protocol analyzer, was introduced in the first quarter of 2000. It was the first analyzer for the Bluetooth standard delivered to the market and our first analyzer for wireless communications. Merlin is a non-intrusive design verification system that provides Bluetooth network traffic capture, display and analysis. Advisor. Advisor, our fourth generation USB bus and protocol analyzer, was introduced in the first quarter of 2000. It was the first USB 2.0 analyzer delivered to the market and builds on our growing experience and knowledge of the development community's needs. Advisor captures, displays and analyzes signals transmitted at all three USB speeds, one and one-half, twelve and 480 Mbps. Chief. Chief, our third generation USB bus and protocol analyzer, was introduced in the first quarter of 1999. It incorporates advanced features, including dual channel recording, advanced triggering with event counting and sequencing capability, and automatic class and vendor specific decoding. Chief also incorporates software that operates as a stand-alone viewer and is backward compatible with the capture files from our earlier analyzers, the Detective and Inspector. The Chief Plus version permits simultaneous USB bus traffic generation. FireInspector. FireInspector, our first generation 1394 bus and protocol analyzer, was introduced in the second quarter of 1998. FireInspector was the first of our bus and protocol analyzers to incorporate our proprietary BusEngine technology. All of our subsequently developed analyzers are based on this modular design. The FireInspector Plus version permits simultaneous 1394 bus traffic generation. 40 Inspector. Inspector, our second generation USB bus and protocol analyzer, was introduced in the first quarter of 1997. It operates with any Windows-based desktop or portable design computer and provides real time event decoding. The hardware is housed in a separate enclosure that is connected to the design computer through the parallel port. Traffic Generator. Traffic Generator, our first generation USB host emulator, was introduced in the second quarter of 1996. It was the first emulator for USB delivered to the market. Traffic Generator functions as a flexible host that enables both device and hub developers to stress test their designs and observe product behavior under intentionally faulty bus conditions. Traffic Generator is complementary to both our Detective and Inspector products and is either sold separately or bundled with them. Detective. Detective, our first generation USB bus and protocol analyzer, was introduced in the first quarter of 1996. It was the first analyzer for USB delivered to the market. Detective is used by both hardware and software developers to identify design and implementation problems by analyzing messages transmitted over the bus. Detective consists of a circuit board that is inserted into the design computer and application software that is loaded onto this computer. Production Products Our production verification systems are also designed to assist hardware and software manufacturers in volume production of reliable devices and systems and software downloads onto new computers. Our production products consist of the following:
Name Type Introduction Date UPT Universal port tester First quarter of 2000 - ----------------------------------------------------------------------------------- EL2 USB/Ethernet link Third quarter of 1999 - ----------------------------------------------------------------------------------- USB4DOS Protocol stack for DOS First quarter of 1999 - ----------------------------------------------------------------------------------- UHT Hub tester First quarter of 1997 - ----------------------------------------------------------------------------------- HPT Host production tester Third quarter of 1996
- -------------------------------------------------------------------------------- UPT. The universal port tester, or UPT, our second generation USB port verification system, was introduced in the first quarter of 2000. UPT is used as a universal verification system on the production line by integrated circuit, circuit board, computer system and hub manufacturers to verify compliance with USB specifications. UPT is capable of verifying up to eight USB host or hub ports in less than 30 seconds. EL2. EL2, an industrial device that links USB and Ethernet channels, was introduced in the third quarter of 1999. It is used on the production line by computer manufacturers and assembly houses for loading test and data files on newly manufactured systems. We believe that EL2 is the only device available that connects a computer operating under the DOS operating system to an Ethernet network through a USB port. EL2 conforms to both USB and Ethernet specifications and operates at an effective data transfer rate of more than five Mbps. USB4DOS. USB4DOS, a software product for the DOS operating system, was introduced in the first quarter of 1999. It provides USB support under DOS for production line verification and embedded applications. USB4DOS is either sold separately or bundled with our EL2 product. 41 UHT. The universal hub tester, or UHT, our first generation USB hub verification system, was introduced in the first quarter of 1997. It is used on the production line by hub manufacturers to verify compliance with USB specifications and as an engineering tool for debugging and analysis. UHT is also used by the USB Implementers Forum for hub compliance verification and certification. UHT is capable of verifying hubs with up to four ports in less than ten seconds. HPT. The host production tester, or HPT, our first generation USB port verification system, was introduced in the third quarter of 1996. HPT is used on the production line by integrated circuit, circuit board and computer system manufacturers to verify compliance with USB specifications. It is capable of verifying compliance in computers with one or two USB ports in less than ten seconds. Connectivity Products Our connectivity products are designed to assist broadband Internet service providers in delivering convenient and dependable service and device manufacturers in producing reliable products. Our connectivity products consist of the following:
Name Type Introduction Date NetMate Plus USB/Ethernet link and hub Fourth quarter of 1999 - -------------------------------------------------------------------------------- USB-EL1210A USB/Ethernet controller ASIC Third quarter of 1999 - -------------------------------------------------------------------------------- NetMate USB/Ethernet link Fourth quarter of 1998 - --------------------------------------------------------------------------------
NetMate Plus. NetMate Plus, an integrated USB hub and connectivity device that links USB and Ethernet channels, was introduced in the fourth quarter of 1999. It provides the ability to connect up to four low or full speed USB devices, in conjunction with an Ethernet network, to any USB enabled desktop or portable computer. NetMate Plus, which conforms to both the USB and Ethernet standards, has a transfer rate of more than six Mbps. USB-EL1210A. USB-EL1210A, a USB/Ethernet Controller ASIC, was introduced in the third quarter of 1999. This ASIC combines the functionality of a USB controller and an Ethernet controller. We use EL1210A in both our EL2 and NetMate products and also sell it for use by other commercial connectivity device manufacturers. NetMate. NetMate, a commercial device that links USB and Ethernet channels, was introduced in the fourth quarter of 1998. It is used primarily for cable and DSL broadband Internet access by suppliers of these services. NetMate provides plug and play connectivity and eliminates the need to insert cards or shut down the system upon connection. NetMate consists of a small hardware device and the associated Windows software that add a standard Ethernet interface to a USB-equipped computer. NetMate has been tested successfully by the Microsoft Windows Hardware Quality Labs to ensure that NetMate meets Microsoft standards for compatibility with the Windows operating systems. 42 Customers Our customers include semiconductor, device, system and software companies and our distributors and value-added resellers. We have recognized at least $25,000 in revenue during the 12-month period ended June 30, 2000 from each of the following customers: 3Com Intel SCI Systems Apple Jabil Circuit Seagate AT&T Logitech Sepoong Belkin Components Lucent Technologies Shaw Communications CAE MediaOne Sierra Technologies Cisco Medtronic Solectron Comcast Cable Merritt Manufacturing Sony Compaq Microsoft Standard Microsystems Dell MicroWare Technology Sun Microsystems Dynacolor Motorola Terayon Enable Engineering NEC Texas Instruments Flash Technology Nohau Elektronik Thomson Consumer Electronics Fujitsu PC Panasonic Toshiba Gateway Philips Toyo Hewlett-Packard Proxim Xircom
Collectively, our top five customers accounted for approximately 42.3% of our revenue in the year ended December 31, 1999, which includes Toyo, our distributor in Japan, which accounted for approximately 18.8% of our revenue in the year ended December 31, 1999 and 12.9% in the six month period ended June 30, 2000. In addition, we recognized approximately 42.4% and 33.4% of our revenue from sales to our international customers in the same periods. Marketing, Sales and Distribution Our marketing efforts focus on developing corporate and product strategies and increasing our brand and product awareness. Our marketing group leads the creation of our strategic corporate direction and develops our product roadmap, including market studies, business potential analysis, competitive positioning, functional requirements and product lifecycle planning. Our brand and product awareness initiatives center on our strategic relationships with the core or promoter companies and also include active participation in communications standards groups, trade shows, compliance workshops and industry conferences. Our marketing group also provides technical and strategic sales support to our direct sales personnel, resellers and international distributors, including in- depth product training, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration and other support functions. We intend to continue to focus our marketing efforts on these strategies in the future. Our sales efforts are dedicated to establishing and maintaining long-term customer relationships. This support emphasizes customer satisfaction and includes the expertise and resources necessary for customers to use our products successfully. We provide product documentation, technical information and software bug fixes through our web site. We intend to continue to provide our customers with comprehensive sales and technical support and believe that this is critical to remaining competitive. Our distribution channels include a direct sales force and a network of distributors and value-added resellers. We sell our products in North America through our direct sales force and resellers. 43 Our direct sales force maintains close contact with our customers and provides support to both direct customers and resellers. We sell our products in Asia and Europe through distributors. Our direct sales force also maintains close contact with these distributors, which provide both sales and support in the countries they cover. To date, we have established relationships with distributors and resellers in over 25 countries in Asia and Europe. We are increasingly able to leverage customer satisfaction and our service-oriented approach to gain valuable introductions that have led to additional sales to existing customers and initial sales to new customers. We expect to continue benefiting from this trend in the future. In addition, we intend to expand our distribution efforts by pursuing relationships with additional distributors and resellers in our current markets and with new distributors and resellers in our future markets. Research and Development We believe that our future success depends, to a large extent, upon our ability to develop new products for established and emerging communications standards and to add improved features to our existing products. Our research and development efforts are focused on the development of technology and products that will enhance our position in our future markets. We intend to significantly expand our research and development team in the near future. For example, we have recently opened research and development centers in San Diego, California and Netanya, Israel. As of June 30, 2000, we employed 27 people in our research and development organization. Our research and development team is comprised of hardware and software design engineers with expertise in the design and application of computer and communications systems and devices, semiconductor devices, embedded software, software drivers and software applications. Our research and development expenses were approximately $3.5 million in the year ended December 31, 1999, $2.6 million in the year ended December 31, 1998, $1.2 million in the year ended December 31, 1997 and $1.9 million in the six month period ended June 30, 2000. As part of our research and development activities, we are engaged in formal and informal relationships with our customers worldwide as well as special interest groups for emerging communications standards. For example, in the first half of 2000, we participated in three USB and one Bluetooth compliance workshops, one USB 2.0, two Bluetooth and one 1394 developers conferences, an Intel Developer Forum, the Microsoft Windows Hardware Engineering Conference and the Applied Computing Conference. Technology We believe that we have a competitive advantage as a result of our knowledge and expertise covering multiple communications standards, computer and software architecture and advanced ASIC and programmable logic design. This expertise is enhanced by our advanced design tools and collaboration among our various design teams. The following is a summary of our technology position: Vertically Integrated Technology. We have a broad, vertically integrated technology base that includes the knowledge and expertise to: . design advanced ASICs; . use programmable logic in the form of microcontrollers and programmable logic devices, or PLDs, in real-time, embedded applications; 44 . design electronic circuit boards and systems; and . design and develop embedded software, software drivers and software applications. This technology base, coupled with the specific experience gained by designing previous generations of our products, enables us to provide reliable, easy to use and cost-effective products. Expertise in Multiple Standards. We have expertise in several communications standards including USB, USB 2.0, 1394, Bluetooth wireless technology and Ethernet and intend to extend our technology base to support additional emerging standards. We believe that our broad technology base allows us to quickly apply the expertise and technology incorporated in our existing product lines to new standards and products. Computer Architecture and Software. We have expertise in computer architecture and software, including all forms of internal and external device connectivity. Our products have a large software content at various levels, from embedded software to software drivers to software applications, and for different devices, computers and operating systems, such as DOS, Windows, Linux and Unix. Our computer architecture and software expertise allow us to bring easy to use, reliable and flexible products to market rapidly. Semiconductor and Programmable Logic Design. Our ability to integrate a complex design into an ASIC results in a product that we believe offers higher performance at lower power levels and lower cost than those products otherwise commercially available. The combination of programmable logic design techniques and non-volatile, or flash, memory adds flexibility and reliability to our products and allows us to add new features and capabilities to our products. Core Technology for Verification Systems. Our most recent verification systems are based on a common core of software and hardware technology. This technology simplifies and accelerates our development of verification systems for emerging communications standards, thereby reducing our time to market and allowing us to remain an early market mover. Manufacturing We use outside contract manufacturing services for printed circuit board fabrication, assembly and testing. We outsource the manufacture of our lower volume, higher margin products to several facilities located in the Silicon Valley area. We conduct final assembly, testing and quality assurance at our facility in Santa Clara, California. We outsource the turnkey manufacturing and assembly of our higher volume, lower margin products to several facilities located in Asia. This approach enables us to focus on our design strengths, reduce fixed costs and capital expenditures, and provide flexibility in meeting market demand. We do not have long-term contracts with any of our contract manufacturers. We design and develop a number of the key components of our products, including our ASIC, printed circuit boards and mechanical packaging. We also use inspection, testing and statistical process controls to assure product quality and reliability. Although we use standard parts and components for our products where possible, we currently purchase a few key components used in the manufacture of our products from single or limited sources. Our principal single source component suppliers include Altera, LSI Logic and Intel. Generally, purchase commitments with our single or limited source suppliers are on a purchase order basis. Any interruption or delay in the supply of any of these components, or the inability to procure these components from alternate sources at acceptable prices and within a 45 reasonable time, would substantially harm our business. In addition, qualifying additional suppliers could be time-consuming and expensive and might increase the likelihood of errors. Competition Our markets are highly competitive, and we expect competition to intensify in the future. We believe that the principal factors of competition are: . ease of product use; . speed and accuracy of products; . flexibility and programmability of products; . upgradability of products; . local support and service for products; . time to market with new products; and . breadth of product offerings. We believe that we compete favorably with respect to each of these factors and have gained significant market share in some of our target markets as a result. We believe our success has been driven by our vertically integrated technology, ability to generate customer loyalty and ability to anticipate market trends. The markets for advanced verification and connectivity products for emerging communications standards are highly competitive. We compete with multiple companies in various markets including 3A International in the markets for products that address the 1394 standard. In addition to these competitors, we may also face competition from other companies with new technologies or products based on emerging communications standards or large companies that may enter our target markets. Any of these or other potential competitors, as well as our existing competitors, may develop or acquire technologies that address our target markets more effectively and at a lower cost. In addition, these competitors may enter into strategic alliances or business combinations that increase their ability to innovate and address our markets. Intellectual Property We rely on a combination of copyright, trademark and trade secret laws to protect our intellectual property. However, we believe that factors such as the creativity and technological skills of our personnel, new product developments, frequent product enhancements, reliable customer service and product maintenance are more essential to establishing and maintaining a technology leadership position. We cannot provide any assurance that other companies will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, existing laws and our contractual arrangements provide only limited protection. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Expensive litigation may be necessary in the future to enforce our intellectual property rights. Our failure to enforce and protect our intellectual property rights or any adverse change in the laws protecting intellectual property rights could harm our business. 46 We expect that we will be subject to infringement claims as the number of products and competitors in our markets grows and the functionality of products further overlaps. From time to time, we may receive letters from third parties, including some of our competitors, alleging that our products infringe these parties' patent or other intellectual property rights. If any of these claims cannot be resolved through a license or similar arrangement, we could become a party to litigation. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with third parties that could arise in the future, we could be required to pay substantial damages, including treble damages if we are held to have willfully infringed, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop noninfringing technology, or to obtain licenses to the infringing technology. In addition, lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention from our business. To date, we have not received any letters of this nature. Facilities Our principal executive and administrative offices are located in a leased facility consisting of approximately 14,000 square feet of office space in Santa Clara, California. This lease expires in January 2002 and we have an option to renew the lease for an additional five-year period. In September 2000, we opened new facilities in Netanya, Israel, with approximately 3,500 square feet and in San Diego, California, with approximately 3,000 square feet. We believe that our existing facilities are adequate to meet our current and projected needs, or that suitable additional or substitute space will be available as needed. Employees As of September 15, 2000, we had 58 employees. Of these individuals, ten were in sales and marketing, 28 were in research and development, 13 were in operations and seven were in finance and administration. Our employees are not represented by any collective bargaining unit, and we believe our relations with our employees are satisfactory. Legal Proceedings We are not a party to any material legal proceedings. We may, from time to time, become a party to various legal proceedings arising in the ordinary course of business. 47 MANAGEMENT Executive Officers and Directors The following table sets forth, as of September 15, 2000, information regarding our executive officers and directors:
Name Age Position ---- --- -------- Dan Wilnai....................... 58 President, Chief Executive Officer and Chairman of the Board of Directors Peretz Tzarnotzky................ 52 Vice President, Chief Technology Officer and Director Dennis Evans..................... 48 Vice President, Chief Financial Officer and Secretary Albert Lee....................... 57 Vice President, Operations Joseph Mendolia.................. 47 Vice President, Sales and Marketing Srikumar Chandran................ 50 Vice President, Engineering Philip Pollok.................... 46 Director Jean-Louis Gassee................ 56 Director Roger W. Johnson................. 66 Director
Dan Wilnai, one of our co-founders, has served as our President, Chief Executive Officer and Chairman of the Board of Directors since our incorporation in February 1992 as well as our Secretary from our incorporation in February 1992 until August 2000. Prior to founding our company, from February 1985 to February 1992, Mr. Wilnai served as President of Summit Microsystems, a company that focused on the FDDI fiber optic local area network standard. From September 1974 to February 1985, Mr. Wilnai served as a program manager for Fairchild Camera & Instrument Corporation, a developer of high performance microprocessors and board-level products for military and commercial real-time applications. Mr. Wilnai holds a B.S. in Electrical Engineering from the Technion-Israel Institute of Technology. Peretz Tzarnotzky, one of our co-founders, has served as a member of our Board of Directors since our incorporation in February 1992 and our Vice President, Chief Technology Officer since July 2000. Mr. Tzarnotzky also served as our Vice President, Engineering from our incorporation in February 1992 to June 2000. Prior to founding our company, from November 1989 to July 1991, Mr. Tzarnotzky served as a systems engineering group manager at Cadence Design Systems, a developer of design automation products. Mr. Tzarnotzky holds a B.S.C. in Electrical Engineering from Ben-Gurion University of the Negev in Israel. Dennis Evans has served as our Vice President, Chief Financial Officer since May 2000 and our Secretary since August 2000. Prior to joining our company, from March 1997 to May 2000, Mr. Evans served as Vice President, Chief Financial Officer and Secretary of Whisper Communications, Inc., a designer and manufacturer of wireless telemetry systems. From February 1996 to March 1997, Mr. Evans served as the corporate controller of Sherpa Corporation, a developer and distributor of product data management software systems. From September 1993 to December 1995, Mr. Evans was assistant division manager at Space Applications Corporation. Mr. Evans holds a B.S. in Business Administration from California State University, Long Beach. Albert Lee has served as our Vice President, Operations since December 1997. Prior to joining our company, from July 1995 to June 1997, Mr. Lee served as Vice President of Operations with Hine Design, Inc., a designer and manufacturer of robotics systems for the semiconductor equipment industry. From February 1991 to July 1995, Mr. Lee served as the Vice President of Operations at 48 Advanced Molecular Systems, a designer and manufacturer of automated capillary electrophoresis systems. Mr. Lee holds a B.S. in Business Administration from the University of San Francisco. Joseph Mendolia has served as our as Vice President, Sales and Marketing since April 1999. Prior to joining our company, from May 1994 to April 1999, Mr. Mendolia served as Vice President of Sales and Marketing with SciNet, Inc., a designer, manufacturer and distributor of storage networking systems. From March 1992 to May 1994, Mr. Mendolia served as the North American sales manager for Adaptec, Inc., a designer and manufacturer of hardware and software products that enable data to be transferred from a computer to a peripheral or network device. Mr. Mendolia holds a B.S. in Computer Science and Mathematics from Pepperdine University. Srikumar Chandran has served as our Vice President, Engineering since June 2000. From February 1998 to June 2000, Mr. Chandran served as our Director of Engineering. Prior to joining our company, from July 1997 to February 1998, Mr. Chandran served as Director of Storage Systems Architecture with Storage Dimensions, a designer, manufacturer and distributor of high performance, high capacity data storage and back-up systems. From 1981 to July 1997, Mr. Chandran served in several capacities at Tandem Computers, a designer, manufacturer and distributor of enterprise servers, including, most recently, as section head of ServerNet Adapters and related firmware. Mr. Chandran holds a B.E. in Electrical Engineering from the University of Madras in India, an M.Tech in Control Systems from the Indian Institute of Technology in India and a M.S. in Computer Engineering from Oregon State University. Philip Pollok has served as one of our directors since February 1999. Since January 1999, Mr. Pollok has served as the Senior Vice President and General Manager of Business Line Networking of Philips Semiconductors, a division of Philips Electronics North American Corporation. From February 1998 to October 1998, Mr. Pollok served as the Business Unit Director of Wireless Communications at Mitel Semiconductor, a manufacturer of cellular, GPS, set top box, paging and wireless LAN products. From May 1994 to February 1998, Mr. Pollok served as the Communications Business Unit Director at GEC Plessey Semiconductors, a manufacturer of cellular, paging, wireless LAN and telecommunications products. Mr. Pollok holds a B.S. in Electronic Engineering from the University of Aston in Birmingham in the United Kingdom. Jean-Louis Gassee has served as one of our directors since September 2000. Since October 1990, Mr. Gassee has served as Chief Executive Officer and Director of Be Incorporated, a manufacturer of personal computer operating systems and Internet appliances. From February 1981 to October 1990, Mr. Gassee served in various capacities at Apple Computer, Inc. a manufacturer of personal computers, related products and communication solutions, most recently as the President of the Apple Products Division. Mr. Gassee serves on the boards of directors of 3Com Corporation, EFI Electronics Corporation and Logitech, International SA. Mr. Gassee holds a B.S. in Mathematics and Physics from Orsay University in France. Roger W. Johnson has served as one of our directors since September 2000. Since March 1996, Mr. Johnson has served as the President of R.W. Johnson and Associates, a private consulting firm. From June 1993 to March 1996, Mr. Johnson served as the Administrator of the United States General Services Administration. Mr. Johnson serves on the boards of directors of Collector's Universe, Inc., Maxtor Corporation and Sypris Solutions, Inc. Mr. Johnson holds a B.B.A. in Business Administration from Clarkson University and a M.B.A. in Industrial Management from the University of Massachusetts. 49 Board of Directors We currently have five members on our board of directors. Each director holds office until his or her term expires or until his or her successor is duly elected and qualified. Upon completion of this offering, our certificate of incorporation and bylaws will provide for a classified board of directors. In accordance with the terms of our certificate of incorporation, our board of directors will be divided into three classes whose terms will expire at different times. The three classes will be comprised of the following directors: . Class I consists of , who will serve until the annual meeting of stockholders to be held in 2001; . Class II consists of and , who will serve until the annual meeting of stockholders to be held in 2002; and . Class III consists of and , who will serve until the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders, beginning with the 2001 annual meeting, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or until their successors have been duly elected and qualified. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. Committees of the Board of Directors The board of directors has a compensation committee and an audit committee. The compensation committee of our board of directors reviews and makes recommendations to the board of directors regarding all forms of compensation and benefits provided to our officers. In addition, the compensation committee establishes and reviews general policies relating to the compensation and benefits of all our employees. The current members of the compensation committee are Philip Pollok, Jean-Louis Gassee and Roger Johnson. The audit committee of our board of directors reviews and monitors our internal accounting procedures, corporate financial reporting, external and internal audits, fee results and scope of the annual audit and other services provided by our independent accountants and our compliance with legal matters that have a significant impact on our financial reports. The current members of the audit committee are Philip Pollok, Jean-Louis Gassee and Roger Johnson. Compensation Committee Interlocks and Insider Participation The board of directors established its compensation committee in August 2000. Prior to establishing the compensation committee, the board of directors, as a whole, performed the functions delegated to the compensation committee. None of our compensation committee members has been an officer or employee of our company at any time since our formation. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or our compensation committee. See "Related Party Transactions" for a description of transactions between our company and entities affiliates with members of our compensation committee. 50 Director Compensation Other than expenses in connection with attendance at meetings, we currently do not compensate any non-employee member of our board of directors. Directors who are also employees currently do not receive additional compensation for serving as directors. Executive Compensation The following table sets forth information concerning compensation paid by us during the year ended December 31, 1999 to our Chief Executive Officer and each of our four other executive officers who received salary compensation of more than $100,000 in that year, referred to collectively in this prospectus as the "named executive officers." Mr. Evans joined our company in May 2000 at an annual base salary of $175,000. Summary Compensation Table
Long-term Compensation Annual Compensation Awards ---------------- ------------ Securities Underlying All Other Name and Principal Position Salary Bonus Options (#) Compensation(1) - --------------------------- -------- ------- ------------ --------------- Dan Wilnai....................... $194,441 $60,000 -- $10,612 President and Chief Executive Officer Albert Lee....................... 144,250 15,000 25,000 5,579 Vice President, Operations Peretz Tzarnotzky................ 181,121 54,000 -- 10,612 Vice President, Chief Technology Officer Srikumar Chandran................ 142,066 14,000 25,000 10,411 Vice President, Engineering Joseph Mendolia.................. 116,885 15,000 187,500 3,910 Vice President, Sales and Marketing
- -------- (1) Consists solely of contributions made to each executive officer's account under our 401(k) profit sharing plan. Option Grants in Last Year The following table sets forth information regarding stock options granted to the named executive officers during the year ended December 31, 1999. All of these options were granted pursuant to our 1994 stock option plan and have a term of ten years from the date of grant.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------- --------------------- Number of Securities Percentage of Underlying Total Options Options Granted in Exercise Expiration Name Granted (#) Fiscal 1999 Price ($) Date 5% 10% - ---- ----------- ------------- --------- ---------- ---------- ---------- Dan Wilnai.............. -- -- -- -- $ -- $ -- Albert Lee.............. 25,000 4.79% 0.60 7/1/09 504,957 804,060 Peretz Tzarnotzky....... -- -- -- -- -- -- Srikumar Chandran....... 25,000 4.79% 0.60 5/13/09 504,957 804,060 Joseph Mendolia......... 187,500 35.97% 0.60 4/14/09 3,787,180 6,030,451
51 In the year ended December 31, 1999, we granted options to purchase a total of 649,000 shares of common stock to our employees, executive officers and directors. Generally, we grant options at an exercise price equal to the fair market value of the underlying common stock on the date of grant, as determined by our board of directors, and the options vest over four years from the date of grant. In determining the fair market value of our common stock, our board of directors considers valuations of comparable companies and the lack of liquidity of our securities. Once we become a publicly-held company, the fair market value of our stock will equal its market trading price. In accordance with the rules of the SEC, the above table sets forth the potential realizable value over the ten-year period from the grant date to the expiration date, assuming rates of stock appreciation of 5% and 10%, compounded annually and calculated based on an assumed initial public offering price of $13.00 per share. These amounts do not represent our estimate of future stock price performance. Actual realizable values, if any, of stock options will depend on the future performance of our common stock. We have granted options to purchase shares of our common stock to our directors and executive officers under our 1994 stock option and 2000 stock option/stock issuance plans as described in "Related Party Transactions--Grants of Options." Aggregate Option Exercises in 1999 and Year-End Option Values The following table sets forth information for our named executive officers relating to the number and value of shares of common stock underlying exercisable and unexercisable options held at December 31, 1999. No options or stock appreciation rights were exercised during 1999 and no stock appreciation rights were outstanding as of December 31, 1999. The value of unexercised in-the-money options at December 31, 1999 is based on the assumed initial public offering price of $13.00 per share, less the per share exercise price, multiplied by the number of shares issuable upon exercise of the option. All options were granted under our 1994 stock option plan.
