-----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, MYEXN0SWmbxuBCDHIOM9Edm0cyD/OPCl2xQY5YEaBvx79IxOlXNrPo1iYqJPnpr3 RXFKipZl7YxjdD0wsbyNJw== 0001141218-03-000012.txt : 20030114 0001141218-03-000012.hdr.sgml : 20030114 20030113171028 ACCESSION NUMBER: 0001141218-03-000012 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20030113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE MICRO TECHNOLOGY INC CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-06635 FILM NUMBER: 03512536 BUSINESS ADDRESS: STREET 1: 75 ROBIN HILL RD CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056835353 MAIL ADDRESS: STREET 1: 75 ROBIN HILL ROAD CITY: GOLETA STATE: CA ZIP: 93117 FORMER COMPANY: FORMER CONFORMED NAME: APPLIED MAGNETICS CORP DATE OF NAME CHANGE: 19920703 10KSB 1 imt10k2001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. --------------------- FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NO. 1-6635 INNOVATIVE MICRO TECHNOLOGY, INC. (Name of small business issuer) Innovative Micro Technology, Inc. (Exact name of registrant as specified in its charter) Delaware 95-1950506 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 75 Robin Hill Road, Goleta, California 93117 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (805) 681-2800 Securities registered pursuant to Section 12 (b) of the Act: None Name of each exchange on which registered Title of each class Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.0001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [_] No [X] Check if there is no disclosure of delinquent filers pursuant to Item 405 or Regulation S-B contained in this form herein and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or in any amendment to this Form 10-KSB. [X] (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [__] No [X*] The aggregate market value of the Common Stock held by non-affiliates of registrant was $0.00 as of December 2, 2002. * Securities to be distributed under the Company's Plan of Reorganization have not been distributed as of the filing date. DOCUMENTS INCORPORATED BY REFERENCE None IN THIS ANNUAL REPORT ON FORM 10-KSB, THE WORDS "BELIEVE," "ESTIMATE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. ALL OF THE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN AND DIFFICULT TO PREDICT. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES INHERENT IN THE COMPANY'S BUSINESS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: THE COMPANY'S ABILITY TO MAKE THE TRANSITION TO VOLUME PRODUCTION OF MEMS PRODUCTS; THE COMPANY'S HISTORY OF LOSSES AND BANKRUPTCY; THE COMPANY'S NEED FOR ADDITIONAL CAPITAL; CHANGING TECHNOLOGY; COMPETITION; THE COMPANY'S ABILITY TO PROTECT INTELLECTUAL PROPERTY; FLUCTUATIONS IN THE COMPANY'S QUARTERLY AND ANNUAL OPERATING RESULTS; LACK OF AN ACTIVE TRADING MARKET; RISKS RELATED TO INTERNATIONAL TRANSACTIONS; ENVIRONMENTAL LAWS AND REGULATIONS, SUPPLIES OF RAW MATERIALS; ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CHARTER AND DELAWARE LAW; AND GENERAL ECONOMIC AND POLITICAL UNCERTAINTY. 2 ITEM 1. BUSINESS Innovative Micro Technology, Inc. ("the Company") is engaged in the business of the design and manufacture of MEMS devices. MEMS is an acronym for micro-electro-mechanical system, and MEMS devices are sometimes referred to as "micromachines." MEMS devices were first developed in the late 1970s and early 1980s. Generally speaking, MEMS devices are made using modern wafer-processing technology, similar to that used in making silicon electronic devices or thin-film recording heads for magnetic storage devices. However, what distinguishes MEMS devices is that they are designed to include moving parts, hence the "mechanical" part of the name. By using modern wafer techniques, device complexity and performance is enhanced, and cost is lowered owing to the large number of devices that can be made on a single wafer. Common uses for MEMS devices are automotive air-bag sensors (accelerometers), pressure and airflow sensors, and inkjet printer heads. Future uses for MEMS devices are expected to be numerous, in that many mechanical systems which today are built using conventional techniques could be made using MEMS. HISTORY The Company was incorporated in California in 1957 and was reincorporated in Delaware in 1987 under the name "Applied Magnetics Corporation." The Company was an independent manufacturer of head gimbal assemblies ("HGAs") and head stack assemblies (which consist of multiple HGAs assembled together with other components) to the disk drive industry. The disk drive industry is intensely competitive and largely dependent on sales to a limited number of major disk drive manufacturers and systems companies. Due to the small number of disk drive manufacturers and systems companies requiring independent sources of supply for magnetic recording heads, the Company's customer base was concentrated. The Company experienced a sudden drop in the demand for its family of inductive thin film heads starting in the middle of its first fiscal quarter of 1998. This drop in demand was due in part to an overall softening in the disk drive industry and reduced demand for recording heads and in part due to a rapid industry-wide adoption of magnetoresistive based recording head technology in the desktop platform. The Company was unable to respond. The Company filed for Chapter 11 Reorganization on January 7, 2000. The Company exited its Chapter 11 Reorganization on November 16, 2001 and changed its name to Innovative Micro Technology, Inc. The following section describes the history leading up to the Chapter 11 filing. FINANCIAL DIFFICULTIES. As a result of the technology changes in the marketplace, the Company experienced a 62.9% decline in revenue during fiscal 1998 and a 78.8% decline in fiscal 1999. This loss in revenue resulted in the Company experiencing significant operating losses in fiscal 1998 and 1999. The Company took several steps in 1999, in an effort to improve its financial and operating strength. 3 On February 11, 1999, the Company completed a merger with DAS Devices, Inc., a research and development company. The merger initially improved product development efforts, but ultimately the Company was unable to use the new technology in its product offerings. On April 12, 1999, the Company completed the sale of its subsidiary, Magnetic Data Technologies, LLC to Dubilier & Company. The Company received approximately $25.9 million in net proceeds from the Mag Data Sale. On May 12, 1999, the Company embarked on a significant cost reduction program in order to realign expenses to respond to the reduced projections for revenue and cash flow from operations for the balance of calendar 1999, resulting in a 35% reduction in work force and consolidation of facilities. On July 14, 1999, the Company sold four million shares of its common stock to Kennilworth Partners II LP for $16 million and a senior subordinated convertible note receiving in return $25 million. On September 8, 1999 the Company completed a rights offering of common stock to its stockholders which raised approximately $17.2 million. Additionally, during September 1999, the Company reached agreements with respect to individual private placements of 2% convertible notes. These transactions, together with the Rights Offering, provided the Company with a total of approximately $27.4 million in new financing. Despite the foregoing efforts, throughout the last quarter of 1999, the Company continued to lose money as it attempted to keep pace with technology developments within its industry. As a result of its continuing losses, and the inability to obtain on a timely basis orders for its products, the Company was unable to turn around its business. As a result, the Company experienced continuing liquidity shortfalls and mounting pressure from its creditors, whose claims were increasingly past-due. RESTRUCTURING EFFORTS. In the months prior to the commencement of the Chapter 11 Reorganization, the Company initiated discussions with various of its equipment lessors in an effort to negotiate a comprehensive and global moratorium and restructuring. The Company was unable to consummate an out-of-court restructuring with the equipment lessors due in large measure to the Company's inability to obtain orders for its new products in time to turn the Company around. The Company made a formal proposal to its trade creditors regarding a compromise and extension of the Company's obligations. While certain of the Company's trade creditors accepted the Company's proposal, a substantial number of the trade creditors did not and in certain instances they commenced enforcement actions against the Company. Throughout the last quarter of 1999 and continuing until the Company commenced the Chapter 11 Reorganization, the Company attempted to raise new capital to finance its ongoing operations and avoid a Chapter 11 filing and the termination of its operations. The Company was not successful in this regard and filed for Chapter 11 Reorganization on January 7, 2000. 