Number of Securities Underlying Value of Unexercised Unexercised Options as In-the-Money Options as of December 31, 1999 (#) of December 31, 1999 ($) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Dan Wilnai.................. -- -- $ -- $ -- Albert Lee.................. 70,313 142,187 887,519 1,789,181 Peretz Tzarnotzky........... -- -- -- -- Srikumar Chandran........... 46,875 103,125 592,875 919,925 Joseph Mendolia............. -- 187,500 -- 2,325,000
2000 Stock Incentive Plan Introduction. Our 2000 stock incentive plan is intended to serve as the successor equity incentive program to our 1994 stock option plan and our 2000 stock option/stock issuance plan, also referred to as the predecessor plans. The 2000 stock incentive plan was adopted by our board of directors and our stockholders on August 4, 2000. The 2000 stock incentive plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under the predecessor plans will be transferred to the 2000 stock incentive plan, and no 52 further option grants will be made under the predecessor plans. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 2000 stock incentive plan to those options. Except as otherwise noted below, the transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 2000 stock incentive plan. Share Reserve. 4,812,500 shares of our common stock have been authorized for issuance under the 2000 stock incentive plan. This share reserve consists of the number of shares we estimate will be carried over from the predecessor plans, including the shares subject to outstanding options thereunder, plus an additional increase of approximately 556,250 shares. The share reserve under our 2000 stock incentive plan will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2001, by an amount equal to four percent of the total number of shares of our common stock outstanding on the last trading day of December in the preceding calendar year, but in no event will this annual increase exceed 2 million shares. Equity Incentive Programs. Our 2000 stock incentive plan is divided into five separate components. . The discretionary option grant program, under which eligible individuals may be granted options to purchase shares of common stock at an exercise price not less than the fair market value of those shares on the grant date. . The stock issuance program, under which eligible individuals may be issued shares of our common stock directly, through the purchase of these shares at a price not less than their fair market value at the time of issuance or as a bonus tied to the attainment of performance milestones or the completion of a specified period of service. . The salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants. . The automatic option grant program, under which option grants will automatically be made at periodic intervals to our non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date. . The director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any annual retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 2000 stock incentive plan include our officers and other employees, our non-employee board members and any consultants that we hire. In addition, no participant in our 2000 stock incentive plan may be granted stock options, separately exercisable stock appreciation rights, and direct stock issuances for more than 500,000 shares of common stock per calendar year. Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the option grants or stock issuances are to be made, the number of shares subject to each 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 53 stock issuance and the maximum term for which any granted option is to remain outstanding. 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 if that program is activated for one or more calendar years. Plan Features. Our 2000 stock incentive plan includes the features described below. . The exercise price for any option granted under the plan may be paid in cash or in shares of our 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 these 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 that exercise or purchase. . The compensation committee has the authority to cancel outstanding options under the discretionary option grant program, including options transferred from our predecessor plans, in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the vested shares subject to the surrendered option, less the aggregate exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the outstanding options under our predecessor plans has any stock appreciation rights. Change in Control. The 2000 stock incentive plan includes change in control provisions that may result in the accelerated vesting of outstanding option grants and stock issuances described below. . If we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program that is not assumed by the successor corporation will become immediately exercisable for all the option shares, and all unvested shares under the discretionary grant option program and stock issuance program will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. . The compensation committee has complete discretion to structure one or more options under the discretionary option grant program so those options will vest as to all the option shares in the event those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. . The compensation committee also has the authority to grant options which will immediately vest in the event we are acquired, whether or not those options are assumed by the successor corporation. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will vest in connection with a successful 54 tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board of directors through one or more contested elections for board membership. This accelerated vesting may occur either at the time of such transaction or upon the subsequent termination of the individual's service. . The options currently outstanding under our 2000 stock option/stock issuance plan will immediately vest if we are acquired by a merger or sale of substantially all of our assets, unless those options are assumed by the acquiring entity or our repurchase rights with respect to any unvested shares subject to those options are assigned to that entity. However, a number of those options may also contain a special acceleration provision pursuant to which the shares subject to those options will immediately vest upon an involuntary termination of the optionee's employment within 18 months following an acquisition in which the repurchase rights with respect to those shares are assigned to the acquiring entity. . The options currently outstanding under our 1994 stock option plan will be assumed or an equivalent option substituted by an acquiring entity in a merger. Salary Investment Option Grant Program. If the compensation committee decides to activate this program for one or more calendar years, each of our executive officers and other selected highly compensated employees may elect, prior to the start of the calendar year, to reduce his or her base salary for the calendar year by a specified amount not less than $10,000 nor more than $50,000. Each selected individual who makes a timely election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an 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 our 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 option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount by which the optionee's salary is reduced under the program. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will automatically receive an option grant for 20,000 shares of common stock on the date that individual joins the board, provided the individual has not been in our prior employ. In addition, on the date of each annual stockholders' meeting held after the effective date of this offering, each non-employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board members, will automatically be granted an option to purchase 5,000 shares of common stock, provided the individual has served on the board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of ten years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option that are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 20,000 share automatic option grant will vest in a series of four successive annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. The shares subject to each 55 annual 5,000 share automatic option grant will vest in two installments upon the optionee's completion of each year of service on our board of directors over the two-year period measured from the grant date. However, the shares will immediately vest in full upon certain changes in control or upon the optionee's death or disability while a board member. Director Fee Option Grant Program. If this program is activated in the future, each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year 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 our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the retainer fee election is in effect. However, the option will become immediately exercisable for all the option shares upon the optionee's death or disability while serving as a board member and upon certain changes in control. Additional Program Features. Our 2000 stock incentive plan also has the features described below. . Outstanding options under the salary investment option grant, automatic option grant and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The board of directors may amend or modify the 2000 stock incentive plan at any time, subject to any required stockholder approval. The 2000 stock incentive plan will terminate no later than August 3, 2010. 2000 Employee Stock Purchase Plan Introduction. Our 2000 employee stock purchase plan was adopted by our board of directors and our stockholders on August 4, 2000. The plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of any of our future participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions. Share Reserve. 312,500 shares of our common stock will initially be reserved for issuance under the plan. The reserve will automatically increase on the first trading day in January of each 56 calendar year, beginning in calendar year 2001, by an amount equal to one percent of the total number of outstanding shares of our common stock on the last trading day in December in the prior calendar year. In no event will any annual reserve increase exceed 500,000 shares. Offering Periods. The plan will have a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period may have a duration in excess of 24 months and will start on the date the underwriting agreement for this offering is signed and will end on the last business day in 2002. The next offering period will start on the first business day in 2002, and subsequent offering periods will be set by our compensation committee. Eligible Employees. Individuals scheduled to work more than 20 hours per week for more than five months per calendar year may join an offering period on the start date of that period. However, employees may participate in only one offering period at a time. Payroll Deductions. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period in which the participant is enrolled or, if lower, 85% of the fair market value per share on the semi- annual purchase date. Semi-annual purchase dates will occur on the last business day of and each year. However, a participant may not purchase more than 5,000 shares on any purchase date, and not more than 100,000 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. Reset Feature. If the fair market value per share of our common stock on any purchase date is 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. All participants in the terminated offering period will automatically be transferred to the new offering period. Change in Control. Should we be acquired by merger or sale of substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price will be equal to 85% of the market value per share on the start date of the offering period in which the participant is enrolled at the time the acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. Plan Provisions. The following provisions will also be in effect under the plan: . The plan will terminate no later than the last business day of 2010. . The board may at any time amend, suspend or discontinue the plan. However, certain amendments may require stockholder approval. 401(k) Profit Sharing Plan In January 1996, we adopted a 401(k) profit sharing plan covering our full- time employees located in the United States. The plan is intended to qualify under Section 401(a) of the Internal Revenue Code, so that contributions to the plan by employees or by us on their behalf, and the investment earnings on these contributions, are not taxable to employees until withdrawn from the 57 plan and so that we can deduct our contributions, if any, when made. Pursuant to the plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,500 in 2000) and to have the amount of the reduction contributed to the plan. The plan permits, but does not require, us to provide additional matching contributions to the plan on behalf of all participants in the plan. We make contributions to the plan each pay period on behalf of all participants in an amount determined by the board of directors. In the year ended December 31, 1999, we contributed $162,493 on behalf of participants in the plan, of which $41,124 was contributed on behalf of our named executive officers. Employment Contracts and Change of Control Arrangements We have entered into employment agreements with Albert Lee, Srikumar Chandran, Joseph Mendolia and Dennis Evans, each of whom are executive officers of our company. On December 5, 1997, Albert Lee, our Vice President, Operations, entered into an employment agreement with us. The agreement provides for a starting annual salary of $125,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Lee meeting certain objectives as defined by company management. In connection with his employment, Mr. Lee was granted options to purchase up to 150,000 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.35. In the event Mr. Lee is involuntarily terminated without cause within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. On January 8, 1998, Srikumar Chandran, our Vice President, Engineering, entered into an employment agreement with us. The agreement provides for a starting annual salary of $130,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Chandran meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Chandran was granted options to purchase up to 125,000 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.35. On March 3, 1999, Joseph Mendolia, our Vice President, Sales and Marketing, entered into an employment agreement with us. The agreement provides for a starting annual salary of $100,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Mendolia meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Mendolia was granted options to purchase up to 187,500 shares of common stock pursuant to our 1994 stock option plan at a per share exercise price of $0.60. In the event Mr. Mendolia is involuntarily terminated without cause within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. On May 1, 2000, Dennis Evans, our Vice President, Chief Financial Officer, entered into an employment agreement with us. The agreement provides for a starting annual salary of $175,000. The agreement also provides for periodic achievement bonuses based on our company's financial performance and on Mr. Evans meeting certain objectives as defined by our company's management. In connection with his employment, Mr. Evans was granted options to purchase up to 187,500 shares of common stock, in accordance with our 2000 stock option/stock issuance plan at a per share exercise price of $2.00. This option grant was subject to board approval, and was approved by the board of directors in August 2000. In the event Mr. Evans is involuntarily terminated without cause after the 58 first twelve months of his employment or his employment is terminated within twelve months of a change of control, he will be entitled to a lump sum severance payment equal to six months of his base salary. Limitation of Liability and Indemnification Our certificate of incorporation limits the liability of directors to the maximum extent permitted by the Delaware General Corporation Law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws provide that we must indemnify our directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify our other officers, employees and other agents to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws would permit indemnification. Prior to the consummation of the offering, we will obtain an insurance policy covering directors and officers for claims they may otherwise be required to pay or for which we are required to indemnify them. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 59 RELATED PARTY TRANSACTIONS Sales of Stock Since our inception in February 1992, we have issued and sold shares of our common stock in private placement transactions as follows: . 1,500,000 shares at a price of $0.00008 per share in February 1992 to Dan Wilnai, the Chairman of our board of directors and our President, Chief Executive Officer and Secretary. . 1,000,000 shares at a price of $0.00008 per share in February 1992 to Peretz Tzarnotzky, a member of our board of directors and our Vice President, Chief Technology Officer. . 1,071,426 shares at a price of $0.9333 per share in March 1994 to Philips Semiconductors. Philip Pollok, a member of our board of directors, is the Senior Vice President and General Manager of Business Line Networking at Philips. In October 1997, each outstanding share of our common stock was split into four shares of common stock. Grants of Options From our inception in February 1992, we have granted options to purchase our common stock to our directors and executive officers as follows:
Number Grant of Exercise Name Date Shares Price - ---- -------- ------- -------- Srikumar Chandran..................................... 02/02/98 125,000 $0.35 05/13/99 25,000 0.60 08/04/00 31,250 2.00 Albert Lee............................................ 12/01/97 150,000 0.35 04/01/98 37,500 0.48 07/01/99 25,000 0.60 08/04/00 25,000 2.00 Joseph Mendolia....................................... 04/14/99 187,500 0.60 08/04/00 25,000 2.00 Dennis Evans.......................................... 08/04/00 187,500 2.00 Jean-Louis Gassee..................................... 9/06/00 25,000 4.00 Roger Johnson......................................... 9/06/00 25,000 4.00
Transactions with Directors and Officers In May 2000, Albert Lee, our Vice President, Operations, exercised options to purchase 87,500 of our common stock and paid an aggregate purchase price of $30,800 for these shares. In May 2000, we loaned $125,000 to Mr. Lee pursuant to a promissory note. The loan is full-recourse and secured by 87,500 shares of our common stock held by Mr. Lee. The note accrues interest at a rate of eight percent and is due on May 11, 2002 or upon termination of Mr. Lee's employment with our company. As of September 15, 2000, $128,507 remained outstanding on Mr. Lee's loan. In September 2000, Srikumar Chandran, our Vice President, Engineering, exercised options to purchase 50,000 shares of our common stock and paid an aggregate purchase price of $17,600 for these shares. In September 2000, Joseph Mendolia, our Vice President, Sales and Marketing, exercised options to purchase 33,750 shares of our common stock and paid an aggregate purchase price of $20,250 for these shares. 60 We sold products to Philips Semiconductors, a stockholder, and its affiliates totaling $95,000 in the year ended December 31, 1999, and $71,000 in the six month period ended June 30, 2000. Philip Pollock, a member of our board of directors, is the Senior Vice President and General Manager of Business Line Networking at Philips. In September 2000, some of our stockholders entered into an agreement to sell certain of their shares of our common stock to Agilent Technologies for $3 million and Toyo Corporation for $2 million at a price per share equal to the price paid by the public for our common stock in this offering. The selling stockholders include a family trust of Dan Wilnai, our President and Chief Executive Officer and the Chairman of our board of directors, of which Mr. Wilnai is a trustee; several members of Mr. Wilnai's family; a family trust of Peretz Tzarnotzky, our Vice President, Chief Technology Officer and a member of our board of directors, of which Mr. Tzarnotzky is a trustee; and Philips Semiconductors. Philip Pollok, a member of our board of directors, is the Senior Vice President and General Manager of Business Line Networking at Philips. The sale is expected to be completed upon the completion of this offering. If this offering is not completed by January 31, 2001, Agilent and Toyo each have agreed to purchase shares of our common stock directly from us in a private placement for $16.25 per share (this price is not adjusted for the 1.25 for 1 stock split referenced in beginning of this prospectus). We have agreed to indemnify Agilent in the event that the shares sold by the selling stockholders are delivered to Agilent with any restrictions on title. In September 2000, we entered into an agreement with Agilent Technologies Deutschland GmbH, an affiliate of Agilent Technologies, in which both we and Agilent agreed to license intellectual property to each other to allow each of us to jointly develop an Infiniband analyzer that can be utilized to provide probing and analysis of a single Infiniband link. We and Agilent will each develop one module for a prototype of analyzer, and each of us will independently develop, manufacture and sell its respective versions of the analyzer. Both versions will include our proprietary graphical user interface, the CATC Trace, and our CATC trademarks. We have entered into employment arrangements with our executive officers. See "Management--Employment Contracts and Change of Control Arrangements." We have made contributions to our 401(k) profit sharing plan on behalf of several of our executive officers. See "Management--401(k) Profit Sharing Plan." We have entered into an indemnification agreement with each of our directors and executive officers that provide for indemnification beyond what is provided for in our certificate of incorporation and bylaws. The indemnification agreements, among other things, indemnify our directors and executive officers for expenses they may incur as a result of any proceeding against them and against liabilities (other than liabilities arising from intentional or knowing and culpable violations of law) that may arise by reason of their status or service as directors or executive officers of our company or other entities to which they provide service at our request. We believe that these provisions and indemnification agreements are necessary to attract and retain qualified directors and officers. Policy Regarding Transactions with Affiliates We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties. All future transactions with affiliates, including any loans we make to our officers, directors, principal stockholders or other affiliates, will be approved by a majority of our board of directors, including a majority of the independent and disinterested members or, if required by law, a majority of disinterested stockholders, and will be on terms no less favorable to us than we could have obtained from unaffiliated third parties. 61 PRINCIPAL STOCKHOLDERS The table below sets forth information regarding the beneficial ownership of our common stock as of September 15, 2000 and as adjusted for this offering assuming no exercise of the underwriters' overallotment option, by: . each person, group of affiliated persons, or entity who is known by us to own beneficially more than 5% of our outstanding stock; . each of the named executive officers and directors; and . all of our directors and executive officers as a group. Each stockholder's percentage ownership in the following table is based on 14,826,940 shares of common stock outstanding as of September 15, 2000, which excludes shares of common stock issuable upon the closing of this offering, and treats as outstanding all options exercisable within 60 days of September 15, 2000 held by the particular stockholder and that are included in the first column. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Computer Access Technology Corporation, 2403 Walsh Avenue, Santa Clara, California 95051. Except as otherwise indicated and subject to applicable community property laws, to the best of our knowledge, the persons named in the table have sole voting and investment power for all of the shares of common stock held by them.
Shares Beneficially Owned ---------------------------- Percent Percent Before After Beneficial Owner Number Offering Offering - ---------------- ---------- -------- -------- 5% Stockholders: Philips Semiconductors(1)........................ 4,285,705 28.9% % Directors and Executive Officers: Dan Wilnai(2).................................... 5,965,000 40.2 Peretz Tzarnotzsky(3)............................ 4,000,000 27.0 Albert Lee(4).................................... 142,705 * * Srikumar Chandran(5)............................. 96,864 * * Joseph Mendolia(6)............................... 74,219 * * Philip Pollok(7)................................. 4,285,705 28.9 Dennis Evans..................................... -- * * Jean-Louis Gassee................................ -- * Roger Johnson.................................... -- * All directors and executive officers as a group (9 persons)..................................... 14,564,493 98.2
- -------- * Less than 1% of the outstanding shares of common stock (1) Philips Semiconductors is a division of Philips Electronics North American Corporation. The business address for Philips Semiconductors is 1109 McKay Dr. M/S 48 San Jose , CA 95131. The percentage of shares beneficially owned by Philips Semiconductors after the offering reflects the sale of an aggregate of shares to Agilent Technologies and Toyo Corporation as further described in "Related Party Transactions." (2) Mr. Wilnai's shares include an aggregate of 5,555,000 shares held by family trusts of which Mr. Wilnai is a trustee and 410,000 shares held by Mr. Wilnai's family members. The percentage of shares beneficially owned by Mr. Wilnai after the offering reflects the sale of an aggregate of shares to Agilent Technologies and Toyo Corporation as further described in "Related Party Transactions." (3) Mr. Tzarnotzsky's shares include 562,500 held by a family trust of which Mr. Tzarnotzsky is a trustee. The percentage of shares beneficially owned by Mr. Tzarnotzky after the offering reflects the sale of an aggregate of shares to Agilent Technologies and Toyo Corporation as further described in "Related Party Transactions." (4) Mr. Lee's shares include 55,205 shares subject to options exercisable within 60 days of September 15, 2000. (5) Mr. Chandran's shares include 46,864 shares subject to options exercisable within 60 days of September 15, 2000. (6) Mr. Mendolia's shares represents 40,469 shares of common stock subject to options exercisable within 60 days of September 15, 2000. (7) Mr. Pollok's shares include 4,285,705 shares of common stock held by Philips Semiconductors. Mr. Pollok is a Senior Vice President and General Manager of Business Line Networking of Philips Semiconductors and disclaims beneficial ownership of these shares, if any. 62 DESCRIPTION OF CAPITAL STOCK General Our certificate of incorporation authorizes the issuance of up to 100 million shares of common stock, $0.001 par value, and authorizes the issuance of 25 million shares of undesignated preferred stock, $0.001 par value. From time to time, our board of directors may establish the rights and preferences of the preferred stock. As of September 15, 2000, 14,826,940 shares of common stock were issued and outstanding and held by 35 stockholders. Upon the closing of this offering, there will be an aggregate of 18,326,940 shares of common stock issued and outstanding. The following description of our capital stock is, by necessity, not complete. We encourage you to refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement, of which this prospectus forms a part, and applicable provisions of Delaware law for a more complete description. Common Stock Each holder of common stock is entitled to one vote for each share of common stock held on all matters to be voted upon by the stockholders. Subject to preferences that may apply to any outstanding preferred stock that we may issue, the holders of common stock are entitled to receive ratably dividends, if any, that may be declared from time to time by our board of directors out of funds legally available for dividends. In the event of a liquidation, dissolution or winding up of our 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. Holders of common stock have 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 outstanding upon completion of this offering will be fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future. Preferred Stock Our board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until our board of directors determines the specific rights of the holders of that preferred stock. However, the effects might include, among other things: . restricting dividends on the common stock; . diluting the voting power of the common stock; . impairing the liquidation rights of the common stock; or . delaying or preventing a change in control of our company without further action by the stockholders. We have no present plans to issue any shares of preferred stock. 63 Compliance with California Law We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, certain provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of our board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval that may result in the frequent removal of a member or members of our board of directors; . places limitations on the distribution of dividends that may reduce or eliminate the possibility that a holder of our common stock will receive any dividends; . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares that may limit or restrict our ability to complete these types of transactions or incur additional expenses in doing so; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger that may limit or restrict our ability to complete these types of transactions or incur additional expenses in doing so. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market. If this condition occurs, then we will no longer be subject to Section 2115 as of the record date for our next annual meeting of stockholders. Antitakeover Effects of Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws Some provisions of our certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of our company. These provisions also may have the effect of preventing changes in the management of our company. The provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of our company to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire our company outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms. Undesignated Preferred Stock. Our certificate of incorporation authorizes our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by our board of directors at the time of issuance. 64 Elimination of Stockholder Action by Written Consent. Our certificate of incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by written consent. Stockholder Meetings. In addition, our certificate of incorporation and bylaws do not permit our stockholders to call a special meeting of stockholders. Only our chief executive officer, president or chairman of the board or a majority of our board of directors are permitted to call a special meeting of stockholders. Election and Removal of Directors. Our certificate of incorporation also provides that our board of directors is divided into three classes, with each director assigned to a class with a term of three years and that the number of directors may only be determined by our board of directors. Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting and that the chairman of the board has the authority to adjourn any meeting called by the stockholders. Amendment of Charter Provisions. Our bylaws also require a majority vote of members of our board of directors or a supermajority vote of stockholders to amend any provisions. Delaware Antitakeover Law. We are subject to Section 203 of the Delaware General Corporation Law, an antitakeover law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: -- employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or -- persons who are directors and also officers; and . on or after to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation's outstanding voting securities. We expect the existence of this provision to have an antitakeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that Section 203 may 65 discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Transfer Agent and Registrar The transfer agent and registrar for our common stock is . Listing We have applied to have our common stock listed for quotation on the Nasdaq National Market under the symbol "CATZ." 66 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market following this offering or the possibility of sales occurring could adversely affect prevailing market prices for our common stock or could impair our ability to raise capital through an offering of equity securities. After this offering, we will have outstanding 18,326,940 shares of common stock, based upon shares outstanding as of September 15, 2000, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options after September 15, 2000. All of the shares sold in this offering will be freely tradeable without restriction under the Securities Act except for any shares purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 14,826,940 shares of common stock held by existing stockholders are "restricted" shares as that term is defined in Rule 144 under the Securities Act. We issued and sold the restricted shares in private transactions in reliance upon exemptions from registration under the Securities Act. Restricted shares may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration, such as Rule 144 or 701 under the Securities Act, which are summarized below. Each of our officers, directors, employees and other stockholders has entered into a lock-up agreement with the underwriters in connection with this offering. These lock-up agreements provide that, with limited exceptions, our officers, directors, employees and stockholders have agreed not to offer, sell, contract to sell, dispose of, loan, pledge or grant any rights with respect to any of our shares or options to purchase any of our shares for a period of 180 days after the effective date of this offering. Robertson Stephens, Inc. may, in its sole discretion and at any time without prior notice, release all or any portion of the shares subject to these lock-up agreements. We have also entered into an agreement with Robertson Stephens, Inc. that we will not offer, sell or otherwise dispose of our common stock until 180 days after the effective date of this offering. Taking into account the lock-up agreements, 14,826,940 shares of our common stock will be available for sale in the public market under the provisions of Rule 144, 144(k) and 701 beginning 180 days after the effective date of this offering. Rule 144 In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including any of our affiliates, who has beneficially owned shares for at least one year, including the holding period of any prior owner who is not an affiliate, is entitled to sell within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . one percent of the then-outstanding shares of our common stock, which will be approximately 183,269 shares immediately after this offering; or . the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC, subject to restrictions. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. To the extent that shares were acquired from one of our affiliates, a person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. The foregoing summary of Rule 144 is not a complete description. 67 Rule 144(k) Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner then an affiliate, is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)" shares may be sold immediately upon the completion of this offering. Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory share plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some restrictions, including the holding period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of options, including exercises after the effective date of this offering. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the effective date of this offering, may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement. Stock Options We intend to file a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance under our 2000 stock incentive plan and our 2000 employee stock purchase plan. We expect this registration statement to be filed and to become effective as soon as practicable after the effective date of this offering. Shares of common stock issued upon exercise of options under the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates and subject to the contractual restrictions described above. As of June 30, 2000, options to purchase 1,356,250 shares of common stock were outstanding, of which options to purchase approximately 657,500 shares were then vested and exercisable. Beginning 180 days after the effective date of this offering, approximately shares issuable upon the exercise of vested stock options will become eligible for sale in the public market, if the options are exercised. 68 UNDERWRITING The underwriters named below, acting through their representatives, Robertson Stephens, Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and Needham & Company, Inc., have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock shown opposite their names below. The underwriters are committed to purchase and pay for all of these shares if any are purchased.
Number of Underwriters Shares ------------ ------ Robertson Stephens, Inc. ............................................. CIBC World Markets Corp. ............................................. SG Cowen Securities Corporation....................................... Needham & Company, Inc. .............................................. ---- Total............................................................... ====
The representatives of the underwriters have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price shown on the cover page of this prospectus and to dealers at that price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the completion of this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction will change the amount of proceeds we are to receive as shown on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. Robertson Stephens, Inc. expects to deliver the shares on , 2000. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 525,000 additional shares of common stock at the same price per share as we will receive for the 3,500,000 shares that the underwriters have agreed to purchase from us. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the 3,500,000 shares are being sold. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the shares of common stock in this offering. The following table shows the per share and total underwriting discounts and commissions that we are to pay to the underwriters. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment option.
Total ------------------- Without With Per Over- Over- Share Allotment Allotment ----- --------- --------- Public offering price.............................. $ $ $ Underwriting discounts and commissions............. $ $ $ Proceeds, before expenses, to us................... $ $ $
Expenses of this Offering. The expenses of this offering, other than the underwriting discounts and commissions, are estimated at approximately $1.1 million and are payable entirely by us. 69 Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements. Each of our executive officers, directors, stockholders and option holders has agreed, subject to limited exceptions, not to offer, sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for common stock owned by the holder as of the date of this prospectus or acquired directly from us or with respect to which these holders have or may acquire the power of disposition, without the prior written consent of Robertson Stephens, Inc. However, Robertson Stephens, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the underwriters and any of our stockholders providing consent by the representatives to the sale of shares before the expiration of the 180-day lock-up period. This restriction terminates after the close of trading of the shares on the 180th day after, and including, the day the shares began trading on the NASDAQ National Market. Future Sales By Us. In addition, we have agreed that, for a period of 180 days after the date of this prospectus, we will not, without the prior written consent of Robertson Stephens, Inc. (a) consent to the disposition of any shares held by stockholders before the expiration of the 180-day lock-up period or (b) issue, sell, contract to sell or otherwise dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than our sale of shares in this offering, the issuance of shares of common stock upon the exercise of options outstanding on the date of this prospectus and the grant of options to purchase shares of common stock under existing employee stock option or stock purchase plans. Directed Shares. At our request, the underwriters will reserve up to 175,000 shares of common stock for sale in this offering, at the initial public offering price, to our customers, partners and business associates. The number of shares of common stock available for sale to the general public will be reduced to the extent that these individuals purchase all or a portion of the reserved shares. Any reserved shares that are not purchased will be offered by the underwriters to the general public on the same basis as the other shares of common stock offered by this prospectus. We have agreed to indemnify the underwriters of the directed share program against liabilities and expenses, including liabilities under the Securities Act, in connection with the sale of the reserved shares. No Prior Public Market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined through negotiations between us and the representatives. Among the factors to be considered in these negotiations are prevailing market conditions, our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential and the present state of our development. The underwriters do not expect sales of shares of common stock offered by this prospectus to any accounts over which they exercise discretionary authority to exceed 5% of the shares offered. Syndicate Short Sales. The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a 70 "covered" short position to the extent that it does not exceed the 525,000 shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. Stabilization. The representatives have advised us that, under Regulation M under the Exchange Act, they may engage in transactions, including stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to claim the selling concession otherwise accruing to an underwriter or syndicate member in connection with the offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in the open market in a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that stabilizing bids and open market purchases may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 71 LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Francisco, California. Legal matters will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS The consolidated financial statements of Computer Access Technology Corporation as of December 31, 1998 and December 31, 1999 and June 30, 2000 and for each of the three years in the period ended December 31, 1999 and the six month period ended June 30, 2000 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC, a registration statement on Form S-1 under the Securities Act, relating to the common stock sold in this offering. This prospectus does not contain all of the information contained in the registration statement and its exhibits and schedule. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits and schedule. Statements in this prospectus about the contents of any contract, agreement or other document referred to are not necessarily complete and you should refer to the copy of that contract or other document filed as an exhibit to the registration statement. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may read a copy of the registration statement, including exhibits, at the SEC public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain copies of these documents upon payment of a duplication fee. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy information statements and other information regarding registrants that file electronically with the SEC. The address of this web site is http://www.sec.gov. As a result of the offering, the information and reporting requirements of the Securities Exchange Act of 1934 will apply to us. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law. 72 COMPUTER ACCESS TECHNOLOGY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Income.......................................... F-4 Consolidated Statement of Stockholders' Equity............................. F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Computer Access Technology Corporation The reincorporation and stock split described in Note 10 to the consolidated financial statements had not been consummated as of September 28, 2000. When it has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Computer Access Technology Corporation at June 30, 2000, December 31, 1999 and 1998, and the results of their operations and their cash flows for the six month period ended June 30, 2000 and for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California August 3, 2000 except for Note 10 as to which the date is September 28, 2000 F-2 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
June December 31, 30, --------------- ------- 1998 1999 2000 ------ ------- ------- ASSETS Current assets: Cash and cash equivalents.......................... $2,215 $ 4,195 $ 5,158 Short-term investments............................. -- -- 1,161 Trade accounts receivable, net of allowance for doubtful accounts of $40, $58 and $79 in 1998, 1999 and 2000..................................... 1,046 2,166 2,995 Related party receivable........................... 83 95 71 Inventories........................................ 373 673 959 Deferred tax assets................................ -- 250 976 Other current assets............................... 12 2 339 ------ ------- ------- Total current assets............................. 3,729 7,381 11,659 Property and equipment, net.......................... 179 255 334 Other assets......................................... 18 18 25 ------ ------- ------- $3,926 $ 7,654 $12,018 ====== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 235 $ 370 $ 538 Accrued expenses................................... 489 1,238 1,470 Deferred revenue................................... -- -- 1,726 ------ ------- ------- Total current liabilities........................ 724 1,608 3,734 Deferred rent........................................ -- 19 15 ------ ------- ------- Total liabilities................................ 724 1,627 3,749 ------ ------- ------- Commitments (Note 8) Stockholders' equity: Common Stock, $0.001 par value, 100,000,000 shares authorized, 14,285,705 shares issued and outstanding as of December 31, 1998 and 1999 and 14,580,080 shares issued and outstanding as of June 30, 2000..................................... 14 14 15 Additional paid-in capital......................... 2,454 5,039 5,691 Deferred stock-based compensation.................. (754) (1,776) (1,442) Retained earnings.................................. 1,488 2,750 4,005 ------ ------- ------- Total stockholders' equity....................... 3,202 6,027 8,269 ------ ------- ------- $3,926 $ 7,654 $12,018 ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Year Ended December Six Month Period 31, Ended June 30, --------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------- ----------- ------ (unaudited) Revenue............................... $4,169 $6,771 $12,506 $5,289 $8,782 Cost of revenue (inclusive of amortization of deferred stock-based compensation of none, $242, $243, $99 (unaudited) and $112 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)........................ 764 1,437 3,136 1,237 2,168 ------ ------ ------- ------ ------ Gross profit.......................... 3,405 5,334 9,370 4,052 6,614 ------ ------ ------- ------ ------ Operating expenses: Research and development (exclusive of amortization of deferred stock- based compensation of none, $290, $656, $266 (unaudited) and $336 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 1,210 2,572 3,538 1,751 1,882 Sales and marketing (exclusive of amortization of deferred stock- based compensation of none, $162, $643, $79 (unaudited) and $410 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 431 800 1,194 572 1,103 General and administrative (exclusive of non-cash stock-based compensation of none, none, $21, none (unaudited) and $26 in 1997, 1998, 1999, and the six month period ended June 30, 1999 and 2000, respectively)................ 340 345 434 171 433 Amortization of deferred stock-based compensation....................... -- 452 1,320 345 772 ------ ------ ------- ------ ------ Total operating expenses........... 1,981 4,169 6,486 2,839 4,190 ------ ------ ------- ------ ------ Income from operations................ 1,424 1,165 2,884 1,213 2,424 Interest income....................... 56 80 138 54 156 ------ ------ ------- ------ ------ Income before provision for income taxes................................ 1,480 1,245 3,022 1,267 2,580 Provision for income taxes............ 556 708 1,760 656 1,325 ------ ------ ------- ------ ------ Net income............................ $ 924 $ 537 $ 1,262 $ 611 $1,255 ====== ====== ======= ====== ====== Net income per share: Basic............................... $ 0.06 $ 0.04 $ 0.09 $ 0.04 $ 0.09 ====== ====== ======= ====== ====== Diluted............................. $ 0.06 $ 0.04 $ 0.08 $ 0.04 $ 0.08 ====== ====== ======= ====== ====== Weighted average shares outstanding Basic............................... 14,286 14,286 14,286 14,286 14,359 ====== ====== ======= ====== ====== Diluted............................. 14,507 15,079 15,084 15,226 15,508 ====== ====== ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-4 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Month Period Ended June 30, 2000 and Year Ended December 31, 1999, 1998 and 1997 (in thousands, except share data)
Common Stock Additional Deferred ----------------- Paid-In Stock-Based Retained Shares Amount Capital Compensation Earnings Total ---------- ------ ---------- ------------ -------- ------ Balance as of December 31, 1996............... 14,285,705 $14 $1,006 $ -- $ 27 $1,047 Net income............ -- -- -- -- 924 924 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1997............... 14,285,705 14 1,006 -- 951 1,971 Deferred stock-based compensation......... -- -- 1,448 (1,448) -- -- Amortization of deferred stock-based compensation......... -- -- -- 694 -- 694 Net income............ -- -- -- -- 537 537 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1998............... 14,285,705 14 2,454 (754) 1,488 3,202 Deferred stock-based compensation......... -- -- 2,585 (2,585) -- -- Amortization of deferred stock-based compensation......... -- -- -- 1,563 -- 1,563 Net income............ -- -- -- -- 1,262 1,262 ---------- --- ------ ------- ------ ------ Balance as of December 31, 1999............... 14,285,705 14 5,039 (1,776) 2,750 6,027 Exercise of common stock options........ 294,375 1 102 -- -- 103 Deferred stock-based compensation......... -- -- 550 (550) -- -- Amortization of deferred stock-based compensation......... -- -- -- 884 -- 884 Net income............ -- -- -- -- 1,255 1,255 ---------- --- ------ ------- ------ ------ Balance as of June 30, 2000................... 14,580,080 $15 $5,691 $(1,442) $4,005 $8,269 ========== === ====== ======= ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-5 COMPUTER ACCESS TECHNOLOGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December Six Month Period 31, Ended June 30, ----------------------- ------------------- 1997 1998 1999 1999 2000 ------ ------ ------- ----------- ------- (unaudited) Cash flows from operating activities: Net income...................... $ 924 $ 537 $ 1,262 $ 611 $ 1,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.. 24 44 88 43 57 Provision for doubtful accounts...................... 40 -- 18 -- 21 Amortization of deferred stock- based compensation............ -- 694 1,563 444 884 Loss on disposal of property and equipment................. -- -- 9 -- -- Changes in assets and liabilities: Accounts receivable.......... 45 (581) (1,150) (981) (826) Inventories.................. (186) (115) (300) (165) (286) Deferred tax assets.......... -- -- (250) (184) (726) Other assets................. 12 5 10 12 (219) Accounts payable............. 49 72 135 275 168 Accrued expenses............. 486 (104) 749 227 232 Deferred revenue............. -- -- -- -- 1,726 Deferred rent................ -- -- 19 19 (4) ------ ------ ------- ------ ------- Net cash provided by operating activities...... 1,394 552 2,153 301 2,282 ------ ------ ------- ------ ------- Cash flows from investing activities: Acquisition of property and equipment...................... (58) (153) (173) (111) (136) Purchase of short-term investments.................... -- -- -- -- (1,161) Other assets.................... -- -- -- -- (125) ------ ------ ------- ------ ------- Net cash used in investing activities................ (58) (153) (173) (111) (1,422) ------ ------ ------- ------ ------- Cash flows from financing activities: Proceeds from exercise of stock options........................ -- -- -- -- 103 ------ ------ ------- ------ ------- Net cash provided by financing activities...... -- -- -- -- 103 ------ ------ ------- ------ ------- Net increase in cash and cash equivalents..................... 1,336 399 1,980 190 963 Cash and cash equivalents at beginning of period............. 480 1,816 2,215 2,215 4,195 ------ ------ ------- ------ ------- Cash and cash equivalents at end of period....................... $1,816 $2,215 $ 4,195 $2,405 $ 5,158 ====== ====== ======= ====== ======= Supplemental information: Cash paid for income taxes....... $ 137 $ 877 $ 1,063 $ 855 $ 1,625 ====== ====== ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--THE COMPANY: Computer Access Technology Corporation (the "Company") was incorporated in California in February 1992. The Company will reincorporate in Delaware prior to the effectiveness of its initial public offering (see Note 10). The Company designs, manufactures and markets advanced verification systems and connectivity products for existing and emerging digital communications standards such as Universal Serial Bus, IEEE 1394, Bluetooth wireless technology and Ethernet for semiconductor, device, system and software companies in the United States, Europe and Asia. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist principally of investments in money market funds. Short-term investments The Company accounts for short-term investment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities." Debt and equity securities are classified as available-for-sale securities and are reported at fair market value with any unrealized holding gains and losses excluded from current earnings and reported in stockholders' equity. As of June 30, 2000, there was no significant difference between the cost of investments and their fair market value. Revenue recognition The Company has adopted Statement of Position ("SOP") 97-2, Software Revenue Recognition. Under SOP 97-2, the Company recognizes revenue to resellers and endusers upon shipment provided that there is persuasive evidence of an arrangement, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is probable. The Company does not provide resellers or customers price protection, return or exchange rights. When the Company has shipped a product but certain elements essential to the functionality of the product have not been completed, revenue and associated cost of revenue are deferred until the remaining elements have been delivered. Provisions for warranty costs are recorded at the time products are shipped. F-7 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair value of financial instruments The reported amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term investments, receivables, accounts payable and accrued expenses approximate fair value due to their short maturities. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market value. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is three years for computers and software, and five years for all other assets. Research and development Research and development costs are charged to operations as incurred. Software development costs incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. Costs incurred from the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material. To date, all software development costs have been expensed as incurred. Income taxes The Company accounts for income taxes under the liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of the Company's assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized. Advertising and promotional costs Advertising and promotional costs are charged to operations as incurred. Advertising and promotional costs for the year ended December 31, 1997, 1998 and 1999, and for the six month period ended June 30, 1999 (unaudited) and 2000 were $65,000, $136,000, $156,000, $54,000 and $191,000, respectively. Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. F-8 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company limits its exposure to loss by placing its cash and cash equivalents with financial institutions in the United States and Israel. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company performs ongoing credit evaluations of its customers' financial condition and historically has not experienced significant bad debts related to accounts receivable. Revenue and accounts receivable of the customers comprising more than 10% of revenue or receivables are summarized as follows:
Year Ended Six Month Period December 31, Ended June 30, ---------------- ---------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ---- (unaudited) Revenue: Company A.................................. 17% 22% 19% 18% 13% Company B.................................. 17% 12% 7% 17% 6% Accounts receivable: Company A.................................. 21% 29% 15% 41% 15% Company B.................................. 20% 14% 13% 16% 14%
Comprehensive income Comprehensive income is defined as changes in equity of a company from transactions, other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. There is no difference between net income and comprehensive income for the Company in any of the periods presented. Foreign currency translation The functional currency of the Company's foreign subsidiary is the U.S. dollar. All assets and liabilities denominated in foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at the average rates of exchange prevailing during the period. Gains and losses resulting from foreign currency translations and transactions are included in the consolidated statements of income and have not been significant. Net income per share The Company computes net income per share in accordance with SFAS No. 128, Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income per share excludes potential common stock if their effect is antidilutive. Potential common stock consists of incremental common shares issuable upon the exercise of stock options. F-9 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands except per share data):
Year Ended December Six Month Period 31, Ended June 30, -------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------ ----------- ------ (unaudited) Numerator: Net income............................ $ 924 $ 537 $1,262 $ 611 $1,255 ====== ====== ====== ====== ====== Denominator: Weighted average shares outstanding... 14,286 14,286 14,286 14,286 14,359 ------ ------ ------ ------ ------ Denominator for basic calculation..... 14,286 14,286 14,286 14,286 14,359 Dilutive effect of stock options...... 221 793 798 940 1,149 ------ ------ ------ ------ ------ Denominator for diluted calculation... 14,507 15,079 15,084 15,226 15,508 ====== ====== ====== ====== ====== Net income per share: Basic................................. $ 0.06 $ 0.04 $ 0.09 $ 0.04 $ 0.09 ====== ====== ====== ====== ====== Diluted............................... $ 0.06 $ 0.04 $ 0.08 $ 0.04 $ 0.08 ====== ====== ====== ====== ======
Stock-based compensation The Company measures stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and recognizes the related expense in accordance with Financial Accounting Standards Board Interpretation ("FIN") No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's common stock and the exercise price. SFAS No. 123 defines a "fair value" based method of accounting for an employee stock option or similar equity investment. The pro forma disclosures of the difference between the compensation expense included in net income and the related cost measured by the fair value method are presented in Note 4. Interim results The interim consolidated financial statements as of June 30, 2000 and for the six month period ended June 30, 1999 (unaudited) and 2000 have been prepared on the same basis as the annual consolidated financial statements as of December 31, 1999 and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's consolidated financial position as of June 30, 2000 and its results of operations and cash flows for the six month period ended June 30, 1999 (unaudited) and 2000. The results for the six month period ended June 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. F-10 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be reported either in the statement of income or as a deferred item depending on the type of hedge relationship that exists with respect to these derivatives. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until fiscal years commencing after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment of FASB Statement No. 133, which deferred the effective date of SFAS No. 133 until the quarter ending March 31, 2001. Accordingly, the Company will adopt SFAS No. 133 in its quarter ending March 31, 2001 and has not determined whether the adoption of this pronouncement will have a material impact on its consolidated financial condition or consolidated results of operations. In December 1999, the Securities and Exchange Commission issued SAB No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date for implementation of SAB 101 until the fourth quarter of fiscal 2000. The Company believes that its current revenue recognition policies comply with SAB 101. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - An interpretation of APB Opinion No. 25 ("FIN 44"). This Interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after December 15, 1998, or January 12, 2000. The Company believes that FIN 44 will not have a material effect on its consolidated financial position or consolidated results of operations. Segment information The Company identifies its operating segments based on business activities and geographical location. For all periods presented, the Company operated in three segments: development products, production products and connectivity products. See Note 9 for disclosure of segment information. F-11 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 3--BALANCE SHEET COMPONENTS: Inventories consist of the following (in thousands):
December 31, June 30, ------------ -------- 1998 1999 2000 ---- ------ -------- Raw materials......................................... $49 $137 $305 Work in progress...................................... 1 79 161 Finished goods........................................ 323 457 493 ---- ------ ------ $373 $673 $959 ==== ====== ====== Property and equipment consists of the following (in thousands): December 31, June 30, ------------ -------- 1998 1999 2000 ---- ------ -------- Computers and equipment............................... $246 $363 $480 Furniture and fixtures................................ 18 65 84 ---- ------ ------ 264 428 564 Less: Accumulated depreciation........................ (85) (173) (230) ---- ------ ------ $179 $255 $334 ==== ====== ====== Accrued expenses consist of the following (in thousands): December 31, June 30, ------------ -------- 1998 1999 2000 ---- ------ -------- Income taxes payable.................................. $308 $ 956 $ 658 Employee benefits and other........................... 181 282 812 ---- ------ ------ $489 $1,238 $1,470 ==== ====== ======
F-12 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--STOCK OPTION PLAN: In 1994, the Company adopted the 1994 Stock Option Plan (the "Plan") under which shares of the Company's common stock are reserved for issuance to employees and consultants. The Company had reserved a total of 2,750,000 shares of common stock for issuance under the Plan. Options issued under the Plan vest over four years. A summary of the activity under the Plan, since its inception, is set forth below (in thousands, except per share data):