4 DEBTOR IN POSSESSION ADMINISTRATION. During the administration of the Chapter 11 Reorganization, a number of events occurred in the effort to restructure the Company. These events included: LIQUIDATION OF NON-CORE EQUIPMENT ASSETS. To assist the Company in connection with the liquidation of equipment not required for the MEMS Business (the "Non-Core Equipment Assets"), the Bankruptcy Court authorized the Company to retain a professional auctioneer. The Company generated $3.1 million from the orderly, nonauction, sales of Non-Core Equipment Assets. The remaining Non-Core Equipment Assets were sold at auction. The auction sale generated approximately $3.0 million of net proceeds to the estate and there was no gain or loss recognized on the sale as the assets were written down to fair market value as of September 1999. REAL ESTATE BROKERS - LIQUIDATION OF REAL ESTATE. To assist the Company in the liquidation of its real property located at 6300 Hollister Avenue, Goleta, CA (the "Hollister Property"), the Company retained commercial real estate professionals. The Company was unable to sell the Hollister Property before the November 16, 2001 exit from the Chapter 11, but instead used the equity in the property as collateral to increase a short term loan of $2.0 million, secured in August of 2001, to an amount of $5.4 million to be used to fund the Company's working capital requirements. The increase to the loan was consummated in January 2002. The Company continues to pursue the sale of the Hollister Property. LIQUIDATION OF SUBSIDIARIES. On the Petition Date, the Company owned 100% of the outstanding stock of Applied Magnetics Korea, Ltd. ("AMC-Korea") and Applied Magnetics (M) SDN. BHD. ("AMC-Malaysia"). As a result of the Company ceasing its prior line of business, AMC-Korea and AMC-Malaysia both commenced an orderly liquidation process. In connection with the wind-down of AMC-Korea, the Company was able to sell the stock of AMC-Korea for net consideration to the Company of $1.7 million, and a release of any claims of AMC-Korea against the Company. The liquidation of AMC-Malaysia did not result in any proceeds to the Company. WARN ACT LITIGATION. Former AMC employees filed approximately 340 claims pursuant to the Worker Adjustment and Retraining Notification Act ("WARN Claims") asserting $1.4 million in obligations owing by the Company. The Company negotiated a settlement with the claimants. Each holder of WARN Claims who participates in the settlement will receive shares of new common stock, based upon the new common stock purchase price determined in the Plan of Reorganization, with a value equal to $1,505 per claimant. The settlement also provided for reimbursement of the out-of-pocket expenses and fees of counsel to the WARN Claims in the amount of $32,000. SUMMARY OF CLAIMS. Based upon the Company's review and analysis of its books and records, and the proofs of claim filed, the Company estimates that the total of claims allowed by the Bankruptcy Court (the "Allowed Claims") will be approximately $315.7 million. ISSUANCE OF NEW COMMON STOCK TO CLAIMANTS. The Company's Plan of Reorganization provided that, on the effective date, all of the old common stock was cancelled without consideration to the holders and the Company would 5 subsequently issue 4,500,000 shares of new common stock to the classes of claimants designated in the Plan. EXIT FROM CHAPTER 11. The Confirmation Hearing for the Company's Plan of Reorganization was held on November 2nd and 3rd of 2001. The Plan was approved and the Effective Date of the Plan was determined to be November 16, 2001 ("Effective Date"). THE COMPANY'S MEMS BUSINESS The Company used the Chapter 11 Reorganization to reposition its operations into the MEMS business. MEMS is an acronym for micro-electro-mechanical system, and MEMS devices are sometimes referred to as "micromachines." MEMS devices were first developed in the late 1970s and early 1980s. Generally speaking, MEMS devices are made using modern wafer-processing technology, similar to that used in making silicon electronic devices or thin-film recording heads for magnetic storage devices. However, what distinguishes MEMS devices is that they are designed to include moving parts, hence the "mechanical" part of the name. By using modern wafer techniques, device complexity and performance is enhanced, and cost is lowered owing to the large number of devices that can be made on a single wafer. Common uses for MEMS devices are automotive air-bag sensors (accelerometers), pressure and airflow sensors, and inkjet printer heads. Future uses for MEMS devices are expected to be numerous, in that many mechanical systems which today are built using conventional techniques could be made using MEMS. Examples of this include electromagnetic relays. In addition, many electrical systems may be replaced by MEMS. An example of this is optical fiber switching, used in telecommunications. In the future, it is possible that it can be done mechanically using MEMS. Another example is components for wireless communication technology. High-Q inductors, variable capacitors and transmit/receive switches could be replaced by MEMS devices at lower cost, using less space and providing higher performance. The Company fabricates MEMS products on a six-inch silicon wafer, which depending upon the size of the individual part, is cut into multiple finished parts referred to as dies. The Company's MEMS Business operations commenced in February 2000. From that point the Company focused on establishing and growing the MEMS Business. Initial employees were hired to provide key services needed to start up facilities, plan equipment requirements, develop business plans, and seek out new customers. By March 2000, IMT was servicing its first MEMS customer in the telecommunications business. The Company's three additional lines of business are: "Santa Barbara Tool and Die," "Insight Analytical" and leasing of excess space in its owned facility under long-term lease contracts. Santa Barbara Tool and Die's technology permits high precision manufacturing of tooling, and the organization features electron-discharge machining (EDM) which includes metals and ceramics capabilities. Insight Analytical's laboratory technology includes electron microscopy in a variety of forms and features operation of a focused ion beam tool which can precisely make three-dimensional cuts in samples and reveal detailed information as to dimension, material makeup, and material crystal 6 properties. Santa Barbara Tool and Die and Insight Analytical are strategic parts of the core company in that their services are used to make the core business more competitive, and both provide service to outside customers using the portion of their capacity that exceeds Company needs. The Company has approximately 51,000 square feet of building space available to lease. As of September 29, 2001 approximately 34,000 square feet were under long term lease arrangements with annual future rental income of approximately $0.5 million. The Company has multiple customers for MEMS products. A major goal of the Company is to spread business risk by generating products in more than one industry. The Company serves the telecommunications, inertial navigation, bio-technical, microfluidics and biomedical industries and is looking forward to broadening into the wireless communication industry. These initiatives are in an early stage, and the Company can give no assurance that it will be successful in penetrating these businesses and diversifying its product lines and customer base. EMPLOYEES The majority of the employees of the Company were employees of the Company when it was previously known as Applied Magnetics Corporation. Key engineers and technicians were rehired to maintain and operate the sophisticated equipment that is used in the fabrication of MEMS devices. Most of these individuals play a dual role of operations as well as process development. The employees cover the following technical areas: 1. photolithography, including resist application, resist development, and patterned exposure; 2. deposition, including sputtering, ion beam deposition, plating; 3. etching, including wet-etching and dry (vacuum) processing; 4. planarization, including chemical-mechanical polishing; 5. wafer slicing, including gang-saw processing; 6. assembly, including die bonding, electrical bonding, precision alignment; and 7. testing, including mechanical and electrical testing. For Santa Barbara Tool and Die, the Company hired former AMC employees who had extensive tool and die experience. For Insight Analytical, the Company hired former AMC employees to operate the Company's analytical tools. As of September 29, 2001, the Company had 39 employees at its headquarters in Goleta, California. 