Weighted- Options Average Available Options Exercise for Grant Outstanding Price --------- ----------- --------- Balance, December 31, 1996................... 2,473 278 $0.29 Options granted............................ (505) 505 $0.35 Options canceled........................... 75 (75) $0.30 ----- ----- Balance, December 31, 1997................... 2,043 708 $0.33 Options granted............................ (531) 531 $0.40 Options canceled........................... 16 (16) $0.35 ----- ----- Balance, December 31, 1998................... 1,528 1,223 $0.36 Options granted............................ (649) 649 $0.59 Options canceled........................... 180 (180) $0.37 ----- ----- Balance, December 31, 1999................... 1,059 1,691 $0.44 Options granted............................ (75) 75 $0.80 Options exercised.......................... -- (295) $0.35 Options canceled........................... 115 (115) $0.55 ----- ----- Balance, June 30, 2000....................... 1,099 1,356 $0.46 ===== =====
Significant option groups outstanding as of June 30, 2000, and related weighted-average exercise price and contractual life information are as follows:
Options Outstanding Options Exercisable -------------------------------------------- ----------------------------- Weighted- Average Remaining Contractual Exercise Number of Life Number of Exercise Price Shares (Years) Shares Price -------- --------- ----------- --------- -------- (in thousands) (in thousands) $0.27 48 5.52 46 $0.27 $0.30 65 6.16 63 $0.30 $0.35 516 7.64 329 $0.35 $0.48 197 8.33 96 $0.48 $0.60 471 9.05 124 $0.60 $0.80 59 10.00 -- $0.80 ----- --- 1,356 658 ===== ===
F-13 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-based compensation In connection with certain stock option grants in 1998, 1999 and 2000, the Company recorded deferred stock-based compensation totaling $4,583,000, which represents the difference between the exercise price and the deemed fair value at the date of grant, which is being recognized over the vesting period of the related options. Future amortization of deferred stock-based compensation on grants prior to June 30, 2000 is estimated to be approximately $578,000, $610,000, $222,000, and $32,000 in the six month period ending December 31, 2000 and the year ending December 31, 2001, 2002 and 2003 respectively, and may change due to the granting of additional options in future periods. Fair value disclosures The weighted-average fair values of options granted during the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000, under the Company's stock option plan were $0.80, $2.21, $4.10, $3.64 and $8.44, respectively. In determining the fair value of options granted in each of the periods, the Company used the minimum value option pricing model and assumed the following:
Six Month Period Ended Year Ended December 31, June 30, --------------------------------- ----------------------- 1997 1998 1999 1999 2000 --------- ----------- ----------- ----------- ----------- (unaudited) Expected life (in years)................. 4 4 4 4 4 Risk-free interest rate................... 5.7%-6.6% 4.62%-5.77% 4.18%-5.84% 4.18%-5.44% 5.97%-6.58% Volatility.............. 0% 0% 0% 0% 0% Dividend yield.......... 0% 0% 0% 0% 0%
Had compensation costs been determined based upon the fair value at the grant date for awards under the Plan, consistent with the methodology prescribed under SFAS No. 123, the Company's pro forma net income and pro forma basic and diluted net income per share under SFAS No. 123 would have been (in thousands, except per share data):
Year Ended Six Month Period December 31, Ended June 30, ------------------ ------------------ 1997 1998 1999 1999 2000 ----- ----- ------ ----------- ------ (unaudited) Net income As reported......................... $ 924 $ 537 $1,262 $ 611 $1,255 Pro forma........................... $ 910 $ 495 $1,222 $ 590 $1,232 Net income per share, as reported Basic............................... $0.06 $0.04 $ 0.09 $0.04 $ 0.09 Diluted............................. $0.06 $0.04 $ 0.08 $0.04 $ 0.08 Net income per share, pro forma Basic............................... $0.06 $0.03 $ 0.09 $0.04 $ 0.09 Diluted............................. $0.06 $0.03 $ 0.08 $0.04 $ 0.08
NOTE 5--EMPLOYEE BENEFIT PLANS: In January 1996, the Company adopted the Computer Access Technology Corporation 401(k) Profit Sharing Plan (the "401(k) Plan") covering full-time employees located in the United States. F-14 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code, so that contributions to the 401(k) Plan by employees or by the Company, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) Plan and so that the Company can deduct contributions, if any, when made. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,500 in 2000) and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, that the Company provides additional matching contributions to the 401(k) Plan on behalf of all participants in the 401(k) Plan. In the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000, the Company made contributions of $53,000, $104,000, $162,000, $40,000 and $46,000, respectively. NOTE 6--INCOME TAXES: The provision for income taxes included the following (in thousands):
Year Ended Six Month Period December 31, Ended June 30, ------------------ ------------------ 1997 1998 1999 1999 2000 ---- ---- ------ ----------- ------ (unaudited) Federal: Current............................ $527 $619 $1,515 $567 $1,620 Deferred........................... 109 116 361 131 431 ---- ---- ------ ---- ------ 636 735 1,876 698 2,051 ---- ---- ------ ---- ------ State: Current............................ (77) (23) (110) (39) (623) Deferred........................... (3) (4) (6) (3) (103) ---- ---- ------ ---- ------ (80) (27) (116) (42) (726) ---- ---- ------ ---- ------ $556 $708 $1,760 $656 $1,325 ==== ==== ====== ==== ======
The reconciliation between the effective tax rates and statutory federal income tax rate is shown in the following table:
Year Ended Six Month Period December 31, Ended June 30, ---------------- ---------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ---- (unaudited) Statutory federal income tax rate...... 34.0% 34.0% 34.0% 34.0% 34.0% State taxes, net of federal income tax benefit............................... 4.7 3.8 7.7 6.6 7.0 Amortization of deferred stock-based compensation.......................... -- 20.2 17.6 12.4 11.6 Other.................................. (1.1) (1.1) (1.1) (1.2) (1.2) ---- ---- ---- ---- ---- Effective tax rate................... 37.6% 56.9% 58.2% 51.8% 51.4% ==== ==== ==== ==== ====
F-15 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The significant components of deferred tax assets and liabilities consist of the following (in thousands):
December 31, June 30, -------------- -------- 1998 1999 2000 ------ ------ -------- Deferred tax assets: Accrued expenses.... $ 5 $ 234 $269 Allowance for doubtful accounts.... 16 23 31 Deferred revenue..... -- -- 685 ------ ------ ---- 21 257 985 Deferred tax liabilities: Depreciation and amortization.. (21) (7) (9) ------ ------ ---- $ -- $ 250 $976 ====== ====== ====
The Company has not provided a valuation allowance for its net deferred tax assets as it expects these amounts to be realized through taxable income from future operations, or by carryback to prior years' taxable income. NOTE 7--RELATED PARTY TRANSACTIONS: The Company had sales to Philips Semiconductors, a stockholder, and its affiliates totaling $144,000, $49,000, $95,000, $22,000 and $71,000 (deferred at period end) in the year ended December 31, 1997, 1998 and 1999 and six month period ended June 30, 1999 (unaudited) and 2000, respectively. At the end of each period the Company had receivable balances with Philips Semiconductors of $26,000, $83,000, $95,000, $22,000 and $71,000, respectively. The stockholder has a right of first refusal to purchase a pro rata share of any new securities issued by the Company at the same price per share offered to any other entity. This right terminates immediately prior to the closing of an initial public offering with aggregate proceeds in excess of $5 million or in the event that the stockholder's ownership percentage ceases to be at least 15% of the Company's outstanding common stock. In May 2000, the Company loaned $125,000 to Albert Lee, Vice President, Operations, pursuant to a promissory note. The loan is full recourse and collateralized by 87,500 shares of common stock in the Company held by Mr. Lee. The note accrues interest at a rate of 8.00% and is due on May 11, 2002, or on termination of Mr. Lee's employment. NOTE 8--COMMITMENTS: Purchase commitments As of June 30, 2000, the Company had approximately $301,000 in noncancelable purchase commitments to suppliers. These commitments were entered into between January and June 2000, and will expire once the commitment has been fulfilled. The total value of these commitments when they were entered into was $580,000. The Company expects to sell all products which it has committed to purchase from suppliers. Leases The Company leases its office facilities under a noncancelable operating lease which expires in December 2001. Rent expense for the year ended December 31, 1997, 1998 and 1999, and the six F-16 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) month period ended June 30, 1999 (unaudited) and 2000 was $208,000, $220,000, $221,000, $111,000 and $111,000, respectively. As of June 30, 2000 future minimum lease payments under the noncancelable facilities lease are as follows (in thousands):
Operating Period Ending December 31, Leases -------------------------- --------- 2000.............................................................. $114 2001.............................................................. 235 ---- Total minimum payments....................................... $349 ====
NOTE 9--REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION: The Company has three reportable segments categorized by product type: development products, production products and connectivity products. The development products are advanced verification systems that assist hardware and software manufacturers in the efficient design of reliable and interoperable systems and devices. Production products are production verification systems and connectivity solutions designed to assist hardware and software manufacturers in volume production of reliable devices and systems. Connectivity products are designed to assist broadband Internet service providers in delivering convenient and dependable service and device manufacturers in producing reliable products. The Company has no inter-segment revenue. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company analyzes segment revenue and cost of revenue, but does not allocate operating expenses, including stock-based compensation, or assets to segments. Accordingly, the Company has presented only revenue and gross profit by segment. Information about segments (in thousands):
Unallocated Stock-based Development Production Connectivity Compensation Products Products Products Expense Total ----------- ---------- ------------ ------------ ------- Year Ended December 31, 1997 Segment revenue from external customers... $2,396 $1,720 $ 53 $ -- $ 4,169 Segment gross profit.. $2,134 $1,256 $ 15 $ -- $ 3,405 Year Ended December 31, 1998 Segment revenue from external customers... $3,708 $2,765 $ 298 $ -- $ 6,771 Segment gross profit.. $3,435 $2,054 $ 87 $(242) $ 5,334 Year Ended December 31, 1999 Segment revenue from external customers... $6,204 $4,593 $1,709 $ -- $12,506 Segment gross profit.. $5,521 $3,476 $ 616 $(243) $ 9,370 Six Month Period Ended June 30, 1999 (unaudited) Segment revenue from external customers... $2,533 $2,371 $ 385 $ -- $ 5,289 Segment gross profit.. $2,295 $1,763 $ 93 $ (99) $ 4,052 Six Month Period Ended June 30, 2000 Segment revenue from external customers... $4,028 $2,757 $1,997 $ -- $ 8,782 Segment gross profit.. $3,554 $2,311 $ 861 $(112) $ 6,614
F-17 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Geographic information (in thousands):
Long-Lived Revenue Assets ------- ---------- Year Ended December 31, 1997 North America.............................................. $ 2,304 $ 70 Europe..................................................... 348 -- Asia....................................................... 1,492 -- Rest of world.............................................. 25 -- ------- ---- Total.................................................... $ 4,169 $ 70 ======= ==== Year Ended December 31, 1998 North America.............................................. $ 3,881 $179 Europe..................................................... 626 -- Asia....................................................... 2,169 -- Rest of world.............................................. 95 -- ------- ---- Total.................................................... $ 6,771 $179 ======= ==== Year Ended December 31, 1999 North America.............................................. $ 7,201 $255 Europe..................................................... 1,509 -- Asia....................................................... 3,562 -- Rest of world.............................................. 234 -- ------- ---- Total.................................................... $12,506 $255 ======= ==== Six Month Period Ended June 30, 1999 (unaudited) North America.............................................. $ 3,172 $248 Europe..................................................... 694 -- Asia....................................................... 1,338 -- Rest of world.............................................. 85 -- ------- ---- Total.................................................... $ 5,289 $248 ======= ==== Six Month Period Ended June 30, 2000 North America.............................................. $ 5,851 $330 Europe..................................................... 1,067 4 Asia....................................................... 1,772 -- Rest of world.............................................. 92 -- ------- ---- Total.................................................... $ 8,782 $334 ======= ====
Revenues are attributed to countries based on delivery locations. Sales to foreign customers accounted for 45%, 43%, 42%, 40% and 33% of revenue during the year ended December 31, 1997, 1998 and 1999, and the six month period ended June 30, 1999 (unaudited) and 2000, respectively. NOTE 10--SUBSEQUENT EVENTS: Initial public offering In August 2000, the Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its common stock to the public. F-18 COMPUTER ACCESS TECHNOLOGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reincorporation In August 2000, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware prior to the effectiveness of the offering referred to above. As a result of the reincorporation, the Company will be authorized to issue 100,000,000 shares of $0.001 par value common stock and 25,000,000 shares of $0.001 par value preferred stock. The par value and shares of common stock in the accompanying financial statements have been retroactively adjusted to reflect the reincorporation. In August 2000, the Board of Directors adopted the 2000 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan. Upon approval of these plans and the signing of the underwriting agreement, 4,812,500 and 312,500 shares will be reserved for issuance under the 2000 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan, respectively. In August and September 2000 the Board of Directors authorized the grant of 1,008,125 options to employees. As a result of the grants, the Company expects to record deferred stock-based compensation of approximately $9,954,875. In September 2000, the Board of Directors finalized a 1.25 for 1 stock split of common stock. The stock split is subject to stockholder approval which is expected to be obtained prior to the effectiveness of the offering. All share and per share amounts in the accompanying financial statements have been adjusted retroactively. In September 2000, the Company entered into an agreement with Agilent Technologies to jointly develop and separately market an Infiniband analyzer. Pursuant to the agreement, the Company will receive a royalty for each unit of the analyzer that Agilent sells, subject to a minimum of $200,000 in the first year of sales. The agreement provides for a fee of up to $1,000,000 if either party elects not to renew the agreement after the initial two year term. In connection with the agreement, certain stockholders of the Company agreed to sell $3,000,000 of common stock to Agilent at the initial public offering price. If the Company's initial public offering is not completed by March 31, 2001, the shares will be purchased from the Company at $13.00 per share. The Company has agreed to indemnify Agilent in the event that the shares sold by the selling stockholders are delivered to Agilent with any restrictions on title. In September 2000, certain stockholders of the Company agreed to sell $2,000,000 of the Company's common stock to Toyo, one of the Company's distributors and a major customer, at the initial public offering price. If the Company's initial public offering is not completed by January 31, 2001, the shares will be purchased from the selling stockholders at $13.00 per share. F-19 [Description of Inside Back Cover Graphics] The background of the inside back cover page of the prospectus is a graphic likeness of the CATC Trace screen. The CATC logo is centered at the top of the page. The page includes photographs, with corresponding product category title, of 11 of CATC's products. The bottom on the inside back cover page is centered text that reads "Enabling Global Connectivity." [COMPUTER ACCESS TECHNOLOGY CORPORATION LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee................ $ 14,876 NASD filing fee.................................................... 5,733 Nasdaq National Market initial listing fee......................... 5,000 Printing and engraving expenses.................................... 250,000 Legal fees and expenses............................................ 400,000 Accounting fees and expenses....................................... 400,000 Blue sky fees and expenses......................................... 10,000 Transfer agent and registrar fees and expenses..................... 5,000 Miscellaneous...................................................... * -------- Total............................................................
- -------- * To be provided by amendment Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board 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 Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to the Registrant or its stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or . for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's Bylaws provide that: . the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; . the Registrant may indemnify its other employees and agents to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; . the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding; II-1 . the Registrant may advance expenses, as incurred, to its employees and agents in connection with a legal proceeding; and . the rights conferred in the Bylaws are not exclusive. The Registrant has entered into Indemnification Agreements with each of its current directors and executive officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Certificate of Incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. Reference is also made to Section 7 of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provision in the Registrant's Certificate of Incorporation, Bylaws and the Indemnification Agreements entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. The Registrant maintains directors' and officers' liability insurance and expects to obtain a rider to such coverage for securities matters. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number - ---------------- ------ Form of Underwriting Agreement........................................... 1.1 Registrant's Certificate of Incorporation................................ 3.1 Registrant's Bylaws...................................................... 3.2 Form of Indemnification Agreement........................................ 10.1
Item 15. Recent Sales of Unregistered Securities In the three years prior to the effective date of this Registration Statement, the Registrant has issued and sold the following unregistered securities: (1) From 1995 through August 2000, we granted stock options to acquire an aggregate of 2,025,500 shares of our common stock at prices ranging from $0.375 to $2.50 per share to employees and directors pursuant to our 1994 stock option plan and 2000 stock option/stock incentive plan. As of August 15, 2000, we have issued 316,447 shares of our common stock to employees and directors pursuant to the exercise of stock options. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients in each transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection II-2 with any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules The exhibits listed in the exhibit index are filed as a part of this registration statement. (a) Exhibits
Exhibit No. Description ----------- ----------- 1.1+ Form of Underwriting Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Bylaws of the Registrant. 4.1* Specimen Certificate of the Registrant's common stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. 10.1+ Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers. 10.2* 1994 Stock Option Plan, as amended. 10.3* 2000 Stock Option/Stock Issuance Plan. 10.4* 2000 Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6 Office Lease for Santa Clara facility, dated October 3, 1996, by and between Talus Corporation, a California corporation, and the Registrant. 10.7 Promissory Note, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.8+ Security Agreement, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.9 Distributor Agreement, dated August 13, 1997, by and between Toyo Corporation and the Registrant. 10.10 Employment Agreement dated December 5, 1997, by and between Albert Lee and the Registrant. 10.11 Employment Agreement dated January 8, 1998, by and between Srikumar Chandran and the Registrant. 10.12 Employment Agreement dated March 3, 1999, by and between Joseph Mendolia and the Registrant. 10.13 Employment Agreement dated May 1, 2000, by and between Dennis Evans and the Registrant. 10.14 Common Stock Purchase Agreement dated March 15, 1994, by and between Philips Semiconductors, a division of Philips Electronics North American Corporation, and the Registrant. 23.1 Consent of Independent Accountants 23.2* Consent of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. Reference is made to Exhibit 5.1. 24.1+ Power of Attorney. 27.1+ Financial Data Schedule.
- -------- * To be supplied by amendment. + Previously filed. II-3 (b) Financial Statement Schedule S-1 Schedule II--Valuation and Qualifying Accounts Item 17. Undertakings 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. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provision described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities 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 has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 28th day of September, 2000. COMPUTER ACCESS TECHNOLOGY CORPORATION /s/ Dan Wilnai By: _________________________________ Dan Wilnai, President and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Name Title Date ---- ----- ---- Principal Executive Officer: /s/ Dan Wilnai President, Chief Executive September 28, 2000 ____________________________________ Officer, Chairman of the Dan Wilnai Board of Directors Principal Financial Officer and Principal Accounting Officer: /s/ Dennis W. Evans Vice President, Chief September 28, 2000 ____________________________________ Financial Officer and Dennis W. Evans Secretary Additional Directors /s/ Peretz Tzarnotsky Vice President, Chief September 28, 2000 ____________________________________ Technology Officer and Peretz Tzarnotzky Director /s/ Philip Pollok Director September 28, 2000 ____________________________________ Philip Pollok /s/ Jean-Louis Gassee Director September 28, 2000 ____________________________________ Jean-Louis Gassee /s/ Roger W. Johnson Director September 28, 2000 ____________________________________ Roger W. Johnson
II-5 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE In connection with our audits of the consolidated financial statements of Computer Access Technology Corporation as of December 31, 1997, 1998, 1999 and June 30, 2000, each of the three years in the period ended December 31, 1999, and the six month period ended June 30, 2000, which financial statements are included in the Prospectus, we have also audited the financial statement schedule listed in Item 16 herein. In our opinion, this financial statement schedule when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP San Jose, California August 3, 2000 S-1 COMPUTER ACCESS TECHNOLOGY CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- ---------- ---------- ---------- ---------- Year Ended December 31, 1997: Allowance for doubtful accounts....................... $-- $40 -- $40 Year Ended December 31, 1998: Allowance for doubtful accounts....................... 40 -- -- 40 Year Ended December 31, 1999: Allowance for doubtful accounts....................... 40 37 (19) 58 Six Month Period Ended June 30, 2000: Allowance for doubtful accounts....................... 58 21 -- 79
S-2 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 1.1+ Form of Underwriting Agreement. 3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Bylaws of the Registrant. 4.1* Specimen Certificate of the Registrant's common stock. 5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. 10.1+ Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers. 10.2* 1994 Stock Option Plan, as amended. 10.3* 2000 Stock Option/Stock Issuance Plan. 10.4* 2000 Stock Incentive Plan. 10.5* 2000 Employee Stock Purchase Plan. 10.6 Office Lease for Santa Clara facility, dated October 3, 1996, by and between Talus Corporation, a California corporation, and the Registrant. 10.7 Promissory Note, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.8+ Security Agreement, dated May 11, 2000, by and between Albert Lee and the Registrant. 10.9 Distributor Agreement, dated August 13, 1997, by and between Toyo Corporation and the Registrant. 10.10 Employment Agreement dated December 5, 1997, by and between Albert Lee and the Registrant. 10.11 Employment Agreement dated January 8, 1998, by and between Srikumar Chandran and the Registrant. 10.12 Employment Agreement dated March 3, 1999, by and between Joseph Mendolia and the Registrant. 10.13 Employment Agreement dated May 1, 2000, by and between Dennis Evans and the Registrant. 10.14 Common Stock Purchase Agreement dated March 15, 1994, by and between Philips Semiconductors, a division of Philips Electronics North American Corporation, and the Registrant. 23.1 Consent of Independent Accountants. 23.2* Consent of Brobeck, Phleger & Harrison LLP, counsel to the Registrant. Reference is made to Exhibit 5.1. 24.1+ Power of Attorney. 27.1+ Financial Statement Schedule.
- -------- * To be supplied by amendment. + Previously Filed. EX-10.6 2 0002.txt OFFICE LEASE FOR SANTA CLARA FACILITY Exhibit 10.6 STANDARD OFFICE LEASE-GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [LOGO] 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties: This Lease, dated, for reference purposes only, October 3, 1996, ----------------- is made by and between Talus Corporation, a California Corporation, ---------------------------------------------------------- (herein called "Lessor") and Computer Access Technology Corporation , ---------------------------------------------------- doing business under the name of (herein called "Lessee"). ----------------------- 1.2 Premises: Suite Number(s) 100 on two (2) floors, consisting of --------------------- approximately 10,026 feet, more or less, as defined in paragraph 2 and as ---------- shown on Exhibit "A" hereto (the "Premises"). 1.3 Building: Commonly described as being located at 2403 Walsh Avenue ------------------------- in the City of Santa Clara ------------------------------------------------------------------ County of Santa Clara ----------------------------------------------------------------------- State of California as more particularly described in Exhibit A -------------------------- --- hereto, and as defined in paragraph 2. 1.4: Use: General office use, research and development light manufacturing -------------------------------------------------------------------- and related legal uses, subject to paragraph 8. - -------------------------------------- 1.5 Term: Five (5) years commencing January 1, 1997 ("Commencement Date") ------------------ ------------------- and ending December 31, 2001, as defined in paragraph 3. ----------------------- 1.6 Base Rent: Refer to Addendum Paragraph 50 per month, payable on ---------------------------------------- the 1st day of each month, per paragraph 4.1 ----- ----------------------------------- - -------------------------------------------------------------------------------- 1.8 Rent Paid upon Execution: $17,545.50 ----------------------------------------------- for the first month's rent ----------------------------------------------------------------------------- 1.9 Security Deposit: Thirty Thousand and 00/100 Dollars ($30,000.00) ------------------------------------------------------- Please Refer to Addendum Para.xxx - -------------------------------------------------------------------------------- 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 Vehicle Parking: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to use 40 parking spaces in the Building Project. ---- 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 Common Areas--Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas--Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the noncompliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 Common Areas--Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. Term. 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2. Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 1 of 10 PAGES option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder: provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements): and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered--Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use In the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the mailers described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, Such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 Uncertain Commencement. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of PossessIon (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. Rent, 4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions, Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 2 OF 10 PAGES 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof, Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. * (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy Initials: DW ---------- XX ---------- C 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 3 OF 10 PAGES Both parties agree that Lessee, at Lessee's expense, has Lessor's consent to demise Room #116 and that Lessor will not require Lessee to remove this alteration at the end of the lease term. any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Protect, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. in addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations. improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations. shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical system communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Commercial General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GL0404), or equivalent, in an amount of not less than $3,000,000.00 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance--Lessor, Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 Property Insurance--Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance--Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property Insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except alter thirty (30) days prior written notice to Lessor, Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and fenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premise, or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claim costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. Refer to Addendum Paragraph 63. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, waler or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the BuildIng. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 4 OF 10 PAGES 9.2 Premises Damage; Premises BuildIng Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which fails into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the dale of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination--Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the real property lax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax" or (ii) the nature of which was hereinbefore included within the definition of "real property tax" or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere, (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. 11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 Services Exclusive, to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 Hours of Service. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 5 OF 10 PAGES 11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease. Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations and as contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expense incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment subletting), 13.1(a) (vacation or abandonment). 13.1(e) (insolvency). 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when do where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute notice required by this subparagraph. Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 6 OF 10 PAGES (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion: To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days, (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any Installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall, to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) The brokers involved in this transaction are MacMillan, Moore & Buchanan, Inc. as "listing broker" and Wayne Mascia Associates as "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s). The fee totals $50,589.88 for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor further agrees that (i) it Lessee exercises any Option, as defined In paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise en Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shell be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), if any, whose names are set forth in paragraph 15(a), above) In connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby Indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, it modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date Initials: DW ---------- XX ---------- (c)1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 7 OF 10 PAGES to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) it Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the dale of Such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SeverabIlity. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on ate charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense Increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given it delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording, Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be one hundred fifty percent (150%) of the rent payable immediately preceding the termination date of this Lease, and all or any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 23. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initialed in the county in which the Office Building Project is located. 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made o the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10 days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact, Lessee does hereby make, constitute and irrevocably appoint Lessor, as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorneys' Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the Court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting [ILLEGIBLE] scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of Utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the [ILLEGIBLE] Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 8 OF 10 PAGES 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises' other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office BuIlding Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or Other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13,1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d). whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) If Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures--Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs In the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest if at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. Initials: DW ---------- XX ---------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 9 OF 10 PAGES 43. Authority. If Lessee is a corporation xxxx or general or limited partnership, Lessee, and xxxx individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this xxxx on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 4.5. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Lender Modification. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. Multiple Parties. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. Work Letter. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and incorporated herein by this reference. 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease: ADDENDUM, including Paragraphs 50 through 63. NOTE: Talus Corporation is a Lessee of MOPAR L.L.C. (Lessor) and for this lease a Sublessor. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Talus Corporation, Computer Access Technology Corporation, - -------------------------------------- ---------------------------------------- a California Corporation a California Corporation By /s/ Michael W. Moshier By /s/ Don Wilnai ----------------------------------- -------------------------------------- Michael W. Moshier Don Wilnai Its C.E.O. Its President ---------------------------- ---------------------------- By By ----------------------------------- -------------------------------------- Its Its ---------------------------- ---------------------------- Executed at Executed at --------------------------- ----------------------------- on 10/28/96 on 10/25/96 [ILLEGIBLE] ------------------------------------ -------------------------------------- for Computer Access Technology Address Address ------------------------------- --------------------------------- (c) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS PAGE 10 0F 10 PAGES For these forms write or call the American Industrial Real Estate Association, 350 South Figueroa Street, Suite 275, Los Angeles, CA 90071, (213) 687-8777. 1984--By American Industrial Real Estate Association. All rights reserved. No part of these words may be reproduced in any form without permission in writing. FIRST ADDENDUM TO LEASE AGREEMENT --------------------------------- This is an Addendum to that certain Lease Agreement dated October 3, 1996 by and between Lessor "Talus Corporation" and Lessee "Computer Access Technology Corporation" for approximately 10,026 rentable square feet of 2403 Walsh Avenue, Santa Clara, California. 50. Base Rent - ------------- The Base Rent for the term of the lease shall be as follows: Month Rent/PSF Rent/Month ----- -------- --------- 01-12 $1.75 $17,545.50 13-24 $1.75 $17,545.50 25-36 $1.85 $18,548.10 37-48 $1.90 $19,049.40 49-60 $1.95 $19,550.70 51. Security Deposit - -------------------- The initial Security Deposit shall be $30,000.00 as set forth in paragraph 1.9. Should Lessee pay rent in a timely manner throughout the first year of the Lease and not otherwise be in default, $12,000.00 of the total amount shall be returned to the Lessee at the commencement of the thirteenth month of the Lease. 52. Storage Space - ----------------- Lessee shall be permitted the use of second floor storage space, adjacent to the fire exit, of up to 2,000 square feet at no additional charge. Additional storage above rooms #119 and #120 (Refer to Exhibit A) can be made available to Lessee. Rental for this additional storage space is to be negotiated in good faith by the parties and shall be at fair market value. 53. Expansion Rights - -------------------- Providing Lessee is not in default, Lessee, in consideration for this Lease, shall be granted an option right of first offer on any additional space in the Building that Lessor may place on the market. The parties shall have 5 days after Lessor gives notice of availability to arrive at an acceptable rent. Both parties agree to negotiate in good faith. If the parties are unable to agree, the Lessor shall have the right to place the available space on the open market and lease it to a third party. 54. Tenant Improvements and Security - ------------------------------------ Premises shall be secure for the Lessee and access shall be with the permission of the Lessee except for emergencies which require immediate action. A double door shall be placed at the end of the hallway to secure the premises. Any existing doors now opening to the premises from other areas shall be secured to accommodate the intent defined above. 55. Arbitration of Disputes - --------------------------- Any dispute or claim in law or equity arising out of this Lease, or any transaction resulting from this agreement, shall be decided by neutral binding arbitration in accordance with the California Code of Civil Procedure, Part III, Title 9. Judgment upon any argument rendered may be entered in a court having jurisdiction thereof. The parties shall have the right to discovery pursuant to California Code of Civil Procedure, Section 1283.5. If the parties cannot agree on the selection of an arbitrator, the Presiding Judge of the Superior Court having jurisdiction to enforce the award shall select the arbitrator. The arbitrator's fee shall be paid by the losing party. 56. Monument Signage - -------------------- Lessee, at it's sole cost and expense, shall have the right to install a sign on the building monument in front of the 2401 & 2403 Walsh Avenue Complex, facing Walsh Avenue. Such signage will be approved and contracted for by Lessor to insure conformance. 57. Compliance with Laws - ------------------------ Lessee shall not be required to construct or to pay the cost of complying with any covenants, conditions, restrictions, underwriter's requirements or rules, regulations, statutes, ordinances, laws and building codes (including the Americans with Disabilities Act of 1990) (collectively "Laws") requiring construction of improvements in the Premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Lessee's particular use of the Premises. 58. Condition of Premises Within thirty (30) days of occupancy, Landlord and Tenant shall conduct a walk-through of the Premises to address any punch-list items which become apparent to Tenant during this period. 59. Hazardous Materials To the best knowledge of Lessor, (1) no Hazardous Materials are present on the Office Building Project or the soil, surface water or groundwater thereof, (ii) no underground storage tanks or asbestos containing building materials are present on the Office Building Project, and (iii) no action, proceeding, or claim is pending or threatened against the Office Building Project concerning any Hazardous Materials or pursuant to any environmental Laws. Lessor agrees to release Lessee from and against all claims, actions, losses, costs, damages, liabilities (including, without limitation, sums paid in settlement of claims), and expenses (including, without limitation, reasonable attorneys', experts' and consultants' fees, investigation and laboratory fees, court costs and litigation expenses), arising out of or based upon the presence of any Hazardous Materials on, under, in or about the Office Building Project, except to the extent the same actually results from Lessee's release or emission of Hazardous materials on or about the Premises in violation of environmental Laws. This Paragraph 59 constitutes the entire agreement of Lessor and Lessee regarding Hazardous Materials and no other provision of the Lease shall be deemed to apply thereto. As used in this Addendum, "Hazardous Material" shall mean any material which is now or hereafter regulated by any governmental authority or which poses a hazard to the environment or human life. 60. Access to Room 137 Lessee will be given exclusive use of and access to Room 137 of the Office Building Project and all existing wiring, and other telephone and communications equipment located therein. Tenant shall grant access to Landlord as necessary with previous notification by phone by Landlord or Tenant. 61. Hours of Service (Refer to Paragraph 11.3) Normal hours of service shall be from 6:00 a.m. to 6:00 p.m. five (5) days per week excluding holidays. All utilities are available to the Premises on a 24-hour per day basis. Should Lessee's use significantly exceed that of normal office use, both parties agree to negotiate in good faith an increase in the Base Rent commensurate with the increase usage of service. 62. Option to Renew Lessee is given the option to extend the term of this Lease on all the provisions contained in this Lease, except for the Base Rent, for a period of five (5) years. The Base Rent, for the extended term, shall be at the "Fair Market Value" for similar space offered in the City of Santa Clara. It shall however, not be less than the Base Rent for the last month of the original Lease. Lessee shall give at least one hundred eighty (180) days notice prior to the end of the Lease term of Lessee's desire to exercise this option. The foregoing is qualified by the provisions that Lessee is not in default on the date given option notice, or on the date the extended term is to commence. Should any conflict exist between this Addendum and the Lease then this Addendum shall prevail. 63. Indemnity, Exemption of Lessor from Liability Lessor shall not be released or indemnified from and shall indemnify, defend, protect and hold harmless Lessee from all damages, liabilities, judgments, actions, claims, attorneys' fees, consultants' fees, payments, costs and expenses arising from the gross negligence or willful misconduct of Lessor or its agents, employees, licensees or invitees, Lessor's violation of Law, or a breach of Lessor's obligations or representations under the Lease. Lessor Lessee Talus Corporation Computer Access Technology Corporation a California Corporation a California Corporation By Michael Moshier By Dan Wilnai Its C.E.O. Its President Date 10/28/96 Date 10/25/96 ------------ ------------ [DIAGRAM] FIRST FLOOR 2403 WALSH AVENUE EXHIBIT "A" [DIAGRAM] SECOND FLOOR 2403 WALSH AVENUE EXHIBIT "A" (CONT) RULES AND REGULATIONS FOR STANDARD OFFICE LEASE [LOGO] Dated: OCTOBER 3, 1996 --------------- By and Between TALUS CORPORATION (LESSOR) and COMPUTER ACCESS CORPORATION (LESSE ----------------------------------------------------------------- GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into area not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost 13. No window coverings, shades or awnings shall be installed or used by Lessee. 14. No Lessee, employee or invitee shall go upon the roof of the Building. 15. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 16. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 17. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 18. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 19. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agencies 20. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 21. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 22. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicle Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles". 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent off-street location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply wIth the applicable parking rules, regulations, laws and/or agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and XXX is intended or shall be created hereby. 13. No overnight parking is permitted. Initials: [INTIALS] [INTIALS] (C) 1984 American Industrial Real Estate Association FULL SERVICE--GROSS EXHIBIT B PAGE 1 OF 1 PAGES EX-10.7 3 0003.txt PROMISSORY NOTE EXHIBIT 10.7 Promissory Note FOR VALUE RECEIVED ($125,000.00), the undersigned Albert Lee, jointly and severally promise to pay to Computer Access Technology Corporation, the sum of One Hundred Twenty-Five Thousand ($125,000.00) Dollars, together with interest thereon at the rate of 8% per annum on any unpaid balance. Said sum inclusive of interest, shall be repaid in full on or before May 11, 2002. The interest will be paid in annual installments, the first being due on May 11, 2001 and the second being due on May 11, 2002. The undersigned reserves the right to pre-pay this note in whole or in part without penalty, and with interest pro-rated to the date of repayment. This note shall be fully payable upon demand of any holder in the event the undersigned shall default in making any payments due under this note within 30 days of its due date. In the event of default the undersigned agrees to pay all reasonable attorney fees and costs of collection to the extent permitted by law. This shall not take effect as a sealed instrument and be enforced in accordance with the laws of the payee' state. Dated: May 11, 2000 /s/ Albert Lee - ----------------- EX-10.9 4 0004.txt DISTRIBUTOR AGREEMENT Exhibit 10.9 Computer Access Technology Corporation DISTRIBUTOR AGREEMENT This Distributor Agreement (the "Agreement") is entered into in Santa Clara, California, as of 13 August, 1997, by and between Computer Access Technology Corporation, a California corporation with offices at 2403 Walsh Avenue, Santa Clara, CA 95051-1302 ("Manufacturer"), and Toyo Corporation with offices at 1-2, Hongokucho 1-chome, Nihonbashi, Chuo-ku, Tokyo 103 Japan. ("Distributor"). IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS: 1. DEFINITIONS ----------- 1.1. "Product" shall mean all of Manufacturer's products listed in Appendix A attached hereto, including "Software", "Software Copy", and "Hardware" as defined herein. 1.2. "Software" shall mean the most current version of the software products listed in Appendix A attached hereto. 1.3. "Software Copy" or "Software Copies" shall mean an object code copy or copies of any of the Software products, together with a copy or copies of any user manual or other documentation customarily supplied to End- Users by Manufacturer with the Software Copy. 1.4. "Hardware" shall mean any non-Software products, together with a copy or copies of any user manual or other documentation customarily supplied to End-Users by Manufacturer with the Hardware. 1.5. "End-User" shall mean any third party which obtains Hardware, Software, or a Software Copy solely in order to fulfill its own needs. 1.6. "End-User License" shall, at any time during the term of this Agreement, mean Manufacturer's then standard license agreement pursuant to which End-Users are granted the right to utilize Hardware, Software, or a Software Copy. 1.7. "Territory" shall mean that geographic area(s) known as "Japan". 1.8. All references in this Agreement to the "sale" of or "selling" of Software or Software Copy shall mean the granting of a license to use ------- such Software or Software Copies. All references in this Agreement to the "purchase" of Software or Software Copies shall mean the obtaining of a license to use such Software or Software Copy. ------- CATC/Toyo 1997 Distribution Agreement Page 2 2. APPOINTMENT AND AUTHORITY OF DISTRIBUTOR ---------------------------------------- 2.1. Appointment. Subject to the terms and conditions set forth herein, ----------- Manufacturer hereby appoints Distributor as Manufacturer's distributor for the Product in the Territory, and Distributor hereby accepts such appointment. As distributor, Distributor shall have the right to obtain Product from Manufacturer and to market and distribute such Product for delivery to End-Users. The Territory appointment, shall be reviewed at the end of each 12 month period following the inception of this agreement. This review is to determine any or all Distributor Territory additions, deletions, changes in status, or modifications and to review Distributor performance in the Territory. 2.2. Sub-distributor. Distributor may exercise its distribution rights --------------- through the use of third party sub-distributors, resellers, dealers or sales representatives ("Sub-distributors") subject (i) to the written agreement by each such Sub-distributor to the restrictions on Distributor contained in this Agreement and (ii) Manufacturer's written approval of the Sub-distributor. Distributor may only grant sub-distributors the right to make sales directly to End Users. 2.3. Territorial Responsibility. Distributor shall pursue aggressive sales -------------------------- policies and procedures to realize the maximum sales potential for the Product in the Territory. Distributor shall not advertise, market or promote the Product outside the Territory or establish a repair or maintenance facility outside the Territory without the prior written consent of Manufacturer. 2.4. Conflict of Interest. The parties acknowledge that any efforts by -------------------- Distributor to sell competing products would constitute a conflict of interest with respect to Distributor's obligations to market the Product. If Distributor chooses to distribute products that compete with the Product, Distributor shall notify Manufacturer of its intent at least sixty (60) days prior to commencing such activity. In the event Distributor promotes, markets or distributes a product which Manufacturer, in its sole judgement, determines is competitive with any of the Product, Manufacturer shall have the right to terminate this Agreement upon thirty (30) days notice to Distributor. Failure to so notify Manufacturer shall be deemed to be a breach of this Agreement. 2.5. Independent Contractors. The relationship of Manufacturer and ----------------------- Distributor established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to (i) give either party the power to direct and control the day-to-day activities of the other, (ii) constitute the parties as partners, joint venture's, co-owners or otherwise as participants in a joint or common undertaking, or (iii) allow Distributor to create or assume any obligation on behalf of Manufacturer for any purpose whatsoever. All financial obligations associated with Distributor's business are the sole responsibility of Distributor. All sales and other agreements between Distributor and its Sub- distributors and customers are Distributor's exclusive responsibility and shall have no effect on Distributor's obligations under this Agreement. Distributor shall be solely responsible for, and shall indemnify and hold Manufacturer CATC/Toyo 1997 Distribution Agreement Page 3 free and harmless from, any and all claims, damages or lawsuits (including Manufacturer's attorneys' fees) arising out of the acts of Distributor or its employees, agents or Sub-distributors. 3. PRODUCT DISTRIBUTION -------------------- 3.1. Packaging. Each Product shall be delivered to Distributor in a shipping --------- package (the "Package") containing the Product including the End-User License and/or user manual for such Product. Distributor may open the Package to inspect and test the Product before delivering it to its customers. Distributor will be responsible to re-package the Product before delivering it to the End-User. 3.2. Demonstration Copies. Distributor shall have the right to order Product -------------------- to be used for demonstration purposes by Distributor ("Demonstration Product") provided Distributor shall pay Manufacturer's then current charges for any such Demonstration Product, and provided that the right to use such Demonstration Product will be governed by the terms of the End-User License. 3.3. Title to Software and Related Matters. Title to the Product (including ------------------------------------- the user manual, diskette and software contained herein) shall remain with Manufacturer. Distributor shall not (and shall require that its Sub-distributors do not) remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed or embedded by Manufacturer on or in any Package or any of the items contained therein. 4. TERMS OF PURCHASE OF PRODUCT BY DISTRIBUTOR ------------------------------------------- 4.1. Terms and Conditions. All orders of Product by Distributor from -------------------- Manufacturer during the term of this Agreement shall be subject to the terms and conditions of this Agreement. Nothing contained in any purchase order or like document submitted by Distributor to Manufacturer shall in any way modify or add to the terms and conditions contained in this Agreement. 4.2. Prices. All prices are F.O.B. Manufacturer's facility currently located ------ at the address listed for Manufacturer at the beginning of this Agreement ("F.O.B. Point"). Manufacturer may, upon thirty (30) days notice to Distributor, designate another Manufacturer or other facility as the F.O.B. Point. The price to Distributor for each of the Product (the "Discount Price") shall be as set forth in Appendix A attached hereto. The difference between Distributor's Discount Price and Distributor's selling price to its customers shall be Distributor's sole remuneration for distribution of the Product. 4.3. Distributor Product Discount Schedule (Appendix A). Manufacturer may -------------------------------------------------- from time to time, at its sole discretion, with thirty (30) days advance written notice to Distributor, issue new revisions to the Distributor Product Discount Schedule. These new revisions of Distributor Product Discount Schedule will replace Appendix A and will become part of this agreement. Manufacturer has the right at any time to add Products, to remove Products, to revise Products version and description, and to revise the Product prices in CATC / Toyo 1997 Distribution Agreement Page 4 Appendix A. Such revisions shall apply to all orders received after the effective date of revision. Price changes shall not affect unfulfilled orders accepted by Manufacturer prior to the effective date of the price change. Distributor may purchase at any time only the Products that are listed in the latest revision of Appendix A. 4.4. Taxes. Distributor's Discount Prices are payable in full to ----- Manufacturer without deduction and are net of taxes (including any withholding tax) and customs duties. In addition to such amounts, Distributor shall pay sums equal to taxes (including, without limitation, sales, withholding, value-added and similar taxes) and customs duties paid or payable, however designated, levied, or based on amounts payable to Manufacturer hereunder or on an end user's use or possession of the Product under or in accordance with the provisions of this Agreement, but exclusive of United States federal, state, and local taxes based on Manufacturer's net income. 4.5. Order and Acceptance. All orders for Product submitted by Distributor -------------------- shall be initiated by written orders mailed or faxed to Manufacturer and requesting a delivery date during the term of this Agreement. To facilitate Manufacturer's production scheduling, Distributor shall submit purchase orders to Manufacturer at least fifteen (15) days prior to the requested day of delivery. No order shall be binding upon Manufacturer until accepted by Manufacturer in writing, and Manufacturer shall have no liability to Distributor with respect to purchase orders that are not accepted. Manufacturer shall use its reasonable efforts to notify Distributor of the acceptance or rejection of an order and of the assigned delivery date for accepted orders within two (2) days of receipt of the order. No partial shipment of an order shall constitute the acceptance of the entire order, absent the written acceptance of such entire order. Manufacturer shall use its reasonable efforts to deliver Product at the times specified either in its quotation or in its written acceptance of Distributor's orders. 4.6. Payment. Manufacturer shall submit an invoice to Distributor upon ------- shipment of each Product ordered by Distributor and as set forth below. The invoice shall cover Distributor's Discount Price for the Product in a given shipment plus any freight, taxes or other applicable costs initially paid by Manufacturer but to be borne by Distributor. The full invoiced amount shall be due for payment within sixty (60) days of the date of invoice. Any invoiced amount not received within sixty (60) days of the date of invoice shall be subject to a service charge of two and one-half percent (2.5%) per month. Distributor shall pay all of Manufacturer's costs and expenses (including reasonable attorneys' fees) to enforce and preserve Manufacturer's rights under this Subsection 4.6. 4.7. Shipping. All Product delivered pursuant to the terms of this -------- Agreement shall be suitably packed for shipment in Manufacturer's standard shipping cartons, marked for shipment at Distributor's address set forth above, and delivered to Distributor or its carrier agent at the F.O.B. Point, at which time risk of loss shall pass to Distributor. Unless otherwise instructed in writing by Distributor, Manufacturer shall select the carrier. Distributor agrees to undertake all import formalities required to import the Product into the Territory. All customs, freight, insurance, and other shipping expenses, CATC/Toyo 1997 Distribution Agreement Page 5 as well as any special packing expense, shall be paid by Distributor. Distributor shall also bear all applicable taxes, duties, and similar charges that may be assessed against the Product after delivery to the carrier at the F.O.B. Point. 