7 TECHNOLOGY The Company has three main forms of technology: manufacturing technology, design technology, and service technology. The manufacturing technology encompasses photolithography, material deposition, and material removal, which are the essential methods of producing integrated wafers. While much of this technology was acquired to make magnetic recording heads for the disk drive storage industry, the techniques are broadly applicable and can be used in making MEMS devices. In addition, new manufacturing technology has been introduced into the Company via new equipment that has been purchased and the training required of the Company's personnel associated with the installation of this equipment. Additional manufacturing technology includes assembly and testing procedures, including precision alignment and assembly, ceramic bonding, wire attachment, and testing algorithms. Design technology the Company possesses comes from years of recording head experience, which afforded the Company special skills in the art of making magnetic materials, and finding uses for them. To that end, some of the Company's intended products surround magnetic MEMS devices. Specifically, the Company has skill and experience with generating high magnetic fields efficiently using thin-film coils coupled with high saturation magnetization materials capable of carrying magnetic flux. Coupled with MEMS concepts, this should allow the Company to design and manufacture magnetic actuators of all types. The Company's service technology comes in the form of the business offered by Santa Barbara Tool & Die and Insight Analytical. INTELLECTUAL PROPERTY The Company regards elements of its manufacturing processes, product designs, and equipment as proprietary and seeks to protect its proprietary rights through a combination of employee and third party nondisclosure agreements, internal procedures and patent protection. The Company has filed eight patent applications with the United States Patent Office since January 2000, and more are in preparation for the MEMS business. In fiscal 2002 the Company received notification from the U.S. Patent office that its first patent had been issued. The Company holds many patents issued before January 2000 pertaining to the magnetic recording industry. These are deemed unnecessary for operations going forward. The Company believes that its success depends on the innovative skills and technological competence of its employees and upon proper protection of its intellectual properties. The Company has, from time to time, been notified of claims that it may be infringing patents owned by others. If it appears necessary or desirable, the Company may seek licenses under patents that it is allegedly infringing. Although patent holders commonly offer such licenses, no assurance can be given that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a key patent license from a third party could cause the Company to incur substantial 8 liabilities or to suspend the manufacture of the products utilizing the patented invention. VENDORS The Company purchases from a variety of vendors in the course of its business including providers of manufacturing supplies, office supplies, and direct materials. There are no extraordinary dependencies on any vendors, and in most cases there is a general market for the required products. One exception is the procurement of silicon-on-insulator wafers ("SOI wafers"), which can at times be in short supply. CUSTOMERS The Company's customers are in four categories representing its four business segments: MEMS and wafer customers, machine shop tool and die customers, tenants of excess building space and analytical lab service customers. The MEMS business customers are in the telecommunication, biotechnology, microfluidics, inertial navigation, biomedical, and the personal security businesses. The personal security company, Fidelica Microsystems, Inc. ("Fidelica"), which specializes in hardware for personal identification, represented a significant portion of the Company's sales in fiscal 2001, as shown in the table below. In the second fiscal quarter of 2002, Fidelica cancelled their existing order with the Company for product cost reasons. Inertial navigation MEMS refers to MEMS gyroscopes. Biomedical MEMS includes manufacturing filters. Biotechnology refers to a variety of gene chips. Microfluidics includes print heads for ink-jet printing. Machine shop tool and die customers and analytical laboratory customers include multiple California companies and extend to out-of-state companies. The Company also leases excess space within its owned facility to tenants. The Company's sales by business segment for fiscal 2001 and 2000 are displayed below. Sales by Customer: For the Years Ended: ------------------ -- ---------------- September 29, September 30, (As a percentage of sales) 2001 2000 ------------------ ---------------- Fidelica Microsystems, Inc. 34% 19% All Others 66% 81% ------------------ ---------------- Total 100% 100% ================== ================ Other than Fidelica Microsystems, Inc., no customer accounted for more than 10% of total sales. 9 Sales by Segment: For the Years Ended: ------------------- --- ------------------- September 29, September 30, (As a percentage of sales) 2001 2000 ------------------- ------------------- MEMS 59% 43% Santa Barbara Tool and Die 24% 51% Insight Analytical 7% 6% Rental Income 10% 0% ------------------- ------------------- Total 100% 100% =================== =================== The Company's products are sold in the United States by its direct sales personnel. COMPETITION The Company competes with other independent MEMS manufacturers. They are generally private entities and information about their financial status is unavailable to the Company. The names of these firms are Standard MEMS, Applied MEMS, Tronics and Issys. Some of these companies operate wafer fabrication facilities using a four-inch diameter wafer compared to the six-inch format used by the Company. The larger wafer used by the Company has approximately twice the physical useable area, which provides approximately twice as many die per wafer. This feature provides the Company with cost advantages. The Company also competes with large Integrated Circuit manufacturers with six-inch wafer fabrication ("wafer fab") facilities. These firms include Sony, Analog Devices, Texas Instruments and Motorola. These firms are all significantly larger than the Company with greater financial, technical and marketing resources than the Company. They operate wafer fabs based on Complimentary Metal Oxide Semiconductor ("CMOS") technology which limits their use compared to the Company's equipment capabilities. The Company also competes with captive wafer fabs owned by vertically integrated MEMS users. These include: Intellisense, owned by Corning, Inc.; Cronos, which was recently sold by JDS Uniphase to Memscap S. A.; Kymata, owned by Alcatel; and Xros, owned by Nortel. The parents of these firms are all significantly larger than the Company with greater financial, technical and marketing resources than the Company. These firms are focused on producing products for the parent, but they also service external customers. IMT competes directly with Cronos on an optotel product as a second source to JDS Uniphase. The principal competitive factors in the markets the Company addresses are price, product performance, quality, product availability, responsiveness to customers and technological sophistication. See "Customers" for further discussion. 10 ENVIRONMENTAL REGULATIONS The Company uses hazardous chemicals in its manufacturing and is subject to a variety of environmental and land use regulations related to their use, storage and disposal. If the Company fails to comply with present or future regulations, liability, production suspension or delay could result. In addition, environmental or land use regulations could restrict the Company's ability to expand its current production facilities or establish additional facilities in other locations, or could require the Company to acquire costly equipment, or to incur other significant expenses for compliance with environmental regulations or to clean up prior discharges. The Company has been subject to regulatory and legal proceedings related to past environmental contamination, and other proceedings could arise in the future. In fiscal 2002 the Company was advised by the U.S. Environmental Protection Agency that it may be required to pay for part of the remediation of a solvent and refrigerant recycling and treatment facility formerly operated by the Omega Chemical Company in Whittier, California, and may be required to pay an additional amount which management does not expect to be material. The EPA alleges that the Company provided solvent and refrigerant waste to this facility for recycling and disposal. The Company is still exploring legal defenses, including defenses arising out of the bankruptcy proceedings. At this time, the Company intends to defend this matter vigorously. The Company is also remediating and monitoring ground water contaminated with volatile organic compounds ("VOCs") at a former Company site in Goleta, California under an order of the California Regional Water Quality Control Board ("CRWQCB"). VOC contamination at the site has been reduced and the Company does not expect further expenditures at the site to be material. The Company is in the process of selling its unneeded facility in California. The environmental testing performed by the Company in support of this sale determined that the soil showed no metal or volatile organic compound ("VOC") contamination. Ground water samples showed low levels of VOC contamination. The CRWQCB required the Company to install one monitoring well, and test results confirmed the low level VOC concentration. The property adjacent to the Company is conducting a remediation project on its site for this same VOC and the CRWQCB has requested this property to place monitoring wells between the two properties to make a determination of possible intrusion from the adjacent site. The results of their testing showed the daughter products of the pertinent VOC. They have been asked to conduct bi-annual sampling of the wells. The Company believes it conducts its business in a manner that complies with environmental laws and regulations. While the Company's known environmental liabilities have largely been resolved and are not, either individually or taken together, material to its business and financial condition, there can be no assurance that material environmental claims will not arise in the future. If such claims arise, they could be extremely expensive to contest or to resolve if the Company is found responsible and does not have applicable insurance coverage, which would result in material harm to its business. 11 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information as to the name, age, and office(s) held by each executive officer of the Company as of April 30, 2002: Name Age Position or Office Dr. John S. Foster 44 Chief Executive Officer and Chairman of the Board Peter T. Altavilla 49 Chief Financial Officer, Corporate Controller and Secretary Dr. John S. Foster has over 14 years of experience in technology and operations management. He joined the Company in 1993. He has held a variety of senior management positions including two years as the Company's Managing Director of its former operation in Penang, Malaysia and as the Vice President of Worldwide Operations. Dr. Foster holds a doctorate in Applied Physics from Stanford University. He was elected to the position of Chief Executive Officer of the Company on November 16, 2001 and to the position of Chairman of the Board on November 19, 2001. Peter T. Altavilla has been employed by the Company since 1987. He served as Assistant Controller until August 1, 1994, when he was elected to the position of Corporate Controller. Mr. Altavilla was elected Secretary on February 9, 1996. He was elected to the position of Chief Financial Officer of the Company on November 16, 2001. 12 ITEM 2. PROPERTIES Certain information concerning the Company's principal properties at September 29, 2001 is set forth below:
Location Type Principal Use Footage Ownership - ------------------------------------------------------------------------------------------------------------------ Goleta (Santa Barbara), CA Headquarters, Office, Marketing and manufacturing 130,000 Owned plant and warehouse research and engineering Goleta (Santa Barbara), CA Vacant plant 103,000 Owned (1)
(1) The Company plans to sell this facility The Company believes its existing manufacturing facilities are adequate to support customer requirements during fiscal 2002. ITEM 3. LEGAL PROCEEDINGS The Company is not a party, nor are its properties subject to, any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business and the matters described above. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is not traded on any exchange or quoted on NASDAQ. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements provided in this Report and with "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." (In thousands, except per share and employment amounts) 2001 2000 - -------------------------------------------------------------------------------- OPERATIONS Net sales $ 2,773 $ 456 Loss from continuing operations (11,828) (10,716) Loss from discontinued operations 0 (23,048) ----------- ---------- Net loss (11,828) (33,764) Net loss per share: Loss from continuing operations per common share $ (0.17) $ (0.16) Discontinued operations, net 0.00 (0.33) ----------- ---------- Loss per common share - basic and diluted (0.17) (0.49) Weighted average number of common shares outstanding-basic and diluted 70,444 69,598 BALANCE SHEET Working capital $ (4,314) $ 477 Total assets 29,355 32,912 Total liabilities subject to compromise 315,709 313,966 Shareholders' deficiency (294,025) (283,397) OTHER DATA Year-end employment 39 32 14 BUSINESS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the financial statements and related notes included elsewhere in this Annual Report on Form 10-KSB. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under " - Risk Factors Affecting Our Business" and elsewhere in this report. The Company exited its Chapter 11 Reorganization process on November 16, 2001. The Company will adopt the fresh start reporting requirements of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the fresh start reporting requirements, the reorganization value of the Company will be allocated to the Company's assets in conformity with the procedures specified by SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. As provided for under the Company's reorganization plan, the Company will convert approximately $185 million of debt discharge and $131 million of trade credit and operating leases to equity in the reorganized entity. The Company's MEMS Business operations commenced in February 2000. From that point the Company focused on establishing and growing the MEMS Business. Initial employees were hired to provide key services needed to start up facilities, plan equipment requirements, develop business plans, and seek out new customers. By March 2000, IMT was servicing its first MEMS customer in the telecommunications business. The Company's three additional lines of business are: "Santa Barbara Tool and Die," "Insight Analytical" and leasing of excess space in its owned facility under long term lease contracts. Santa Barbara Tool and Die's technology permits high precision manufacturing of tooling, and the organization features electron-discharge machining (EDM) which includes metals and ceramics capabilities. Insight Analytical's laboratory technology includes electron microscopy in a variety of forms and features operation of a focused ion beam tool which can precisely make three-dimensional cuts in samples and reveal detailed information as to dimension, material makeup, and material crystal properties. Santa Barbara Tool and Die and Insight Analytical are strategic parts of the core company in that their services are used to make the core business more competitive, and both use their capacity that exceeds Company needs to provide services to outside customers. The Company has approximately 51,000 square feet of building space available to lease. As of September 29, 2001 approximately 34,000 square feet were under long-term lease arrangements with annual rental income of approximately $.5 million. 15 ANNUAL RESULTS OF OPERATIONS The following table sets forth certain financial data for the Company as a percentage of net sales for the last two fiscal years. FOR THE YEARS ENDED ------------------------------ SEPTEMBER 29, SEPTEMBER 30, 2001 2000 ------------------------------ Net sales MEMS and Other 90.1% 100.0% Rental income 9.9% 0.0% Subtotal 100.0% 100.0% Cost of sales MEMS and Other 227.3% 883.1% Rental income 7.0% 7.0% Subtotal 234.3% 890.1% Gross loss -134.3% -790.1% Operating expenses Research and development 12.5% 61.6% Selling, general and administrative 57.5% 247.4% Impairment of long lived assets 88.9% 0.0% Total operating expenses 158.9% 309.0% Loss from operations -293.2% -1099.1% Interest income 1.2% 0.9% Interest expense -53.1% -222.2% Other income, net 0.0% 193.4% Loss from continuing operations before -345.1% -1127.0% reorganization costs and income taxes Reorganization Costs -81.3% -440.3% Loss from continuing operations before taxes -426.4% -1567.3% Provision for income taxes 0.1% 0.0% Discontinued operations, net 0.0% -5837.1% Net loss -426.5% -7404.4% NET SALES: Net sales increased to $2.8 million in fiscal 2001 over net sales of $0.5 million in fiscal 2000, primarily due to the fact that 2001 represented a full year of operations and that the start up of the reorganized business did not take place until late in the second fiscal quarter of 2000. The MEMS portion of the business had sales of $1.6 million and $0.2 million for fiscal 2001 and 2000, respectively. Santa Barbara Tool and Die generated sales of $0.7 million in fiscal 2001 compared to $0.2 million in fiscal 2000. Insight 16 Analytical had $0.2 million of sales in fiscal 2001 and minimal sales in fiscal 2000. The leasing of excess space did not begin until fiscal 2001 and generated sales of $0.3 million. GROSS LOSS: The gross loss was a negative 134.3% or $3.7 million for fiscal 2001 compared to a negative 790.1% or $3.6 million for fiscal 2000. The change is primarily due to the fact that fiscal 2001 represented a full year of operations for the reorganized business, compared to fiscal 2000, in which the start up occurred late in the second fiscal quarter. The gross deficit improvement was primarily due to the revenue increase in fiscal 2001 allowing for absorption of the fixed cost elements associated with the wafer fabrication facility. These fixed costs include depreciation, utilities and the engineering staff. The MEMS portion of the business had a gross deficit of $4.0 million or a negative 243.8% in fiscal 2001 compared to a gross deficit of $3.5 million or a negative 1815.9% in fiscal 2000. Santa Barbara Tool and Die had a minimal gross profit in fiscal 2001 and a minimal gross deficit in fiscal 2000. Insight Analytical generated a minimal profit of $0.2 million or 79% in fiscal 2001 and a minimal gross deficit in fiscal 2000. The leasing of space to our tenants provided a gross profit of $0.1 million or 29% for its first year of business in fiscal 2001. RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were $0.3 million for both fiscal 2001 and 2000. These expenses represented 12.5% and 61.6% of net sales, respectively, for such periods. R&D expenditures for the Company focus on development of new MEMS devices and the associated production processes for the telecommunication, computer electronics, inertial navigation, and the biomedical product areas. R&D expenditures are expected to grow as the Company continues to diversify into new product areas, such as wireless communication technology. The Company currently has four employees focused on the development of new products and manufacturing processes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative ("SG&A") expenses were $1.6 million and $1.1 million in fiscal 2001 and 2000, respectively. These amounts include $0.5 million in each fiscal year of expenses related to a