5. TRAINING, INSTALLATION, AND SERVICE ----------------------------------- 5.1. Sub-distributor and End-User Inquiries. Distributor is responsible for -------------------------------------- supporting all Product it distributes to End-Users. Distributor shall maintain onsite staff support personnel sufficiently knowledgeable with respect to the Product to answer Sub-distributor, End-User and other customer questions regarding the use and operation of Product marketed by Distributor. Distributor shall ensure that all questions regarding the use or operation of Product marketed by Distributor are initially addressed to and answered by Distributor. Any Sub- distributor or End-User service questions resulting from Distributor's sales will be referred by Manufacturer back to Distributor. 5.2. Training. Distributor shall arrange with Manufacturer, for at least -------- two (2) qualified employees of Distributor to attend Manufacturer's training program in the use and operation of the Product. This training is to be performed semi-annually, although additional training sessions may be arranged. Manufacturer will arrange to provide, and Distributor will receive one training session at the Distributor appointed facility and Manufacturer will arrange to provide, and Distributor will receive one training session at the Manufacturer's appointed facility. In the event of termination of the employment of any such trained employee, Distributor shall notify Manufacturer in writing of such termination, and of the name of another qualified employee, who shall, at Distributor's expense, attend and complete Manufacturer's training program within Thirty (30) days of the date of such termination. 5.3. Manufacturer Support. Manufacturer will provide consultation to ---------------------- Distributor, via all possible communications means, to include telephone, fax, mail, personal visits and other electronic means to be mutually defined between Distributor and Manufacturer, with respect to any Sub-distributor or End-User questions which Distributor cannot adequately answer. Distributor will not represent to any third party that Manufacturer is available to answer questions from any Sub- distributor, End-User or other customer directly. It shall be considered a breach of this Agreement if Distributor fails to support its customers with technical assistance. 6. WARRANTY TO DISTRIBUTOR'S CUSTOMERS ----------------------------------- 6.1. Standard Limited Warranty. Pursuant to the End-User, Manufacturer ------------------------- makes a limited warranty to the End-User regarding the Product obtained by such End-User (the "Limited Warranty"). The End-User Limited Warranty warrants the Product to be free from defects in material, content, and workmanship, agrees to repair or replace any part of the Product that proves defective and specifically disclaims all other warranties relating to the Product, including all warranties with respect to the performance of the Product. DISTRIBUTOR SHALL NOT MAKE OR PASS ON TO ANY PARTY (AND SHALL REQUIRE THAT ITS SUB- DISTRIBUTORS DO NOT MAKE OR CATC/Toyo 1997 Distribution Agreement Page 6 PASS ON TO END-USERS) ANY WARRANTY OR REPRESENTATION ON BEHALF OF MANUFACTURER OTHER THAN OR CONSISTENT WITH THE LIMITED WARRANTY. 6.2. No Other Warranty. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH ABOVE, ----------------- MANUFACTURER GRANTS NO OTHER WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, REGARDING THE PRODUCT, THE FITNESS FOR ANY PURPOSE, THE QUALITY, THE MERCHANTABILITY, OR OTHERWISE. 6.3. Warranty Period. Manufacturer's End-User Limited Warranty is in effect --------------- for a period of time specified in the Product manual or warranty card. The warranty period starts at the delivery of the Product to the carrier at the F.O.B. Point. 6.4. Warranty Product Returns. In the event a Manufacturer Product under ------------------------ warranty is found to be defective by the End-User and reported to the Distributor, the following procedure will be used to assure proper tracking and handling of the defective goods and the replacement Product. 6.4.1. The Distributor will notify Manufacturer about the occurrence of defective or non-operational product via FAX to the attention of the Customer Support Manager. 6.4.2. The Distributor will test and confirm the defective or non- operational status of the product as instructed by Manufacturer. 6.4.3. Manufacturer will issue to the Distributor a Return Merchandise Authorization (RMA) number for each confirmed defective or non-operational product. This RMA number is to be used for all correspondence and shipping documents that relate to the associated product. 6.4.4. The Distributor will ship and defective or non-operational products to Manufacturer monthly, or after accumulating a minimum of 10 RMAs. Distributor is responsible for shipping cost of RMA products to Manufacturer. 6.4.5. With each RMA shipment, the Distributor will send to the attention of the Manufacturer Customer Service Manager an itemized list of all products returned in that shipment, including the associated RMA number(s). 6.4.6. Both Manufacturer and the Distributor are to maintain the RMA number(s) in a RMA database itemizing the customer from who the product is returned together with the date and the problem description of the returned products. 6.4.7. Upon receipt of the returned product, Manufacturer will verify the RMA shipment with the Distributor, and test the product to assure the defective or non-operational status. The Distributor will maintain a No Problem Found (NPF) percentage for all RMAs not to exceed 20%. NPFs in excess of 20% will be billed to the Distributor for Manufacturer testing time. CATC/Toyo 1997 Distribution Agreement Page 7 6.4.8. Manufacturer will either send replacement product, or credit the product cost to the Distributor upon receipt the RMA. All product returned to the Distributor will be referenced to the original RMA for which it is replacing. Manufacturer is responsible for shipping costs of replacement products to the Distributor. 7. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR ------------------------------------- 7.1. Sales and Inventory Reports. Distributor agrees to provide --------------------------- Manufacturer with a quarterly point-of-sale and inventory report showing, at a minimum, date sold, quantity of each type of Product sold, serial number, and the buyers' names and addresses, as well as the quarter-end inventory position on hand for each type of Product. This report must be forwarded to Manufacturer within twenty (20) days of the close of each quarter. 7.2. Demonstrations and Staff Training. Distributor agrees to provide its --------------------------------- staff and Sub-distributors with adequate training regarding the use and operation of the Product, and to also provide its staff and Sub- distributors with regular training regarding updates of the Product. Distributor further agrees to cause Sub-distributors to provide their staff with adequate training regarding the use and operation of the Product and updates of the Product. Distributor agrees, and further agrees to cause Sub-distributors to agree to dedicate a computer workstation for supplementary staff training, demonstrations and support of Product. 7.3. Forecasts. On or before the first day of every month, Distributor --------- shall provide Manufacturer with a four (4) month rolling forecast showing prospective orders by Product and intended submittal date. 7.4. Promotion of the Product. Distributor shall, at its own expense, ------------------------ vigorously promote the distribution of the Product within the Territory. Such promotion shall include but not be limited to advertising the Product in trade publications within the Territory, participating in appropriate trade shows, and directly soliciting orders from customers for the Product. 7.5. Finances and Personnel. Distributor shall maintain a net worth and ---------------------- working capital sufficient, in Manufacturer's reasonable judgment, to allow Distributor to perform fully and faithfully its obligations under this Agreement. Distributor shall devote sufficient financial resources and technically qualified sales and service personnel to the Product to fulfill its responsibilities under this Agreement. 7.6. Customer and Sales Reporting. Distributor shall, at its own expense ---------------------------- and consistent with the marketing and distribution policies of Manufacturer: 7.6.1. place the Product marketing and distribution in Distributor's catalogues as soon as possible and feature the Product in any applicable trade show that it attends; 7.6.2. provide adequate contact with existing and potential customers within the Territory on a regular basis, consistent with good business practice; CATC/Toyo 1997 Distribution Agreement Page 8 7.6.3. assist Manufacturer in assessing customer requirements for the Product, including modifications and improvements thereto, in terms of quality, design, functional capability, and other features; and 7.6.4. submit market research information, as reasonably requested by Manufacturer, regarding competition and changes in the market within the Territory. 7.7. Standard of Business Practices. Distributor shall establish and ------------------------------ maintain, and shall cause its Sub-distributors, employees, consultants and agents to establish and maintain a high standard of ethical business practices in connection with its distribution of Product in the Territory. 8. ADDITIONAL OBLIGATIONS OF MANUFACTURER -------------------------------------- 8.1. Marketing Materials. Manufacturer shall promptly provide Distributor ------------------- with marketing and technical information concerning the Product as well as reasonable quantities of brochures, instructional material, advertising literature, and other Product data. 8.2. Response to Inquiries. Manufacturer shall promptly respond to all --------------------- inquiries from Distributor concerning matters pertaining to this Agreement. 8.3. Delivery Time. Manufacturer shall minimize delivery time as much as ------------- possible and use its reasonable best efforts to fulfill delivery obligations as committed in acceptances. 8.4. New Developments. Manufacturer shall inform Distributor of new product ---------------- developments. 8.5. Product Upgrade/Maintenance. Manufacturer will provide Distributor --------------------------- with appropriate Product upgrades and maintenance, and Distributor will incorporate any and all Manufacturer provided Product upgrades and maintenance, such that the Distributor Product inventory is representative of the latest Product offerings or revisions available from the Manufacturer. 9. TERM AND TERMINATION -------------------- 9.1. Term. This Agreement shall continue in force for a fixed term of two ---- (2) years from the Effective Date hereof unless terminated earlier under the provisions of this Section 9. At the end of the fixed term, this agreement shall terminate automatically without notice unless prior to that time the term of the agreement is extended by mutual written consent of the parties. 9.2. Termination for Convenience. This Agreement may be canceled by either --------------------------- party for any reason or no reason, whether or not extended beyond the first year, by giving the other party written notice ninety (90) days in advance. 1997 Distribution Agreement Page 9 9.3. Termination for Cause. If either party defaults in the performance of --------------------- any provision of this Agreement, then the non-defaulting party may give written notice to the defaulting party that if the default is not cured within thirty (30) days the Agreement will be terminated. If the non-defaulting party gives such notice and the default is not cured during the thirty-day period, then the Agreement shall automatically terminate at the end of that period. 9.4. Termination for Insolvency. This Agreement shall terminate, without -------------------------- notice, (i) upon the institution by or against Distributor of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of Distributor's debts, (ii) upon Distributor's making an assignment for the benefit of creditors, or (iii) upon Distributor's dissolution. 9.5. Fulfillment of Orders upon Termination. Upon termination of this -------------------------------------- Agreement, Manufacturer may, but shall not be obligated to, fulfill, subject to the terms of Sections 3 and 4 above and subject to Manufacturer's right to require prepayment, all orders accepted by Manufacturer prior to the date of termination. 9.6. Return of Materials. All trademarks, trade names, patents, ------------------- copyrights, designs, drawings, formulas or other data, photographs, samples, literature, and sales aids of every kind shall remain the property of Manufacturer. Within thirty (30) days after the termination of the Agreement, Distributor shall prepare all such items in its possession for shipment, as Manufacturer may direct, at Manufacturer's expense. Distributor shall suitably package the materials for shipment in accordance with standard shipment practice for the type and size of the Product(s) to be returned. Distributor shall not return product to Manufacturer without prior receipt of a Return Merchandise Authorization. Distributor shall not make or retain any copies of any confidential items or information which may have been entrusted to it. Effective upon the termination of this Agreement, Distributor shall cease to use all trademarks, marks, and trade names of Manufacturer. 9.7. Limitation on Liability. In the event of termination by either party ----------------------- in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of Manufacturer or Distributor. Termination shall not, however, relieve either party of obligations incurred prior to the termination. 9.8. Inventory Disposition. Upon termination, Manufacturer will purchase --------------------- back from Distributor, at the current Distributor price as defined in Appendix A less any credits or Product price adjustments, all Product in Distributor inventory that is in unopened, unused, and in otherwise like new condition. Distributor shall suitably package the Product for return shipment to the Manufacturer in accordance with standard shipment practice for the type and size of the Product(s) to be returned. Distributor shall not CATC/Toyo 1997 Distribution Agreement Page 10 return product to Manufacturer without prior receipt of a Return Merchandise Authorization. Distributor will bear all transportation, duties and other costs associated with the Product return to Manufacturer. 9.9. Survival of Certain Terms. The provisions of Sections 2.5, 3.3, 6, 9, ------------------------- 10, 11 and 13 shall survive the termination of this Agreement for any reason. All other rights and obligations of the parties shall cease upon termination of this Agreement. 10. LIMITED LIABILITY TO DISTRIBUTOR AND OTHERS ------------------------------------------- 10.1. MANUFACTURER'S LIABILITY UNDER ANY CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR UNDER ANY INDEMNITY CONTAINED IN THIS AGREEMENT SHALL NOT EXCEED THE AMOUNTS RECEIVED BY MANUFACTURER FROM DISTRIBUTOR DURING THE IMMEDIATELY PRECEDING TWELVE (12) MONTH PERIOD. 10.2. IN NO EVENT SHALL MANUFACTURER HAVE ANY LIABILITY TO DISTRIBUTOR OR TO END USERS OR ANY OTHER THIRD PARTY, FOR ANY LOST PROFITS OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY OTHER INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THE PRODUCTS, OR THE FAILURE OF THE PRODUCTS TO PERFORM, OR FOR ANY OTHER REASON. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 11. PROPERTY RIGHTS AND CONFIDENTIALITY ----------------------------------- 11.1. Property Rights. Distributor agrees that Manufacturer owns all right, --------------- title, and interest in the Product and in each Product now or hereafter subject to this Agreement and in all of Manufacturer's patents, trademarks, trade names, inventions, copyrights, know-how, and trade secrets relating to the design, manufacture, operation or service of the Product. The use by Distributor of any of these property rights is authorized only for the purposes herein set forth, and upon termination of this Agreement for any reason such authorization shall cease, except to the extent necessary for Distributor to provide maintenance to its existing Product customers. 11.2. Confidentiality. Manufacturer and Distributor each acknowledge that by --------------- reason of the relationship hereunder each entity will have access to certain information and materials concerning the other entity's business, plans, customers, technology, and products that are confidential and of substantial value to each, which value would be impaired if such information were disclosed to third parties. Manufacturer and Distributor agree that each will not use in any way for their own account or the account of any third party, nor disclose to any third party, any such confidential information revealed as a result of this Agreement. Manufacturer and Distributor shall take every reasonable precaution to protect the confidentiality of such information. Upon request by either Manufacturer or Distributor, each shall advise whether or not it considers any particular information or CATC / Toyo 1997 Distribution Agreement Page 11 materials to be confidential. Both Manufacturer and Distributor shall designate confidential information by clear marking on such information that denotes the information as confidential. Both Manufacturer and Distributor shall not publish any technical description of the Product or information beyond the description published by Manufacturer or Distributor. In the event of termination of this Agreement, there shall be no use or disclosure by Manufacturer or Distributor of any confidential information of Manufacturer and Distributor, and Manufacturer and Distributor shall not manufacture or have manufactured any products utilizing any of each other's confidential information. This confidentiality clause shall survive the termination of this Agreement and extend a minimum of three (3) years beyond the date termination. 11.3. Patent Information. Manufacturer has no patents for the Product, ------------------ either granted or pending, at this time. 12. TRADEMARKS AND TRADE NAMES -------------------------- 12.1. Use. During the term of this Agreement, Distributor shall have the --- right to indicate to the public that it is an authorized distributor of Manufacturer's Product and to advertise (within the Territory) such Product under the trademarks, marks, and trade names that Manufacturer may adopt from time to time ("Trademarks"). Distributor shall not alter or remove any Trademarks applied at the factory to the Product, Packages, or other materials contained therein. Nothing herein shall grant to Distributor any right, title or interest in the Trademarks. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge the Trademarks or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to the Trademarks. 12.2. Approval of Representations. All representations of the Trademarks --------------------------- that Distributor intends to use shall first be submitted to Manufacturer for approval (which shall not be unreasonably withheld) of design, color, and other details or shall be exact copies of those used by Manufacturer. Upon receipt of Distributors plans and designs for use of Manufacturer Trademarks, the Manufacturer shall have twenty-one (21) days to review and approve or reject such representation(s). If any of the Trademarks are to be used in conjunction with another trademark on or in relation to the Product, then Manufacturer's mark shall be presented equally legibly, equally prominently, and of greater size than the other but nevertheless separated from the other so that each appears to be a mark in its own right, distinct from the other mark. 13. PATENT, COPYRIGHT, AND TRADEMARK INDEMNITY ------------------------------------------ 13.1. Indemnification. Distributor agrees that Manufacturer has the right --------------- to defend, or at its option to settle, and Manufacturer agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding brought against Distributor or its customer on the issue of infringement of any patent, copyright or trademark by the Product distributed hereunder or the use thereof, subject to the limitations hereinafter set forth. Manufacturer shall have sole control of any such action or settlement negotiations, and CATC/Toyo 1997 Distribution Agreement Page 12 Manufacturer agrees to pay, subject to the limitations hereinafter set forth, any final judgement entered against Distributor or its customer on such issue in any such suit or proceeding defended by Manufacturer. Distributor agrees that Manufacturer at its sole option shall be relieved of the foregoing obligations unless Distributor or its customer notifies Manufacturer promptly in writing of such claim, suit or proceeding and gives Manufacturer authority to proceed as contemplated herein, and, at Manufacturer's expense, gives Manufacturer proper and full information and assistance to settle and/or defend any such claim, suit or proceeding. If the Product, or any part thereof, are, or in the opinion of Manufacturer may become, the subject of any claim, suit or proceeding for infringement of any United States patent, copyright or trademark, or if it is adjudicatively determined that the Product, or any part thereof, infringe any patent, copyright or trademark, or if the distribution or use of the Product, or any part thereof, is, as a result, enjoined, then Manufacturer may, at its option and expense: (i) procure for Distributor and its customers the right under such patent, copyright or trademark to distribute or use, as appropriate, the Product or such part thereof; of (ii) replace the Product, or part thereof, with other suitable Product or parts; or (iii) suitably modity the Product, or part thereof; or (iv) if the use of the Product, or part thereof, is prevented by injunction, remove the Product, or part thereof, and refund the aggregate payments paid therefor by Distributor within Sixty (60) days upon receipt or written notice, less a reasonable sum for use and damage. Manufacturer shall not be liable for any costs or expenses incurred without its prior written authorization. 13.2 Limitation. Notwithstading the provisions of Subsection 13.1 above, ---------- Manufacturer assumes no liability for (i) any infringement claims with respect to any product in or with which any of the Product may be used but not covering the Product standing alone; (ii) any trademark infringements involving any marking or branding not applied by Manufacturer or involving any marking or branding applied at the request of Distributor; or (iii) the modification of the Product, or any part thereof, unless such modification was made by Manufacturer. 13.3. Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 13 STATE THE ---------------- ENTIRE LIABILITY AND OBLIGATION OF MANUFACTURER AND THE EXCLUSIVE REMEDY OF DISTRIBUTOR AND ITS CUSTOMERS, WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCT, OR ANY PART THEREOF. 13.4. Notification of Unauthorized Use. Distributor shall promptly notify -------------------------------- Manufacturer in writing upon its discovery of any unauthorized use or infringement of the Product or Manufacturer's patent, copyright, trademark or other intellectual property rights with respect thereto. Manufacturer shall have the sole and exclusive right to bring an infringement action or proceeding against a third party, and, in the event that Manufacturer brings such an action or proceeding, Distributor shall cooperate and provide full information and assistance to Manufacturer and its counsel in connection with any such action or proceeding. CATC/Toyo 1997 Distribution Agreement Page 13 14. GENERAL PROVISIONS ------------------ 14.1. Governing Law. The rights and obligations of the parties under this ------------- Agreement shall not be governed by the 1980 U.N. Convention on Contracts for the International Sale of Goods; rather such rights and obligations shall be governed by and construed under the laws of the State of California, including its Uniform Commercial Code, without reference to conflict of laws principles. 14.2. Arbitration. Any dispute or claim arising out of or in connection with ----------- this Agreement shall be finally settled by binding arbitration in Santa Clara, California under the commercial Arbitration Rules of the American Arbitration Association by one arbitrator appointed in accordance with said rules. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for injunctive relief without breach of this arbitration provision. 14.3. Entire Agreement. This Agreement sets forth the entire agreement and ---------------- understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the party to be charged. 14.4. Notices. Any notice required or permitted by this Agreement shall be ------- in writing and shall be sent by prepaid registered or certified mail, or other courier, return receipt requested, addressed to the other party at the address shown at the beginning of this Agreement or at such other address for which such party gives notice hereunder. Such notice shall be deemed to have been given ten (10) days after deposit in the mail, except that notice of change of address shall be effective only upon receipt. 14.5. Force Majeure. Nonperformance of either party shall be excused to the ------------- extent that performance is rendered impossible by strike, fire, flood, governmental acts or orders or restrictions, failure of suppliers, lack of transportation, or any other reason where failure to perform is beyond the control and not caused by the negligence of the non- performing party. 14.6. Nonassignability and Binding Effect. A mutually agreed consideration ----------------------------------- for Manufacturer's entering into this Agreement is the reputation, business standing, and goodwill already honored and enjoyed by Distributor under its present ownership, and, accordingly, Distributor agrees that its rights and obligations under this Agreement may not be transferred or assigned directly or indirectly without the prior written consent of Manufacturer. Subject to the foregoing sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors and assigns. CATC/Toyo 1997 Distribution Agreement Page 14 14.7. Legal Expenses. The prevailing party in any legal action brought by one -------------- party against the other and arising out of this Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses, including court costs and reasonable attorneys' fees. 1997 Distribution Agreement Page 15 14.8. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute on instrument. - ------------------------------------------------------------------------------- "Manufacturer": "Distributor": - ------------------------------------------------------------------------------- Computer Access Technology Corp. Toyo Corporation - ------------------------------------------------------------------------------- Signed: /s/ Dan Wilnai Signed: /s/ Kohzo Yumoto - ------------------------------------------------------------------------------- By (name): Dan Wilnai By (name): Kohzo Yumoto - ------------------------------------------------------------------------------- Title: PRESIDENT Title: PRESIDENT - ------------------------------------------------------------------------------- Date: 7 Nov. 1997 Date: 7 Nov. 1997 - ------------------------------------------------------------------------------- EX-10.10 5 0005.txt EMPLOYMENT AGREEMENT BETWEEN ALBERT LEE AND REGISTRANT Albert F. Lee Employment Agreement Exhibit 10.10 EMPLOYMENT AGREEMENT Computer Access Technology Corporation, a corporation, (hereinafter known as "CATC"), having its principal place of business at 2403 Walsh Avenue, Santa Clara, California 95051-1302, is hiring Mr. Albert F. Lee, whose social security number is ###-##-#### (hereinafter referred to as "Employee"), located at 1362 Merrivale West Square, San Jose, CA 95117, as a full time employee under the following conditions. 1. JOB DESCRIPTION Employee shall perform all functions required by CATC to manage and grow our manufacturing operations, including but not limited to: . Direct all aspects of internal operations including material planning and procurement, cost control, document control, inventory management, cycle- time, scheduling & logistics, shipping & receiving, production, test & rework, QA. . Establish a Management Information System and develop processes and procedures to support efficient and cost-effective manufacturing. . Manage new product development projects from product definition to market launch to ensure smooth transition from prototypes to volume production. . Review development projects from inception for cost, manufacturability, testability, manufacturing technology, and ability to meet schedules. . Develop strategic partnership relationships with vendors and contract manufacturers to improve CATC time-to-market, cycle-time, schedule attainment, quality, and cost performance. . Establish performance goals and monitor our partners progress towards meeting these goals. 2. COMPENSATION 2.1. Salary: Employee is paid a monthly salary starting at $10,416 ($125,000 per year) and is exempt from overtime pay. CATC's pay-day is the last day of the month. 2.2. Bonus: CATC will pay Employee a $10,000 achievement bonus upon successfully meeting the jointly developed goals for the first 6 months of employment. CATC may periodically pay Employee additional achievement bonuses based on the company financial performances and on Employee's meeting certain objectives as defined by CATC's management. 2.3. Performance Reviews: Employee will have two performance-reviews per year (every 6 months). Changes in the compensation package will be determined by CATC's management once a year and will be related to Employee's job performance and to the company revenues and profits. -CONFIDENTIAL- Albert F. Lee Employment Agreement 3. BENEFITS 3.1. Stock Option: When joining the company, Employee will have an option to purchase 120,000 of CATC's common shares in accordance with CATC's Stock Option plan, subject to CATC Board of Directors' approval. Upon successfully meeting the jointly developed goals for the first 6 months of employment, Employee will be offered an option to purchase additional 30,000 of CATC's common shares in accordance with CATC's Stock Option plan, subject to CATC Board of Directors' approval. Additional shares may be granted as part of the performance review process. 3.2. Health Care: Medical, Dental and Vision insurance plans are fully paid by CATC for Employee and dependents 3.3. Pension Plan: CATC offers its employees a 401K retirement saving plan. The company provides matching contributions to the plan (currently at 100%) at the discretion of its Board of Directors. 3.4. Time Off: CATC recognizes the need for employees to enjoy time away from work to relax and pursue personal activities. Employee is entitled to the following time off: . 16 days paid PET (Personal Excused Time) for the first year of service (1.33 days per month accrual). One additional day per year of service up to maximum of 20 days per year. . Paid Holidays for all Holidays that CATC's offices are closed. Employee should schedule his time off with his supervisor, providing reasonable notice so that both company and personal needs can be met. 4. EXPENSES CATC shall reimburse Employee for actual travel expenses incurred while in a travel status authorized in writing by CATC for reasonable amounts. Said reimbursement to cover all proper expenses including motel bills, meals, and: (1) Either the cost of transportation by common carriers; or (2) A per-mile amount (following Government regulations) when Employee's automobile is used; and (3) Other incidental expenses 5. INVENTIONS, PATENT RIGHTS AND COPYRIGHTS (a) Employee agrees that he will communicate to CATC's management all inventions made or conceived by him in connection with the performance of the work contemplated by this Agreement and that he will, without further consideration, assign all right, title and interest in such inventions to CATC and will assist CATC and its nominees in every proper way (entirely at CATC expense) to obtain for its own benefit patents for such inventions in any and all countries, the invention to be and remain the property of CATC and its nominees, whether patented or not. (b) Inventions referred to in the above paragraph means any invention, improvement, or discovery (whether or not patentable) conceived or actually reduced to practice either in the performance of the experimental, developmental, or research work contemplated by this Agreement. -CONFIDENTIAL- Albert F. Lee Employment Agreement (c) Employee agrees that all writings produced by Employee under this contract shall be the sole property of CATC and CATC shall have the exclusive right to copyright such writings in any country or countries. 6. CATC'S TRADE SECRETS Employee agrees he will not, either during or subsequent to the term of this Agreement, directly or indirectly, divulge to unauthorized persons any secret or confidential know-how or other information acquired through his association with CATC, including work in connection with any contract for any department of the United States Government or other customer, and not known to the industry or recognized as standard practice, whether acquired or developed by him during the term of this Agreement or obtained from other employees; and that he will not, either during or subsequent to the term of this Agreement, directly or indirectly, publish or disclose to any third party any such information without written authorization from CATC to do so, nor will he use such information apart from CATC's business without the approval of CATC. 7. TRADE SECRETS OF OTHERS Employee represents that his performance of all of the terms of this Agreement and as a Employee to CATC does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his execution of this Agreement with CATC, and he will not disclose to CATC, or induce CATC to use, any confidential or proprietary information or material belonging to any previous employer or others. Employee agrees not to enter into any agreement either written or oral in conflict herewith. 8. EMPLOYMENT TERMS 8.1 At-will Employment The Company and Employee acknowledge that Employee's employment will be at-will, as defined under applicable law. If Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company. 