California property that the Company is planning to sell. The total selling, general and administrative expenses represented 57.5% and 247.4% of net sales, respectively, for such periods. The Company currently has six employees providing the services reported as SG&A. The cost increase in fiscal 2001 compared to 2000 was primarily due to the fact that 2001 represented a full year of operations and the start up of the MEMS business did not take place until late in the second fiscal quarter of 2000. IMPAIRMENT OF LONG-LIVED ASSETS: The Company adjusted the value of its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar 17 to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. . REORGANIZATION COSTS: Reorganization costs consist primarily of professional fees directly related to the Chapter 11 filing. INTEREST EXPENSE: Interest expense was $1.5 million and $4.6 million in fiscal 2001 and 2000, respectively. The decrease from fiscal 2000 is predominantly due to the interest expense associated with the Company's unsecured debt that was extinguished when the Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000. PROVISION FOR INCOME TAXES: The fiscal 2001 provision for income taxes included minimum state taxes. Under the terms of the bankruptcy, the Company may not be able to receive any benefit from previously accumulated net operating loss carryforwards prior to the bankruptcy. Portions of the Company's pre-bankruptcy tax losses may be eligible for use in future periods. The Company is currently evaluating these amounts. Since January 7, 2000, the Company has accumulated net operating loss carryforwards of approximately $16.8 million for federal tax purposes and $8.4 million for state tax purposes as of September 29, 2001. Once the Company has utilized these remaining net operating loss carry forwards, future U.S. earnings will be taxed at the U.S. statutory rates less available tax credits, if any. To the extent not used, the net operating loss carryforwards for federal and state purposes expire in varying amounts beginning in 2021 and 2011, respectively. At September 29, 2001, all identified deferred tax assets are reduced by a valuation allowance therefore, any additional operating loss carryforwards not recognized would not result in a benefit in the provision for income taxes due to the uncertainty of future realization of those additional operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance increased to $1.7 million at September 29, 2001 from $1.1 million at September 30, 2000. The increase in cash was primarily due to the following sources of cash: $1.6 million from the sale of excess equipment, $2.0 million from a mortgage secured by the real property owned by the Company and $1.2 million collected from a stock subscription receivable. These sources were primarily offset by the net use of cash by operations of $3.9 million plus the purchase of new equipment of $0.1 million. On September 5, 2001 the Company entered into a $2.0 million mortgage secured by the Hollister property. The loan has a three-month term, with the ability to extend it for an additional nine months. The loan requires interest-only monthly payments at 12% annual interest rate. The loan also provided an option for the Company to borrow an additional $3.4 million at 12% annual interest rate with a three-year term for the entire $5.4 million. The Company exercised this option in December of 2001 (see subsequent events footnote). The MEMS industry is capital intensive and requires expenditures for manufacturing equipment and research and development in order to develop and take advantage of technological improvements and new technologies. In fiscal 2002, the Company plans approximately $0.5 million in capital expenditures primarily to continue development and production of new MEMS technologies and 18 products and to increase overall production capacity. Capital equipment purchase commitments totaled $0.4 million at September 29, 2001. The Company's liquidity and ability to fund operating and capital expenditure requirements during fiscal 2002 depend heavily on its ability to achieve volume production of its MEMS products on a timely basis and obtain additional financing. Although the Company is devoting substantial engineering and manufacturing resources to its production goals, there can be no assurances that the Company will achieve planned production levels on a timely basis. The Company completed an equity financing transaction with a strategic investor on August 2, 2002 for $5 million in cash. The Company issued the investor 935,000 shares of common stock along with two warrants. The first warrant has a term of eighteen months and the value was determined to be $0.3 million using the Black-Scholes option pricing model. The second warrant has a term of thirty-six months and the value was determined to be $1.4 million using the Black-Scholes option pricing model. The Company expects the $5 million investment to provide the cash required to fund the Company's working capital needs through the second quarter of fiscal 2003. The Company cannot give assurance that additional financing will be available or, if available, that its terms will be favorable to the Company. If the Company is unable to achieve its production goals or obtain additional financing on acceptable terms, on a timely basis, there will be a material adverse effect on the Company's financial condition and competitive position. Because of the Company's recurring losses from operations, negative cash flow and shareholders' deficiency the Company's accountants have expressed substantial doubt about its ability to continue as a going concern. The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $11.8 million for the fiscal year ended September 29, 2001. It expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. If the Company does achieve profitability, it may not be able to sustain or increase profitability even in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above items raise substantial doubt about the Company's ability to continue as a going concern. COMMITMENTS AND CONTINGENCIES The Company uses hazardous chemicals in its manufacturing and is subject to a variety of environmental and land use regulations related to their use, storage and disposal. If the Company fails to comply with present or future regulations, liability, production suspension or delay could result. In addition, environmental or land use regulations could restrict the Company's 19 ability to expand its current production facilities or establish additional facilities in other locations, or could require the Company to acquire costly equipment, or to incur other significant expenses for compliance with environmental regulations or to clean up prior discharges. The Company has been subject to regulatory and legal proceedings related to past environmental contamination, and other proceedings could arise in the future. The Company has recently been advised by the U.S. Environmental Protection Agency that it may be required to pay for part of the remediation of a solvent and refrigerant recycling and treatment facility formerly operated by the Omega Chemical Company in Whittier, California, and may be required to pay an additional amount which management does not expect to be material. The EPA alleges that the Company provided solvent and refrigerant waste to this facility for recycling and disposal. The Company is still exploring legal defenses, including defenses arising out of the bankruptcy proceedings. At this time, the Company intends to defend this matter vigorously. The Company is also remediating and monitoring ground water contaminated with volatile organic compounds ("VOCs") at a former Company site in Goleta, California under an order of the California Regional Water Quality Control Board ("CRWQCB"). VOC contamination at the site has been reduced and the Company does not expect further expenditures at the site to be material. The Company is in the process of selling an unneeded facility in California, the Hollister property. The environmental testing performed by the Company in support of this sale determined that the soil showed no metal or volatile organic compound ("VOC") contamination. Ground water samples showed low levels of VOC contamination. The CRWQCB required the Company to install one monitoring well and test results confirmed the low level VOC concentration. The property adjacent to the Hollister property is conducting a remediation project on its site for this same VOC and the CRWQCB has requested this property to place monitoring wells between the two properties to make a determination of possible intrusion from the adjacent site. The results of their testing showed the daughter products of the pertinent VOC. They have been asked to conduct bi-annual sampling of the wells. The Company believes it conducts its business in a manner that complies with environmental laws and regulations. While the Company's known environmental liabilities have largely been resolved and are not, either individually or taken together, material to its business and financial condition, there can be no assurance that material environmental claims will not arise in the future. If such claims arise, they could be extremely expensive to contest or to resolve if the Company is found responsible and does not have applicable insurance coverage, which would result in material harm to its business. Purchase commitments associated with capital expenditures were $0.4 million at September 29, 2001 The Company has no leases for which it is the lessee. 