8.2. Severance Benefits (a) Termination Following a Change of Control. If Employee's employment terminates at any time within twelve (12) months following a Change of Control, then Employee shall be entitled to receive the following severance benefits: (i) Termination other than for Cause; Good Reason. If Employee's employment is terminated by the Company other than for Cause or if Employee terminates his employment due to a Good Reason, then Employee shall be entitled to receive severance pay from the Company in an amount equal to Employee's base salary for the six calendar month period immediately preceding the Termination Date. Any severance payment to which Employee is entitled pursuant to this Section shall be paid by the Company to Employee in cash and in full not later than thirty (30) calendar days following the Termination Date. (A) Procedures. In the event Employee believes that the Company has taken an action that constitutes Good Reason as defined in Section 9. (d), Employee shall give written notice to the Company in writing setting forth the basis for such belief. The Company shall have 30 days in which to take action restoring Employee to the position he was in prior to the Company taking the action that constituted Good Reason. If the Company takes such action, Employee shall not thereafter have the right to terminate employment for Good Reason on account of the actions previously taken by Employee. If -CONFIDENTIAL- Albert F. Lee Employment Agreement Employee fails to notify the Company within 30 days of the events that constitute Good Reason, Employee shall not thereafter have the right to terminate his employment for Good Reason based on those events. (ii) Voluntary Resignation; Termination For Cause. If Employee's employment terminates by reason of Employee's voluntary resignation (and not for Good Reason), or if Employee is terminated for Cause, then Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other agreements with the Company. (iii) Disability; Death. If the Company terminates Employee's employment as a result of Employee's Disability, or such Employee's employment is terminated due to the death of Employee, then Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other agreements with the Company. (b) Termination Apart from Change of Control. In the event Employee's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the six (6) month period following a Change of Control, then Employee shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefits plans and practices or pursuant to other agreements with the Company. 9. DEFINITION OF TERMS The following terms referred to in this Agreement shall have the following meanings: (a) Cause. For purposes of this Agreement, the term "Cause" is defined as any one or more of the following occurrences: (i) Employee's continued failure to perform his duties and responsibilities commensurate with the scope and stature of Employee's position in good faith and to the best of his ability for a period of 30 days after written notice thereof from the Company to Employee; or (ii) Employee's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent and final jurisdiction for any crime which constitutes a felony in the jurisdiction involved; or (iii) Employee's commission of an act of fraud or misappropriation of funds, whether prior or subsequent to the date hereof, upon the Company; or (iv) Employee's breach of a material provision of this Agreement or Employee's Confidential Information and Invention Assignment Agreement with the Company; or (v) Gross negligence by Employee in the scope of his services to the Company; or (vi) Employee's commencement of employment (as an employee or a consultant) with another employer while he is an employee of the Company, without the prior written consent of the Company; or (vii) Material nonconformance with the Company's standard business practices and policies generally, including but not limited to policies against racial or sexual discrimination or harassment, delivered in writing to Employee. (b) Change of Control. "Change of Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) other than Dan Wilnai, Peretz Tzarnotzky or Philips Semiconductors -CONFIDENTIAL- Albert F. Lee Employment Agreement (or any affiliate of any such person) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 75% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company, such surviving entity or the entity that controls such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) Disability. "Disability" shall mean that Employee has been unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Employee or Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate Employee's employment. In the event that Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (d) Good Reason. "Good Reason" shall mean (i) without Employee's express written consent, the significant reduction of Employee's duties, authority or responsibilities, relative to Employee's duties, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Employee of such reduced duties, authority or responsibilities; (ii) a reduction by the Company in the base salary of Employee as in effect immediately prior to such reduction; or (iii) the relocation of Employee to a facility or a location more than sixty (60) miles from Employee's then present location, without Employee's express written consent. (e) Termination Date. "Termination Date" shall mean (i) if Employee's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to Employee (provided that Employee shall not have returned to the performance of Employee's duties on a full-time basis during such thirty (30)-day period), (ii) if Employee's employment is terminated by the Company for any other reason, the date on which a notice of termination is given; provided, however, that if within thirty (30) days after the Company gives Employee notice of termination, Employee notifies the Company that a dispute exists concerning the termination or the benefits due pursuant to this Agreement, then the Termination Date shall be the date on which such dispute is finally determined, either by mutual written agreement of the parties, or a by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) subject to Section 8.2 (a)(i)(A), if Employee's employment is terminated by Employee for Good Reason, the date on which Employee delivers the notice of termination required by such Section to the Company. 10. MISCELLANEOUS PROVISIONS (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or -CONFIDENTIAL- Albert F. Lee Employment Agreement written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California as applied to agreements entered into and performed within California solely by residents of that state. (d) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. 11. EFFECTIVE DATE This Agreement is effective as of 5 December 1997. 12. ENTIRE AGREEMENT This Agreement embodies the entire agreement and understanding which exists among and between the parties relating to the subject matter. There are no agreements, representations, warranties or statements with respect to the subject matter hereof except as expressly set forth herein. - -------------------------------------------------------------------------------- Computer Access Technology Corp. Employee - -------------------------------------------------------------------------------- Signature /s/ Dan Wilnai Signature /s/ Albert F. Lee - -------------------------------------------------------------------------------- Dan Wilnai, President Name Albert F. Lee - -------------------------------------------------------------------------------- 5 December 1997 Date 12/5/97 - -------------------------------------------------------------------------------- -CONFIDENTIAL- EX-10.11 6 0006.txt EMPLOYMENT AGREEMENT BETWEEN SRIKUMAR CHANDRAN AND REGISTRANT CATC Sri Chandran Employment Agreement EXHIBIT 10.11 EMPLOYMENT AGREEMENT Computer Access Technology Corporation, a corporation, (hereinafter known as "CATC"), having its principal place of business at 2403 Walsh Avenue, Santa Clara, California 95051-1302, is hiring Mr. Sri Chandran, whose social security number is ___-__-____ (hereinafter referred to as "Employee"), located at 12122 Natoma Ct., Saratoga, CA 95057, as a full time employee under the following conditions: 1. JOB DESCRIPTION As part of CATC's technical team, Employee shall perform all functions required by CATC in connection with the development, manufacturing and technical support of its products, including but not limited to: . Lead the development of end-user products including - . Definition and specifications of new products . Recruit and manage the development team . Detailed Logic and Analog design of new products . Design of enclosures and packaging . Build and debug prototypes of new products . Transfer CATC's products to manufacturing . Develop special test equipment for final product test . Manage product certifications tests (FCC, UL, etc.) . Assist in generating technical, sales and marketing literature . Assist in technical customer support 2. COMPENSATION 2.1. Salary: Employee is paid a monthly salary starting at $10,833 ($130,000 per year) and is exempt from overtime pay. CATC's pay-day is the last day of the month. 2.2. Bonus: CATC will pay Employee a $10,000 achievement bonus upon successfully meeting the jointly developed goals for the first 6 months of employment. CATC may periodically pay Employee additional achievement bonuses based on the company financial performances and on Employee's meeting certain objectives as defined by CATC's management. 2.3. Performance Reviews: Employee will have two performance-reviews per year (every 6 months). Changes in the compensation package will be determined by CATC's management once a year and will be related to Employee's job performance and to the company revenues and profits. -CONFIDENTIAL- CATC Sri Chandran Employment Agreement 3. BENEFITS 3.1. Stock Option: When joining the company, Employee will have an option to purchase 100,000 of CATC's common shares in accordance with CATC's Stock Option plan, subject to CATC Board of Directors' approval. Additional shares may be granted as part of the performance review process. 3.2. Health Care: Medical, Dental and Vision insurance plans are fully paid by CATC for Employee and dependents 3.3. Pension Plan: CATC offers its employees a 401K retirement saving plan. The company provides matching contributions to the plan (currently at 100%) at the discretion of its Board of Directors. 3.4. Time Off: CATC recognizes the need for employees to enjoy time away from work to relax and pursue personal activities. Employee is entitled to the following time off: . 16 days paid PET (Personal Excused Time) for the first year of service (1.33 days per month accrual). One additional day per year of service up to maximum of 20 days per year. . Paid Holidays for all Holidays that CATC's offices are closed. Employee should schedule his time off with his supervisor, providing reasonable notice so that both company and personal needs can be met. 4. EXPENSES CATC shall reimburse Employee for actual travel expenses incurred while in a travel status authorized in writing by CATC for reasonable amounts. Said reimbursement to cover all proper expenses including motel bills, meals, and: (1) Either the cost of transportation by common carriers; or (2) A per-mile amount (following Government regulations) when Employee's automobile is used; and (3) Other incidental expenses 5. INVENTIONS, PATENT RIGHTS AND COPYRIGHTS (a) Employee agrees that he will communicate to CATC's management all inventions made or conceived by him in connection with the performance of the work contemplated by this Agreement and that he will, without further consideration, assign all right, title and interest in such inventions to CATC and will assist CATC and its nominees in every proper way (entirely at CATC expense) to obtain for its own benefit patents for such inventions in any and all countries, the invention to be and remain the property of CATC and its nominees, whether patented or not. (b) Inventions referred to in the above paragraph means any invention, improvement, or discovery (whether or not patentable) conceived or actually reduced to practice either in the -CONFIDENTIAL- CATC Sri Chandran Employment Agreement performance of the experimental, developmental, or research work contemplated by this Agreement. (c) Employee agrees that all writings produced by Employee under this contract shall be the sole property of CATC and CATC shall have the exclusive right to copyright such writings in any country or countries. 6. CATC'S TRADE SECRETS Employee agrees he will not, either during or subsequent to the term of this Agreement, directly or indirectly, divulge to unauthorized persons any secret or confidential know-how or other information acquired through his association with CATC, including work in connection with any contract for any department of the United States Government or other customer, and not known to the industry or recognized as standard practice, whether acquired or developed by him during the term of this Agreement or obtained from other employees; and that he will not, either during or subsequent to the term of this Agreement, directly or indirectly, publish or disclose to any third party any such information without written authorization from CATC to do so, nor will he use such information apart from CATC's business without approval of CATC. 7. TRADE SECRETS OF OTHERS Employee represents that his performance of all of the terms of this Agreement and as a Employee to CATC does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his execution of this Agreement with CATC, and he will not disclose to CATC, or induce CATC to use, any confidential or proprietary information or material belonging to any previous employer or others. Employee agrees not to enter into any agreement either written or oral in conflict herewith. 8. EMPLOYMENT TERMS The Company and Employee acknowledge that Employee's employment will be at-will, as defined under applicable law. If Employee's employment terminates for any reason, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company. 9. MISCELLANEOUS PROVISIONS (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered by either party with respect to the subject matter hereof. (c) Choice of Law. The validity, interpretation, construction and performance of this -CONFIDENTIAL- CATC Sri Chandran Employment Agreement Agreement shall be governed by the laws of the State of California as applied to agreements entered into and performed within California solely by residents of that State. (d) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. 10. EFFECTIVE DATE This Agreement is effective as of 8 January 1998. 11. ENTIRE AGREEMENT This Agreement embodies the entire agreement and understanding which exists among and between the parties relating to the subject matter. There are no agreements, representations, warranties or statements with respect to the subject matter hereof except as expressly set forth herein. - -------------------------------------------------------------------------------- Computer Access Technology Corp. Employee - -------------------------------------------------------------------------------- Signature /s/ Dan Wilnai Signature: /s/ Sri R. Chandran - -------------------------------------------------------------------------------- Dan Wilnai, President Name SRI R. CHANDRAN - -------------------------------------------------------------------------------- 8 January 1998 Date 1.16.98 - -------------------------------------------------------------------------------- Start Date: February 2, 1998 -CONFIDENTIAL- EX-10.12 7 0007.txt EMPLOYMENT AGREEMENT BETWEEN JOSEPH MENDOLIA AND REGISTRANT CATC Joseph C. Mendolia Employment Agreement Exhibit 10.12 EMPLOYMENT AGREEMENT Computer Access Technology Corporation, a corporation, (hereinafter known as "CATC"), having its principal place of business at 2403 Walsh Avenue, Santa Clara, California 95051-1302, is hiring Mr. Joseph C. Mendolia, whose social security number is ###-##-#### (hereinafter referred to as "Employee"), located at 392 Photinia Lane, San Jose, CA 95127-2525, as a full time employee under the following conditions: 1. JOB DESCRIPTION Employee shall perform all functions required by CATC to manage and grow our sales and marketing, including but not limited to: . Set up and implement global corporate sales and marketing strategies . Set up and manage CATC's domestic and international, OEM and reseller distribution channels . Put in place and manage the internal resources required to execute the sales and marketing plans . Put in place the necessary processes and procedures to manage the sales and marketing activities Further responsibilities are strategic and tactical marketing including, but not limited to direction and positioning, product definition, alliances, competitive analysis, pricing, marketing communications, public relations and channel sales support. 2. COMPENSATION 2.1. Salary: Employee is paid a monthly salary starting at $8,333.33 ($100,000 per year) and is exempt from overtime pay. CATC's pay-day is the last day of the month. 2.2. Commission: CATC will pay Employee a sales commission, based on product sales generated by Employee. For the first 3 months, until specific sales goals are set for Employee, CATC will pay Employee every month, as part of the monthly pay check, $4166.67 as a guaranteed sales commission. After the first 3 months of employment, CATC will set specific sales goals for Employee and the sales commission will be tied to Employee's performance relative to these goals. 2.3. Bonus: CATC may periodically pay Employee achievement bonuses based on meeting certain objectives as defined by CATC's management. 2.4. Performance Reviews: Employee will have two performance-reviews per year (every 6 months). Changes in the compensation package will be determined by CATC's management once a year and will be related to Employee's job performance and to the company revenues and profits. 3. BENEFITS 3.1. Stock Option: When joining the company, Employee will have an option to purchase 150,000 of CATC's common shares in accordance with CATC's Stock Option plan, subject to CATC Board of Directors' approval. Additional shares may be granted as part of the performance review process. See note A, Page 7. - CONFIDENTIAL - CATC Joseph C. Mendolia Employment Agreement 3.2. Health Care: Medical, Dental and Vision insurance plans are fully paid by CATC for Employee and dependents 3.3. Pension Plan: CATC offers its employees a 401K retirement saving plan. The company provides matching contributions to the plan at the discretion of its Board of Directors. 3.4. Time Off: CATC recognizes the need for employees to enjoy time away from work to relax and pursue personal activities. Employee is entitled to the following time off: . 16 days paid PET (Personal Excused Time) for the first year of service (1.33 days per month accrual). One additional day per year of service up to maximum of 20 days per year. . Paid Holidays for all Holidays that CATC's offices are closed. Employee should schedule his time off with his supervisor, providing reasonable notice so that both company and personal needs can be met. 4. EXPENSES CATC shall reimburse Employee for actual travel expenses incurred while in a travel status authorized in writing by CATC for reasonable amounts. Said reimbursement to cover all proper expenses including motel bills, meals, and: (1) Either the cost of transportation by common carriers; or (2) A per-mile amount (following Government regulations) when Employee's automobile is used; and (3) Other incidental expenses 5. INVENTIONS, PATENT RIGHTS AND COPYRIGHTS (a) Employee agrees that he will communicate to CATC's management all inventions made or conceived by him in connection with the performance of the work contemplated by this Agreement and that he will, without further consideration, assign all right, title and interest in such inventions to CATC and will assist CATC and its nominees in every proper way (entirely at CATC expense) to obtain for its own benefit patents for such inventions in any and all countries, the invention to be and remain the property of CATC and its nominees, whether patented or not. (b) Inventions referred to in the above paragraph means any invention, improvement, or discovery (whether or not patentable) conceived or actually reduced to practice either in the performance of the experimental, developmental, or research work contemplated by this Agreement. (c) Employee agrees that all writings produced by Employee under this contract shall be the sole property of CATC and CATC shall have the exclusive right to copyright such writings in any country or Countries. 6. CATC'S TRADE SECRETS Employee agrees he will not, either during or subsequent to the term of this Agreement, directly or indirectly, divulge to unauthorized persons any secret or confidential know-how or other information acquired through his association with CATC, including work in connection with any contract for any department of the United States Government or other customer, and not known to the industry or recognized as standard practice, whether acquired or developed by him during the term of this Agreement or obtained from other employees; and that he will not, either during or subsequent to the term of this Agreement, directly or indirectly, publish or disclose to any third party any such information without - CONFIDENTIAL - CATC Joseph C. Mendolia Employment Agreement written authorization from CATC to do so, nor will he use such information apart from CATC's business without the approval of CATC. 7. TRADE SECRETS OF OTHERS Employee represents that his performance of all of the terms of this Agreement and as a Employee to CATC does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his execution of this Agreement with CATC, and he will not disclose to CATC, or induce CATC to use, any confidential or proprietary information or material belonging to any previous employer or others. Employee agrees not to enter into any agreement either written or oral in conflict herewith. 8. EMPLOYMENT TERMS 8.1. At-will Employment The Company and Employee acknowledge that Employee's employment will be at-will, as defined under applicable law. If Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company. 8.2. Severance Benefits (a) Termination Following a Change of Control. If Employee's employment terminates at any time within twelve (12) months following a Change of Control, then Employee shall be entitled to receive the following severance benefits: (i) Termination other than for Cause; Good Reason. If Employee's employment is terminated by the Company other than for Cause or if Employee terminates his employment due to a Good Reason, then Employee shall be entitled to receive severance pay from the Company in an amount equal to Employee's base salary for the six calendar month period immediately preceding the Termination Date. Any severance payment to which Employee is entitled pursuant to this Section shall be paid by the Company to Employee in cash and in full not later than thirty (30) calendar days following the Termination Date. (A) Procedures. In the event Employee believes that the Company has taken an action that constitutes Good Reason as defined in Section 9. (d), Employee shall give written notice to the Company in writing setting forth the basis for such belief. The Company shall have 30 days in which to take action restoring Employee to the position he was in prior to the Company taking the action that constituted Good Reason. If the Company takes such action, Employee shall not thereafter have the right to terminate employment for Good Reason on account of the actions previously taken by Employee. If Employee fails to notify the Company within 30 days of the events that constitute Good Reason, Employee shall not thereafter have the right to terminate his employment for Good Reason based on those events. (ii) Voluntary Resignation; Termination For Cause. If Employee's employment terminates by reason of Employee's voluntary resignation (and not for Good Reason), or if Employee is terminated for Cause, then Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other agreements with the Company. (iii) Disability; Death. If the Company terminates Employee's employment as a result of Employee's Disability, or such Employee's employment is terminated due to the death of Employee, then Employee shall not be entitled to receive severance or other benefits except for those (if - CONFIDENTIAL - CATC Joseph C. Mendolia Employment Agreement any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other agreements with the Company. (b) Termination Apart from Change of Control. In the event Employee's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the six (6) month period following a Change of Control, then Employee shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefits plans and practices or pursuant to other agreements with the Company. 9. DEFINITION OF TERMS The following terms referred to in this Agreement shall have the following meanings: (a) Cause. For purposes of this Agreement, the term "Cause" is defined as any one or more of the following occurrences: (i) Employee's continued failure to perform his duties and responsibilities commensurate with the scope and stature of Employee's position in good faith and to the best of his ability for a period of 30 days after written notice thereof from the Company to Employee; or (ii) Employee's conviction by, or entry of a plea of guilty or no contendere in, a court of competent and final jurisdiction for any crime which constitutes a felony in the jurisdiction involved; or (iii) Employee's commission of an act of fraud or misappropriation of funds, whether prior or subsequent to the date hereof, upon the Company; or (iv) Employee's breach of a material provision of this Agreement or Employee's Confidential Information and Invention Assignment Agreement with the Company; or (v) Gross negligence by Employee in the scope of his services to the Company; or (vi) Employee's commencement of employment (as an employee or a consultant) with another employer while he is an employee of the Company, without the prior written consent of the Company; or (vii) Material nonconformance with the Company's standard business practices and policies generally, including but not limited to policies against racial or sexual discrimination or harassment, delivered in writing to Employee. (b) Change of Control. "Change of Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) other than Dan Wilnai, Peretz Tzarnotzky or Philips Semiconductors (or any affiliate of any such person) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 75% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company, such surviving entity or the entity that controls such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. - CONFIDENTIAL - CATC Joseph C. Mendolia Employment Agreement (c) Disability. "Disability" shall mean that Employee has been unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Employee or Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate Employee's employment. In the event that Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (d) Good Reason. "Good Reason" shall mean (i) without Employee's express written consent, the significant reduction of Employee's duties, authority or responsibilities, relative to Employee's duties, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Employee of such reduced duties, authority or responsibilities; (ii) a reduction by the Company in the base salary of Employee as in effect immediately prior to such reduction; or (iii) the relocation of Employee to a facility or a location more than sixty (60) miles from Employee's then present location, without Employee's express written consent. (e) Termination Date. "Termination Date" shall mean (i) if Employee's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to Employee (provided that Employee shall not have returned to the performance of Employee's duties on a full-time basis during such thirty (30)-day period), (ii) if Employee's employment is terminated by the Company for any other reason, the date on which a notice of termination is given; provided, however, that if within thirty (30) days after the Company gives Employee notice of termination, Employee notifies the Company that a dispute exists concerning the termination or the benefits due pursuant to this Agreement, then the Termination Date shall be the date on which such dispute is finally determined, either by mutual written agreement of the parties, or a by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) subject to Section 8.2 (a)(i)(A), if Employee's employment is terminated by Employee for Good Reason, the date on which Employee delivers the notice of termination required by such Section to the Company. 10. MISCELLANEOUS PROVISIONS (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California as applied to agreements entered into and performed within California solely by residents of that state. (d) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. 11. EFFECTIVE DATE This Agreement is effective as of 29 March 1999. - CONFIDENTIAL - CATC Joseph C. Mendolia Employment Agreement 12. ENTIRE AGREEMENT This Agreement embodies the entire agreement and understanding which exists among and between the parties relating to the subject matter. There are no agreements, representations, warranties or statements with respect to the subject matter hereof except as expressly set forth herein. - -------------------------------------------------------------------------------- Computer Access Technology Corp. Employee - -------------------------------------------------------------------------------- Signature: /s/ Peretz Tzarnotzky Signature: /s/ Joseph C. Mendolia - -------------------------------------------------------------------------------- Peretz Tzarnotzky Name: Joseph C. Mendolia Vice President - -------------------------------------------------------------------------------- 29 March 1999 Date: March 30, 1999 - -------------------------------------------------------------------------------- Note A: As discussed and agreed, If at time of Initial Public Offering (IPO) the pool of shares used to create the IPO includes founders shares, said employee shall have the right to participate in such offering by submitting shares which would be used in creating the IPO share pool. Under no circumstances, however, shall the amount of shares submitted by said employee exceed, as a percentage of holdings, the number of shares submitted by founders (i.e. founder stock submitted / founder holding = employee stock submitted / employee holding). - CONFIDENTIAL - EX-10.13 8 0008.txt EMPLOYMENT AGREEMENT BETWEEN DENNIS EVANS AND REGISTRANT Exhibit 10.13 CATC Dennis Evans Employment Agreement EMPLOYMENT AGREEMENT Computer Access Technology Corporation, a corporation, (hereinafter known as "CATC"), having its principal place of business at 2403 Walsh Avenue, Santa Clara, California 95051-1302, is hiring Mr. Dennis W. Evans, whose social security number is ###-##-#### (hereinafter referred to as "Employee"), located at 17462 Belletto Drive, Morgan Hill, CA 95037, as a full time employee under the following conditions: 1. JOB DESCRIPTION As a key member of CATC's top management team, Employee shall perform all business functions required by CATC, including but not limited to: . Develop and execute CATC's financial strategy, providing advice and guidance on all financial matters. . Implement financial plans, budgets and controls for the company. . Oversee all business performance reporting, business decision analysis, profit planning, accounting policies, financial reporting systems, as well as tax and treasury matters, budgeting, forecasting, and audit. . As company pursues an IPO, coordinate banking relationships and investor relations activities including road shows and conferences, internal and external (including statutory) reporting, and asset allocation planning. Manage Wall Street investors and analysts, communicating CATC's vision and strategy. . In addition to carefully analyzing the industry and company cost structures to identify and correct inefficiencies, Employee will ensure that resources, direction, and internal controls exist throughout the company to achieve timely and accurate reporting of all financial and administrative matters. . At a later stage, may be responsible for coordinating financial and integration aspects of any strategic acquisitions. . Negotiate necessary lines of credit, equipment leasing and other required financing. . Manage cash and investment portfolio against budgets, forecasts and cash flow requirements. . Drive negotiation strategy and tactics with major suppliers, vendors and contractors. . Manages general administration and human resources. . Ensures compliance with applicable regulations or regulatory agencies, such as generally accepted accounting principles (GAAP) and Securities Exchange Commission (SEC) regulations where appropriate. . Maintain stock issuance, options and ensure company compliance. - CONFIDENTIAL - CATC Dennis Evans Employment Agreement 2. COMPENSATION 2.1. Salary: Employee is paid a monthly salary starting at $14,583.33 ($175,000 per year) and is exempt from overtime pay. CATC's pay-day is the last day of the month. 2.2. Bonus: CATC will offer Employee a Sign-on Bonus in the amount of $15,000 to be paid to Employee within 30 days of Start Date. This Sign-on Bonus is contingent on Employee's continuing employment with CATC and is subject to the following terms and conditions: The Sign-on Bonus will accrue to Employee on a pro-rata basis at the rate of 1/12th of $15,000 ($1,250) per month over the first 12 months of your employment with CATC. Should your employment be terminated voluntarily by you, or by CATC for cause, before the end of the 12 months term, the remaining unaccrued balance will be due and payable to CATC by your last day of employment. Within the first 30 days of employment, CATC's management and Employee will jointly define a set of goals and objectives for the Employee for the first 6 months of employment. Upon successfully reaching these goals CATC will pay Employee an achievement bonus of $25,000. In addition, CATC may periodically pay Employee achievement bonuses based on the company financial performances and on Employee's meeting certain objectives as defined by CATC's management. 2.3. Performance Reviews: Employee will have two performance-reviews per year (every 6 months). Changes in the compensation package will be determined by CATC's management once a year and will be related to Employee's job performance and to the company revenues and profits. 3. BENEFITS 3.1. Stock Option: When joining the company, Employee will have an option to purchase 150,000 of CATC's common shares in accordance with CATC's Stock Option plan, subject to CATC Board of Directors' approval. Additional shares may be granted as part of the performance review process. 3.2. Health Care: Medical, Dental, Vision, Life and LTD insurance plans are fully paid by CATC for Employee and dependents 3.3. Pension Plan: CATC offers its employees a 401K retirement saving plan. The company provides matching contributions to the plan at the discretion of its Board of Directors. 3.4. Time Off: CATC recognizes the need for employees to enjoy time away from work to relax and pursue personal activities. Employee is entitled to the following time off: - CONFIDENTIAL - CATC Dennis Evans Employment Agreement . 16 days paid PET (Personal Excused Time) for the first year of service (1.33 days per month accrual). One additional day per year of service up to maximum of 26 days per year. . Paid Holidays for all Holidays that CATC's offices are closed. Employee should schedule his time off with his supervisor, providing reasonable notice so that both company and personal needs can be met. 4. EXPENSES CATC shall reimburse Employee for actual travel expenses incurred while in a travel status authorized in writing by CATC for reasonable amounts. Said reimbursement to cover all proper expenses including motel bills, meals, and; (1) Either the cost of transportation by common carriers; or (2) A per-mile amount (following Government regulations) when Employee's automobile is used; and (3) Other incidental expenses 5. INVENTIONS, PATENT RIGHTS AND COPYRIGHTS (a) Employee agrees that he will communicate to CATC's management all inventions made or conceived by him in connection with the performance of the work contemplated by this Agreement and that he will, without further consideration, assign all right, title and interest in such inventions to CATC and will assist CATC and its nominees in every proper way (entirely at CATC expense) to obtain for its own benefit patents for such inventions in any and all countries, the invention to be and remain the property of CATC and its nominees, whether patented or not. (b) Inventions referred to in the above paragraph means any invention, improvement, or discovery (whether or not patentable) conceived or actually reduced to practice either in the performance of the experimental, developmental, or research work contemplated by this Agreement. (c) Employee agrees that all writings produced by Employee under this contract shall be the sole property of CATC and CATC shall have the exclusive right to copyright such writings in any country or countries. 6. CATC'S TRADE SECRETS Employee agrees he will not, either during or subsequent to the term of this Agreement, directly or indirectly, divulge to unauthorized persons any secret or confidential know-how or other information acquired through his association with CATC, including work in connection with any contract for any department of the United States Government or other customer, and not known to the industry or recognized as standard practice, whether acquired or developed by him during the term of this Agreement or obtained from other employees; and that he will not, either during or subsequent to the term of this Agreement, directly or indirectly, publish or disclose to any third party any such information without written authorization from CATC to do so, nor will he use such information apart from CATC's business without the approval of CATC. - CONFIDENTIAL - CATC Dennis Evans Employment Agreement 7. TRADE SECRETS OF OTHERS Employee represents that his performance of all of the terms of this Agreement and as a Employee to CATC does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to his execution of this Agreement with CATC, and he will not disclose to CATC, or induce CATC to use, any confidential or proprietary information or material belonging to any previous employer or others. Employee agrees not to enter into any agreement either written or oral in conflict herewith. 8. EMPLOYMENT TERMS 8.1. At-will Employment The Company and Employee acknowledge that Employee's employment will be at-will, as defined under applicable law. If Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company. 8.2. Severance Benefits (a) Termination. If Employee's employment terminates (i) at any time after a waiting period of twelve (12) months from Start Date, or (ii) if Employee's employment terminates at any time within twelve (12) months following a Change of Control, then Employee shall be entitled to receive the following severance benefits: (i) Termination other than for Cause; Good Reason. If Employee's employment is terminated by the Company other than for Cause or if Employee terminates his employment due to a Good Reason, then Employee shall be entitled to receive severance pay from the Company in an amount equal to Employee's base salary for the six calendar month period immediately preceding the Termination Date. Any severance payment to which Employee is entitled pursuant to this Section shall be paid by the Company to Employee in cash and in full not later than thirty (30) calendar days following the Termination Date. (A)Procedures. In the event Employee believes that the Company has taken an action that constitutes Good Reason as defined in Section 9. (d), Employee shall give written notice to the Company in writing setting forth the basis for such belief. The Company shall have 30 days in which to take action restoring Employee to the position he was in prior to the Company taking the action that constituted Good Reason. If the Company takes such action, Employee shall not thereafter have the right to terminate employment for Good Reason on account of the actions previously taken by Employee. If Employee fails to notify the Company within 30 days of the events that constitute Good Reason, Employee shall not thereafter have the right to terminate his employment for Good Reason based on those events. (ii) Voluntary Resignation; Termination for Cause. If Employee's employment terminates by reason of Employee's voluntary resignation (and not for Good Reason), or if Employee is terminated for Cause, then Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then - CONFIDENTIAL - CATC Dennis Evans Employment Agreement existing severance and benefits plans and practices or pursuant to other agreements with the Company. (iii) Disability; Death. If the Company terminates Employee's employment as a result of Employee's Disability, or such Employee's employment is terminated due to the death of Employee, then Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and practices or pursuant to other agreements with the Company. (b) Other Termination. In the event Employee's employment is terminated for any reason, (i) prior to the termination of the twelve (12) months waiting period from Start Date or (ii) prior to the occurrence of a Change of Control or (iii) after the twelve (12) months period following a Change of Control, then Employee shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefits plans and practices or pursuant to other agreements with the Company. 9. DEFINITION OF TERMS The following terms referred to in this Agreement shall have the following meanings: (a) Cause. For purposes of this Agreement, the term "Cause" is defined as any one or more of the following occurrences: (i) Employee's continued failure to perform his duties and responsibilities commensurate with the scope and stature of Employee's position in good faith and to the best of his ability for a period of 30 days after written notice thereof from the Company to Employee; or (ii) Employee's conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent and final jurisdiction for any crime which constitutes a felony in the jurisdiction involved; or (iii) Employee's commission of an act of fraud or misappropriation of funds, whether prior or subsequent to the date hereof, upon the Company; or (iv) Employee's breach of a material provision of this Agreement or Employee's Confidential Information and Invention Assignment Agreement with the Company; or (v) Gross negligence by Employee in the scope of his services to the Company; or (vi) Employee's commencement of employment (as an employee or a consultant) with another employer while he is an employee of the Company, without the prior written consent of the Company; or (vii) Material nonconformance with the Company's standard business practices and policies generally, including but not limited to policies against racial or sexual discrimination or harassment, delivered in writing to Employee. (b) Change of Control. "Change of Control" means the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) other than Dan Wilnai, Peretz Tzarnotzky or Philips Semiconductors (or any affiliate of any such person) is or becomes the "beneficial owner" (as - CONFIDENTIAL - CATC Dennis Evans Employment Agreement defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 75% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company, such surviving entity or the entity that controls such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) Disability. "Disability" shall mean that Employee has been unable to perform his Company duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to Employee or Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate Employee's employment. In the event that Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (d) Good Reason. "Good Reason" shall mean (i) without Employee's express written consent, the significant reduction of Employee's duties, authority or responsibilities, relative to Employee's duties, authority or responsibilities as in effect immediately prior to such reduction, or the assignment to Employee of such reduced duties, authority or responsibilities; (ii) a reduction by the Company in the base salary of Employee as in effect immediately prior to such reduction, unless such reduction is caused by Company's general business conditions; or (iii) the relocation of Employee to a facility or a location more than sixty (60) miles from Employee's then present location, without Employee's express written consent. (e) Termination Date. "Termination Date" shall mean (i) if Employee's employment is terminated by the Company for Disability, thirty (30) days after notice of termination is given to Employee (provided that Employee shall not have returned to the performance of Employee's duties on a full-time basis during such thirty (30)-day period), (ii) if Employee's employment is terminated by the Company for any other reason, the date on which a notice of termination is given; provided, however, that if within thirty (30) days after the Company gives Employee notice of termination, Employee notifies the Company that a dispute exists concerning the termination or the benefits due pursuant to this Agreement, then the Termination Date shall be the date on which such dispute is finally determined, either by mutual written agreement of the parties, or a by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) subject to Section 8.2 (a)(i)(A), if Employee's employment is terminated by Employee for Good Reason, the date on which Employee delivers the notice of termination required by such Section to the Company. - CONFIDENTIAL - CATC Dennis Evans Employment Agreement 10. MISCELLANEOUS PROVISIONS (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California as applied to agreements entered into and performed within California solely by residents of that state. (d) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. 11. EFFECTIVE DATE This Agreement is effective as of 1 May 2000. 12. ENTIRE AGREEMENT This Agreement embodies the entire agreement and understanding which exists among and between the parties relating to the subject matter. There are no agreements, representations, warranties or statements with respect to the subject matter hereof except as expressly set forth herein. - -------------------------------------------------------------------------------- Computer Access Techology Employee - -------------------------------------------------------------------------------- Signature /s/ Dan Wilnai, President Signature: /s/ Dennis W. Wans - -------------------------------------------------------------------------------- Dan Wilnai, President Name Dennis W. Wans - -------------------------------------------------------------------------------- 1 May 2000 Date 5/1/00 - -------------------------------------------------------------------------------- - CONFIDENTIAL - EX-10.14 9 0009.txt COMMON STOCK PURCHASE AGREEMENT EXHIBIT 10.14 COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is made effective as of March 15, 1994, by and among Computer Access Technology Corporation, a California corporation (the "Company") with its principal office at 3375 Scott Blvd., Suite 410, Santa Clara, California 95054 and Philips Semiconductors, a division of Philips Electronics North American Corporation ("Philips"), with its principal office at 811 East Arques Avenue, Sunnyvale, California 94088-3409. SECTION 1 1.1 Authorization. The Company has authorized the sale and issuance of up ------------- to 857,141 shares of Common Stock (the "Shares"). 1.2 Sale of the Shares. Subject to the terms and conditions of this ------------------ Agreement, Philips agrees to purchase and the Company agrees to sell and issue to Philips the Shares at a price per Share of $1,16667 for an aggregate purchase price of $1,000,000.69 subject to Section 1.3 hereof. 1.3 Delivery. On the date hereof (the "Initial Closing Date"), the -------- Company will deliver to Philips a certificate or certificates registered in Philips' name representing 428,571 Shares against payment of the purchase price therefor of $500,000.93 by check payable to the Company or wire transfer per the Company's instructions. On June 15, 1994 (the "Second Closing Date"), the Company will deliver to Philips a certificate or certificates registered in Philips' name representing 428,570 Shares, against payment of the purchase price therefor of $499,999.76 by check payable to the Company or wire transfer per the Company's instructions (such delivery of the balance of certificates and the payment therefor being known as the "Second Closing"), provided, however, that neither Philips nor the Company shall have any obligation to consummate the Second Closing if on the Second Closing Date: (a) the Company is a party to a voluntary or involuntary bankruptcy or insolvency proceeding with respect to the Company; (b) Dan Wilnai has ceased to participate actively in the management of the Company; or (c) there has been any significant change in the general business direction of the Company such that the Company ceases to focus on ACCESS.bus market development or ceases to develop ACCESS.bus products. SECTION 2 The Company represents and warrants to Philips, as of the Initial Closing Date, as follows: 2.1 Organization and Standing. The Company is a corporation duly ------------------------- organized and validly existing under, and by virtue of, the laws of the State of California and is in good standing under the laws of such state. The Company is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the ownership or leasing of properties or the conduct of its business requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company. 2.2 Corporation Power. The Company has all requisite legal and corporate ----------------- power and authority to execute and deliver this Agreement, to sell and issue the Shares hereunder and to carry out and perform its obligations under the terms of this Agreement. 2.3 Authorization. All corporate action on the part of the Company, its ------------- directors and officers necessary for the authorization, execution, delivery and performance of this Agreement, the authorization, sale, issuance and delivery of the Shares and the performance of all of the Company's obligations hereunder have been taken prior to the Initial Closing Date. This Agreement, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Shares, when issued in compliance with the provisions of this Agreement will be validly issued, fully paid and non-assessable, and will have the rights, preferences and privileges described in the Company's Articles of Incorporation. 2.4 Capitalization. The authorized capital stock of the Company consists -------------- of 5,000,000 shares of Common Stock, of which 2,000,000 shares are issued and outstanding as of the date hereof. The outstanding shares have been duly authorized and validly issued, and are fully paid and nonassessable. There are no outstanding options, warrants or other rights to purchase any of the Company's authorized and unissued capital stock. SECTION 3 Philips hereby represents and warrants to the Company, effective as of the Initial Closing Date, as follows: 3.1 Organization and Standing. Philips is a corporation duly organized ------------------------- and validly existing under, and by virtue of, the laws of the jurisdiction of its incorporation and is in good standing under the laws of such jurisdiction. 3.2 Corporate Power. Philips has all requisite legal and corporate power --------------- and authority to execute and deliver this Agreement, to purchase the Shares hereunder and to carry out and perform its obligations under the terms of this Agreement. -2- 3.3 Authorization. All corporate action on the part of Philips, its ------------- directors and officers necessary for the authorization, execution, delivery and performance of this Agreement, the purchase of the Shares and the performance of Philips' obligations hereunder have been taken prior to the Initial Closing Date. This Agreement, when executed and delivered by Philips, shall constitute a valid and binding obligation of Philips enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 3.4 Investment Experience. Philips is an "accredited investor" within the --------------------- meaning of Regulation D prescribed by the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"). 3.5 Investment Intent. Philips is purchasing the Shares for investment ----------------- for its own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. Philips understands that the Shares have not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Philips' investment intent as expressed herein. 3.6 Information Concerning the Company. Philips is aware of the Company's ---------------------------------- business and financial condition and has heretofore received all such information as Philips has deemed necessary and appropriate to enable Philips to evaluate the financial risk inherent in making an investment in the Company, and Philips has received satisfactory answers and information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. SECTION 4 The Company hereby covenants and agrees as follows: 4.1 Board Rights: Meetings. ---------------------- (a) So long as the Company's Board of Directors is comprised of three or more directors, Philips shall have the right to designate one such director. In the event that the Company's Board of Directors is comprised of four or more directors, Philips shall have the right to elect one director as noted in the previous sentence, and one other director must be an experienced financial professional recommended by the Company and satisfactory to Philips (Philips approval not to be unreasonably withheld). (b) The Board of Directors shall invite a Philips employee (which employee may be in addition to the Philips designee described above) to be identified by Philips to attend meetings of the Board of Directors solely for the purpose of keeping minutes. -3- (c) The Board of Directors shall make reasonable efforts to schedule its meetings at times that the Philips nominee can attend, and in any event shall give Philips at least 14 days' notice prior to the date of any meeting of the Board of Directors. (d) The Company's Board of Directors shall meet at least one time during each calendar quarter. (e) The Company shall deliver to each director, as soon as practical following the end of each calendar quarter, but in any event not later than sixty (60) days following the end of such quarter, an unaudited balance sheet and an unaudited profit or loss statement of the Company for the prior quarter. The Company shall similarly deliver annual financial reports when available, and if such reports are audited, shall deliver copies of the audited financial statements. The Company understands that Philips will treat all information delivered pursuant to this section 4.1(e) as confidential and not disclose such information to any third party unless required by law or court order. 4.2 Philips Right of First Refusal. The Company hereby grants to Philips a ------------------------------- right of first refusal to purchase Philips' pro rata share (the "Philips Percentage") of any New Securities (as defined below) which the Company may from time to time propose to sell and issue at the same price per share (even if the price is zero) as such shares are offered to any other entity. The "Philips Percentage," for purposes of this right of first refusal, is initially the ratio of the total number of Shares purchased by Philips pursuant to this Agreement and shall be adjusted as provided herein. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock of the Company, whether or not now authorized; provided, however, that the term "New Securities" shall not include (i) up to 550,000 shares of the Company's Common Stock issued to employees, consultants, directors and officers of the Company (other than Dan Wilnai or Peretz Tzarnotzky) pursuant to equity incentive plans and arrangements approved by the Board of Directors and (ii) securities issued in connection with any stock split, stock dividend or recapitalization of the Company, and , provided further, that the Philips Percentage shall be reduced to adjust for the dilutive effect of shares of capital stock issued pursuant to subsection (i) hereof upon the date of issuance thereof. The Philips Percentage shall not be adjusted upward if the Company repurchases outstanding capital stock or capital stock is contributed to the Company. (b) In the event that the Company proposes to undertake an issuance of New Securities, the Company shall give Philips written notice of its intention, describing the type of New Securities, the price and the general terms upon which the Company proposes to issue the same. Philips shall have 45 days from the date of any such notice to agree to purchase any amount of New Securities up to the Philips Percentage for the price and upon the general terms specified in the notice by giving written notice to the Company and starting therein the quantity of New Securities to be purchased. -4- (c) To the extent that Philips does not exercise full its right of first refusal within said 45-day period, the Company shall have 90 days thereafter to sell the New Securities with respect to which Philips' option was not exercised at the price and upon the terms specified in the Company's notice. In the event the Company has not sold the New Securities, without first offering such securities to Philips in the manner provided above. To the extent that Philips does not exercise its right of first refusal granted herein, the Philips Percentage shall thereafter be adjusted downward to that number calculated by dividing (i) the number of shares of capital stock of the Company then held by Philips by (ii) the number of shares of capital stock of the Company outstanding immediately after the sale of the New Securites. (d) Philips shall receive, within ten days of receipt of its written request therefor by the Company, a statement as to the current Philips Percentage and the means of calculating the same. 4.3 Nondisclosure. The Company agrees that it will not make any announcement ------------- to the press or general public of the existence or terms of this agreement without the prior written consent of Philips unless required by law or court order. Notwithstanding the foregoing sentence, the Company and Philips will cooperate to publish a joint press release regarding this Agreement at an agreed upon future date. 4.4 Termination. The covenants of the Company granted pursuant to this ----------- Section 4 shall terminate and be of no further force or effect (a) immediately prior to the closing of a firmly underwritten public offering of the Company's capital stock pursuant to a registration statement under the Securities Act with aggregate proceeds to the Company in excess of $5,000,000 or (b) if the shares of the Company's Common Stock owned by Philips cease to represent at least 15% of the outstanding Common Stock of the Company (calculated, with respect to any outstanding Preferred Stock, on as-if-converted basis) (a "Philips Withdrawal"). SECTION 5 Philips hereby covenants and agrees as follows: 5.1 Most Favored Customer Pricing. Philips agrees to sell to the Company all ----------------------------- the microcontroller products the Company reasonably requires for integration into the Company's products at the lowest price Philips sells each such product to any of its third-party customers. In addition, Philips agrees to sell to the Company microcontroller products for resale without integration into the Company's products at the same price that Philips sells each such product under its standard distributorship arrangements for such products. 5.2 Marketing and Sale of the Company's Products. -------------------------------------------- Philips agrees to promote and market aggressively the Company's ACCESS.bus.products, including but not limited to advertising, seminars and trade shows. Philips also agrees to train and motivate its sales force to sell the Company's ACCESS.bus products. -5- 5.3 Redemption ---------- (a) During the period commencing one year after the date of this Agreement and ending four years after the date of this Agreement, the Company may, at any time during such period that it may lawfully do so, at the option of the Board of Directors, redeem in whole or in part (but not less than 100,000 Shares, unless Phillips shall then own less than 100,000 Shares) the Shares by paying in cash therefor a sum per Share equal to the Redemption Price (as defined in Section 5.3(b) below). (b) At least 30 but no more than 60 days prior to the date fixed for any redemption of the Shares (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to Philips, notifying Philips of the redemption to be effected, specifying the number of shares to be redeemed from Philips, the Redemption Date, the Redemption Price, the place at which payment may be obtained and calling upon Philips to surrender to the Company, in the manner and at the place designated, its certificate or certificates representing the Shares to be redeemed (the "Redemption Notice"). The "Redemption Price" shall be the amount calculated to be the fair market value per Share, such calculation to be determined by an independent financial advisor acceptable to Philips and the Company and calculated based on an evaluation of price/earnings ratios for comparable companies with appropriate discounts for any special circumstances applicable to the Company, such as the lack of a public market for the Shares. Except as provided in subsection (c) hereof, on or after the Redemption Date, in the event of a redemption, Philips shall surrender to the Co, applicable the certificate or certificates representing the Shares to be redeemed, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such Shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the Shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed Shares. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of Philips under this Agreement (except the right to receive the Redemption Price without interest upon surrender of Philips' certificate or certificates) shall cease with respect to such redeemed Shares, and such Shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 5.4 Company Right of First Refusal. Philips hereby grants to the ------------------------------ Company a right of first refusal to purchase any securities of the Company owned or controlled by Philips' which Philips may from time to time propose to sell or transfer. This right of first refusal shall be subject to the following provisions: (a) This right of first refusal shall not apply to any transfers among Philips affiliated companies. -6- (b) In the event the Phillips proposes to sell or transfer any securities of the Company owned or controlled by Philips, Philips shall give the Company written notice of its intention, describing the sale of such securities, the price and the general terms upon which Philips proposes to sell or transfer the same. The Company shall have 45 days from the date of any such notice to agree to purchase any amount of such securities for the price and upon the general terms specified in the notice by giving written notice to Philips and stating therein the quantity of Company securities to be purchased. (c) To the extent that the Company does not exercises in full its right of first refusal within said 45-day, philips shall have 90 days thereafter to sell such Company securities with respect to which the Company's option was not exercised at the price and upon the terms specified in Philips' notice. In the event that Philips has not sold such Company securities within said 90-day period, Philips shall not thereafter sell or transfer any such Company securities without first offering such securities to the Company in the manner provided above. (d) The right of first refusal granted to the Company in this Section 5.4 shall terminate and be of no further force or effect immediately prior to the closing of a firmly underwritten public offering of the Company's capital stock pursuant to a registration statement under the Securities Act with aggregate proceeds to the Company in excess of $5,000,000. 5.5 Market Standoff Agreement. Philips agrees, if requested by the ------------------------- Company or any underwriter of the Company's securities in a firmly underwritten initial public offering of the Company's securities, not to, directly or indirectly, sell, offer to sell, grant any option for the sale of, grant a security interest in, pledge, hypothecate or otherwise dispose of, any shares of Common Stock of the Company, or any other shares of capital stock of the Company convertible into or exchangeable for shares of such Common Stock, or any options, warrants or other rights to acquire shares of such Common Stock, or any interest in such shares or rights, for a period of 180 days after the date of the final Prospectus for such initial public offering without the prior written consent of the Company and any such underwriter; provided that all directors and officers of the Company enter into a market standoff agreement on substantially the same terms as contained herein. 5.6 Nondisclosure. ------------- (a) Philips agrees that it will not make any announcement to the press or general public of the existence or terms of this agreement without the prior written consent of the Company unless required by law or court order. Notwithstanding the foregoing sentence, Philips and the Company will cooperate to publish a joint press release regarding this Agreement at an agreed upon future date. -7- (b) Philips will treat all information delivered pursuant to Section 4.1(e) hereof as confidential and not disclose such information to any third party unless required by law or court order. 5.7 Termination. The covenant of Philips pursuant to Section 5.1 shall ----------- terminate: (a) unless the Company shall have exercised its redemption right pursuant to Section 5.3 hereof, in the event of a Philips Withdrawal, on the date four years subsequent to the date of this Agreement; or (b) in the event that the Company shall exercise its redemption right pursuant to Section 5.3 hereof, on the Redemption Date. The covenant of Philips pursuant to Section 5.2 shall terminate: (c) unless the Company shall have exercised its redemption right pursuant to Section 5.3 hereof, if a Philips Withdrawal shall occur, on the date of such event; or (d) in the event that the Company shall exercise its redemption right pursuant to Section 5.3 hereof, on the Redemption Date. The covenants of Philips pursuant to Sections 5.4 and 5.5 shall terminate and be of no further force or effect at such time as Philips ceases to be a shareholder of the Company. SECTION 6 6.1 Waivers and Amendments. This Agreement may be waived or amended only ---------------------- with the written consent of Philips and the Company, and any such amendment or waiver shall be binding upon the Company and Philips. 6.2 Legends. Each certificate representing the Shares shall be endorsed ------- with the following legends ( in addition to any legend required by applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR ITS SUCCESSOR RULE UNDER THE SECURITIES ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A MARKET STANDOFF AGREEMENT PROHIBITING, UNDER CERTAIN CONDITIONS, THEIR SALE UNTIL A PERIOD OF 180 DAYS HAS ELAPSED -8- AFTER THE DATE OF THE FINAL PROSPECTUS FOR THE INITIAL PUBLIC OFFERING OF THE ISSUER'S COMMON STOCK IN A FIRMLY UNDERWRITTEN OFFERING. A COPY OF THE AGREEMENT CONTAINING THE MARKET STANDOFF AGREEMENT IS AVAILABLE FOR REVIEW AND COPYING WITHOUT CHARGE AT THE ISSUER'S OFFICES. The Company need not register a transfer of the Shares unless the conditions specified in the foregoing legends are satisfied, and the Company may instruct its transfer agent not to register the transfer of any of the Shares unless the conditions specified in the foregoing legends are satisfied. 6.3 Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California as such laws are applied to agreements solely between California residents entered into and to be performed entirely within California. 6.4 Survival. The representations, warranties, covenants and agreements -------- made in this Agreement shall survive any investigation made by the Company or Philips. 6.5 Successors and Assigns. The provisions of this Agreement shall inure ---------------------- to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties to this Agreement (specifically including any successor in interest to Philips in the Shares). 6.6 Entire Agreement. This Agreement constitutes the full and entire ---------------- understanding and agreement between the parties with regard to the subject matter thereof. 6.7 Notices, etc. All notices and other communications required or ------------ permitted under this Agreement shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, overnight delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, address to the Company or Philips, as the case may be, at their respective addresses set forth at the beginning of this Agreement or at such other address as the Company or Philips shall have furnished to the other party in writing. 6.8 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. -9- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPUTER ACCESS TECHNOLOGY CORPORATION By: /s/ Dan Wilnai --------------------------- Title: President --------------------------- PHILIPS SEMICONDUCTORS, A DIVISION OF PHILIPS ELECTRONICS NORTH AMERICA CORPORATION By: /s/ (Signature illegible) --------------------------- Title: V-P & CFO -------------------------- -10- EX-23.1 10 0010.txt CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 We hereby consent to the use in this Registration Statement on Form S-1 of our report dated August 3, 2000, except for Note 10, as for which the date is September 28, 2000, relating to the consolidated financial statements and financial statement schedule of Computer Access Technology Corporation, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California September 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----