20 CRITICAL ACCOUNTING POLICIES Application of the Company's accounting policies require management to make judgments and estimates about the amounts reflected in the financial statements. Management uses historical experience and all available information to make these estimates and judgments, although differing amounts could be reported if there are changes in the assumptions and estimates. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, inventory allowances, impairment costs and other special charges, depreciation and amortization, warranty costs and contingencies. Management has identified the following accounting policies as critical to an understanding of our financial statements and as areas most dependent on management's judgment and estimates. REVENUE RECOGNITION AND WARRANTY POLICIES: The Company uses the completed contract method of accounting for its product development projects due to the inability to accurately estimate percentage of completion during performance of the contract. Costs are capitalized during the project as inventories and expensed at its completion along with the recognition of revenue. Santa Barbara Tool and Die delivers a finished product to the customer and revenue is recognized at the time the product is shipped and title passes. Insight Analytical has service related revenue and this revenue is recognized upon completion of the service for the customer. The Company's MEMS development contracts do not have any rights of return. Santa Barbara Tool and Die and Insight Analytical did not have any sales returns in fiscal 2001 or 2000. The Company's warranty policy provides for the replacement of defective parts when the customer's return request is approved within thirty days of the original shipment date. To date, warranty costs have not been significant. LONG-LIVED ASSETS: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying value may exceed the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the carrying value, the asset will be reduced to an amount equal to the net present value of the expected future cash flows and an impairment loss will be recognized. The Company adjusted its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash equivalents, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. As a result of the Company's Chapter 11 filing, 21 instruments included as liabilities subject to compromise are recorded at their historical value, however, the liabilities will not be settled at this amount. The liabilities not under compromise approximate fair value due to their short term nature or market rate of interest. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company adopted SFAS 133 effective October 1, 2000. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by the Financial Accounting Standards Board. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Intangible assets with a determinable useful life will continue to be amortized over their expected lives. The Company will implement SFAS 142 beginning in its fiscal year 2003 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued by the Financial Accounting Standards Board. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the provisions of SFAS 144 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In May of 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued by the Financial Accounting Standards Board. The statement rescinds FASB No. 4, "Reporting Gains and Losses from extinguishment of Debt," and an amendment of that statement, FASB No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be aggregated and classified as an extraordinary item, net of related income tax effect, in the statement of operations. Instead, such gains and losses will be classified as extraordinary items only if they meet the criteria of unusual or infrequently occurring items. SFAS No. 145 also requires that gains and losses from debt extinguishments, which were classified as extraordinary items in prior periods, be reclassified to continuing operations 22 if they do not meet the criteria for extraordinary items. The provisions related to this portion of the statement are required to be applied in fiscal years beginning after May 15, 2002, with earlier application encouraged. The Company is currently evaluating the provisions of SFAS 145 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In June of 2002, SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies EITF issue 94-3, was issued by the Financial Accounting Standards Board. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan, as required by EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146, but does not expect a material impact on its financials position or results of operations. RISK FACTORS AFFECTING THE COMPANY'S BUSINESS IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS REPORT, THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL CONDITION, COMPETITIVE POSITION AND ABILITY TO CONTINUE AS A GOING CONCERN AND TO CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. THE COMPANY HAS INCURRED LOSSES SINCE 1999; IT RECENTLY EMERGED FROM BANKRUPTCY, AND EXPECTS TO INCUR LOSSES FOR THE FORESEEABLE FUTURE. The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $11.8 million for the fiscal year ended September 29, 2001. It expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. If the Company does achieve profitability, it may not be able to sustain or increase profitability even in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above items raise substantial doubt about the Company's ability to continue as a going concern. CAPITAL NEEDS. The MEMS industry is capital intensive and requires expenditures for facilities, equipment and research and development to develop and keep pace with technological improvements. The Company believes that to achieve its objectives, 23 it will need additional resources over the next several years for capital expenditures, working capital and research and development. The Company purchased property, plant and equipment in fiscal 2001 totaling $0.1 million. During fiscal 2002, the Company plans to purchase or enter into lease financing for approximately $0.5 million of property, plant and equipment. The Company believes that it will be able to fund future expenditures from a combination of new capital infusion, existing cash balances and cash flow from operations. The Company will need additional sources of capital to meet requirements in future years. There is no assurance that additional funds will be available to the Company or, if available, that the terms and conditions will be acceptable to the Company. If the Company cannot obtain sufficient capital, it would need to curtail its operating and capital expenditures, which would adversely affect the Company's future operating results and could prevent the Company from competing successfully in the MEMS industry. THE COMPANY HAS HIGH FIXED COSTS AND EXCESS CAPACITY DUE TO ITS CURRENT LOW PRODUCTION VOLUMES. The fixed costs of operating and maintaining the Company's wafer fabrication facility and other elements of its production capacity are high. Most of its current production consists of prototypes and new product development. These are low-volume projects, which leave the Company's facilities underutilized and cannot absorb the fixed costs. As a result the Company experiences operating losses. The company plans to shift from low-volume prototype and development orders to high-volume production for its customers as their development programs mature into production contracts, which will make fuller use of its excess capacity. However, making this shift depends on the success of the Company's engineers in developing efficient high-volume production technology, the success of its customers in developing marketable uses for its MEMS technology, and the general growth and acceptance of MEMS technology. If the Company cannot successfully make the transition to high-volume production, it will continue to experience losses and suffer material harm to its operating results and liquidity. TECHNOLOGICAL CHANGES. The MEMS business has been characterized by rapidly changing technology. The demand for greater capability will cause competitors to continue to build greater performance into their respective products. There can be no assurance that the Company's products will achieve such performance. There can be no assurance that the Company will not experience manufacturing and product quality problems in the future. The Company's future success depends in large part on its ability to develop and qualify new products on a timely basis and to manufacture them in sufficient quantities to compete effectively on the basis of price and performance. COMPETITION. The Company competes with other independent MEMS manufacturers, with large integrated circuit manufacturers, and with captive Wafer Fabs owned by 24 vertically integrated MEMS users. Many of these competitors are larger than the Company and have greater financial resources. If the Company is unable to equal or surpass its competitors in the area of price, performance, quality or customer responsiveness, then the business will be unsuccessful. THE COMPANY'S SUCCESS DEPENDS IN PART UPON THE ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY. The Company's success depends in large part upon its proprietary technology. The Company relies on a combination of patents, trade secret protection, confidentiality and nondisclosure agreements and licensing arrangements to establish and protect its intellectual property rights. The Company's patents may be successfully challenged or may not provide it with the intended competitive advantages. Important technology developed by the Company may not be patentable. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that is regarded as proprietary. Policing unauthorized use of the Company's proprietary technology is difficult. In addition, the laws of some foreign countries do not protect these proprietary rights to as great an extent as do the laws of the United States. The Company's means of protecting its proprietary rights may not be adequate and its competitors may independently develop similar technology, duplicate its products, or design around its proprietary intellectual property. The Company may face costly damages or litigation costs if a third party claims that the Company infringed on its intellectual property. Advanced technology products such as the Company's are increasingly subject to third-party infringement claims. In addition, former employers of the Company's current and future employees may assert that its employees have disclosed confidential or proprietary information to the Company. Any of these claims even if they are without merit, could be expensive and time consuming to defend. In addition, intellectual property claims against the Company, with or without merit, could require it to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could seriously harm its business. A successful claim of infringement against the Company or its failure or inability to license the infringed or similar technology could adversely affect its business because the Company would not be able to sell the affected product without redeveloping the product or its manufacturing process, incurring significant additional expenses. FLUCTUATIONS IN QUARTERLY AND ANNUAL OPERATING RESULTS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS. The Company's operating results have fluctuated and may continue to fluctuate from quarter to quarter and year to year. The Company's sales are generally made pursuant to individual purchase orders and production is scheduled on the basis of such purchase orders. Because the market for MEMS products is new, and the Company is constantly introducing new designs ordered by customers, the sales cycles are long and unpredictable. The sales cycle for the Company's products typically ranges from three to six months. Moreover, as 25 customer programs mature, the Company may have to write-down inventory and equipment. In addition, the Company must qualify on future programs to sell its products. Cancellation, rescheduling and reductions of orders in the future could result in inventory losses, under-utilization of production capacity and write-downs of tooling and equipment which would have a material adverse effect on the Company's future operating results. In particular, in the past the Company's operating results have been adversely affected when production capacity is underutilized, and will likely be so affected in the future. PLANT EXCESS CAPACITY. The Company has a 6-inch wafer fabrication facility that has 30,000 square feet of fully facilitized manufacturing space. At the current level of customer orders this facility is underutilized and the associated depreciation and utilities expenses are underabsorbed. The Company is working with customers on development programs that are expected to mature into production contracts, which will more fully utilize its plant capacity. However, these contracts may never materialize and the plant underutilization could continue to cause an adverse affect on the Company's operating results. THE COMPANY'S COMMON STOCK MAY BE ILLIQUID AND SUFFER FROM PRICE VOLATILITY BECAUSE IT HAS NOT BEEN PUBLICLY TRADED. There has not been a public market for the Company's common stock since January, 2000. The Company's outstanding common stock, which was issued after the emergence of the Company from bankruptcy, is not listed for trading on any stock market or quotation on the Nasdaq. The company intends to apply for listing of its common stock, but there can be no assurance it will be successful. Even if listed, it is likely that the stock will initially be thinly traded and the Company cannot predict when or if investor interest in the Company will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. A thin trading market in the Company's stock will likely depress the trading price, make it more difficult for investors to buy or sell its common stock, and result in price volatility. INTERNATIONAL SALES IN THE FUTURE COULD EXPOSE THE COMPANY TO RISK. The Company plans to sell its products to foreign customers and expects this to be an important part of its future business. Accordingly, the Company will face risks inherent in conducting business internationally, such as: . difficulties in collecting accounts receivable and longer collection periods; . seasonal business activity in certain parts of the world; . potentially adverse tax consequences; . fluctuations in currency exchange rates; 26 . political and economic instability; and . trade barriers. Any of these factors could seriously harm the Company's international operations and, consequently, its business. ENVIRONMENTAL LAWS AND REGULATIONS. The Company's manufacturing processes employ hazardous substances and are subject to regulation pursuant to various federal and state laws governing the environment. In the past, the Company has been subject to claims by government agencies and individuals related to disposal of hazardous materials. See "Item 1. Business - Legal Proceedings" and " - Environmental Regulations." These matters have largely been resolved and the Company believes it conducts its business in a manner that complies with environmental laws and regulations. Nevertheless, material environmental claims could arise in the future, which could have a material adverse effect on the Company. INTERRUPTIONS IN THE COMPANY'S SUPPLY OF RAW MATERIALS COULD ADVERSELY AFFECT ITS BUSINESS. The Company's operations require raw materials that meet exacting standards. The Company generally has multiple sources of supply for its raw materials; however, only a limited number of suppliers are capable of delivering certain raw materials that meet its standards. Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, and gases. In addition, any transportation problems could delay the Company's receipt of raw materials. Although raw materials shortages or transportation problems have not interrupted its operations in the past, shortages may occur from time to time in the future. Also, lead times for the supply of raw materials have been extended in the past. If the Company's supply of raw materials is interrupted or its lead times extended, then its cash flow would be reduced, orders may be cancelled or diverted to competitors, and its business would suffer significant harm. THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS COULD DELAY OR PREVENT AN ACQUISITION OR SALE OF THE COMPANY. The Company's Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult a change in control of the Company, even if such a change in control would be in the interest of a significant number of our stockholders or if such a change in control would provide its stockholders with a substantial premium for their shares over the then-prevailing market price for the common stock. The Company's Amended and Restated Bylaws contain other provisions that could have an anti-takeover effect, including the following: 27 . only one of the three classes of directors is elected each year; . stockholders have limited ability to remove directors; . stockholders cannot call a special meeting of stockholders; and . stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW COULD DELAY OR PREVENT AN ACQUISITION OF THE COMPANY. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for the Company's common stock or preventing changes in its management. CURRENT ECONOMIC AND POLITICAL UNCERTAINTIES MAY HARM THE COMPANY'S BUSINESS. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause significant disruptions to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending on advanced technology, or the Company's inability to effectively market, manufacture or ship its products, its business, results of operations and financial conditions could suffer harm. In addition, the Company's ability to raise capital for purposes of research and development, capital expenditures and ongoing operations depends on access to financing. During times of adverse global economic and political conditions, general investor confidence could decrease and make it more difficult for the Company to find potential investors. If the Company does not have access to financing, it could be unable to fund operations, invest in capital expenditures and fully carry out its research and development efforts, which could adversely affect the business, results of operations and financial conditions. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (See Pages F-3 through F-6) ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 28 PART III ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The following table provides information concerning each of our directors and executive officers: DIRECTOR NAME AGE SINCE POSITION OR OFFICE ---------- ------ --------- -------------------- John S. Foster 43 n/a Chief Operating Officer Peter T. Altavilla 48 n/a Corporate Controller and Secretary Harold R. Frank 76 1957 Chairman Emeritus and Director Herbert M. Dwight, Jr. 70 1989 Director Jerry E. Goldress 70 1995 Director R.C. Mercure, Jr. 69 1982 Director Excluding traffic violations or other minor offenses, during the five years preceding the date of this report, none of the directors or executive officers named above has been convicted in any criminal proceeding or been subject to a pending criminal proceeding. Each of the directors and executive officers named above served in such capacity at the time the Company filed its petition of bankruptcy. Dr. Foster became our employee in 1993. He has served in a number of management positions for us, including Managing Director of our operations in Penang, Malaysia and our Vice President of Worldwide Operations. Dr. Foster was appointed Chief Operating Officer on February 26, 1999. Dr. Foster has over 13 years of experience in the magnetic recording head industry. We have employed Mr. Altavilla since 1987. He served as Assistant Controller until August 1, 1994, when he was elected to his present position as Corporate Controller. Mr. Altavilla was elected Secretary on February 9, 1996. Mr. Frank, our founder, was named our Chairman Emeritus on November 3, 1995. He is also director of Circon Corporation, a producer of endoscopes and ultra miniature color video cameras for medical and industrial applications, Trust Company of the West, a financial institution, and Key Technology, Inc., a manufacturer of automated food processing systems. Mr. Dwight is, and for more than five years has been, Chairman of the Board of Directors of Optical Coating Laboratory, Inc., which is engaged in the design, development and production of precision optical thin film components. He is also a director of Applied Materials, Inc., a wafer fabrication equipment 29 manufacturer, and Advanced Fiber Communications, Inc., a company engaged in providing telecommunications systems for local access. Mr. Goldress is, and for more than five years has been, Chief Executive Officer of Grisanti, Galef & Goldress, Inc. Mr. Goldress is also a director of K2, Inc., a manufacturer of snow skis and fishing tackle. For additional information concerning the relationship between Grisanti, Galef & Goldress, Inc. and us see "Certain Relationships and Related Transactions". Dr. Mercure has since 1996 been Chairman and Chief Executive Officer of CDM Optics, Inc., a manufacturer of optical components and systems. Prior to 1996 he was Professor and Director of the Engineering Management Program at the University of Colorado at Boulder. Dr. Mercure has been our Director since 1982. He is also a director of Ball Corporation, a manufacturer of metal and plastic containers. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) of the Exchange Act, the Company's directors, executive officers and any person holding ten percent or more of the Common Stock are required to report their ownership of Common Stock and any changes in that ownership to the SEC and to furnish the Company with copies of such reports. Specific due dates for these reports have been established and the Company is required to report in this Proxy Statement any failure to file on a timely basis by such persons. Based solely upon a review of copies of reports filed with the SEC, each person subject to the reporting requirements of Section 16(a) has filed timely all reports required to be filed in fiscal 2001. ITEM 10 - EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table shows, as to the past acts in his capacity of chief executive officer and our only other executive officer whose salary plus bonus exceeded $100,000 during the fiscal year ended September 29, 2001, information concerning compensation paid for services to us in all capacities during that fiscal year, as well as the total compensation paid to each such individual in each of our preceding two fiscal years (if such person was the Chief Executive Officer or an executive officer, as the case may be, during any part of such fiscal year).
Annual Compensation Long-Term Compensation ---------------------------------------------------------------------------------- Awards Payouts -------------------------------------- Other Securities Annual Restricted underlying All Other Compen- Stock Options/ LTIP Compen- Salary Bonus (3) sation (1) Awards (8) SARs (3) Payouts (3) sation (4) Name and Principal Position Year ($) ($) ($) (#) ($) ($) ($) -------------------------------- -------------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- John S. Foster 2001 265,000 Chief Operating Officer (2) 2000 265,000 47,587 1999 164,000 - ------------------------------------------------------------------------------------------------------------------------------------ Peter T. Altavilla 2001 135,000 Controller and Secretary 2000 135,000 6,524 1999 135,000 36,417 - ------------------------------------------------------------------------------------------------------------------------------------
30 (1) The value of perquisites, if any, fell below $50,000 or 10% of reported base salary and bonus for each executive. (2) Acts as the Company's chief executive officer. (3) None granted. (4) Payments made for accrued vacation pay. EMPLOYMENT AGREEMENTS The Company has entered into severance agreements with certain executive officers and key employees of the Company, including both of the named executive officers shown in the Summary Compensation Table. These agreements are intended to provide for continuity of management in the event of a change in control of the Company. The agreements provide that covered executive officers and key employees could be entitled to certain severance benefits following a change in control of the Company. If, following a change in control, the executive officer or key employee is terminated by the Company for any reason, other than for disability or for cause, or if such executive officer or key employee terminates his or her employment for good reason (as this term is defined in the agreements), then the executive officer or key employee is entitled to a severance payment that will be the executive's or key employee's base amount for a period of twelve months, as defined in the agreements. The severance payment generally is made in the form of a lump sum. "Base amount" means the sum of (a) the executive officer's or key employee's then monthly base salary; (b) the executive's or key employee's then monthly car allowance, if any, and (c) one-twelfth of an amount equal to any bonus the executive officer or key employee received or was entitled to receive for the fiscal year immediately preceding a change in control. If a change in control occurs, the agreements are effective for a period of three years thereafter. Under the severance agreements, a change in control would include any of the following events: (1) any "person", as defined in the Securities Exchange Act of 1934, as amended, acquires 20 percent or more of the Company's voting securities; (ii) a majority of the Company's directors are replaced during a two-year period; or (iii) shareholders approve certain mergers, or a liquidation, or sale of the Company's assets. Dr. Foster and Mr. Altavilla are parties to indemnification agreements with the Company. These agreements provide, among other things, that the Company shall (i) indemnify them against certain liabilities that may arise by reason of their status as executive officers provided they acted in good faith and in a manner reasonably believed to be in the best interests of the Company and, with respect to any criminal action, had no cause to believe their conduct was unlawful, (ii) to advance the expenses actually and reasonably incurred as a result of any proceeding against them by third parties or by or in right of the 31 Company, where the indemnitee acted in good faith in a manner the indemnitee believed to be in the best interest of the Company (subject to repayment if it is determined that the indemnitee is not entitled to indemnification); and (iii) to make a good faith attempt to obtain directors' and officers' insurance. There is no action or proceeding pending or, to the knowledge of the Company, threatened which may result in a claim for indemnification by any director, officer, employee or agent of the Company. COMPENSATION OF DIRECTORS No compensation was paid to directors during fiscal 2000 or fiscal 2001. The Company pays to each director who is not employed by the Company an annual retainer of $15,000 and $1,250 for each meeting of the Board of Directors they attend. The Directors received no compensation for their services in fiscal 2000 or 2001. Directors who serve on committees of the Board of Directors are entitled to be paid $1,250 for attendance at meetings of such committees if they occur on days other than on a regularly scheduled board meeting day. Directors are also reimbursed for all expenses incurred by them in their capacity as a director of the Company. Directors are not compensated for meetings held by teleconferencing facilities. The Board of Directors may modify such compensation in the future. In addition, each director not employed by the Company, upon joining the Board of Directors, receives an option to purchase 5,000 shares of the Common Stock of the Company and, thereafter, an option to purchase 5,000 shares of Common Stock on the date of each annual meeting at which such person is reelected to serve as a director. Such options will have an exercise price equal to the fair market value of such shares on the date of grant, become exercisable in two equal annual installments commencing on the first anniversary of the grant thereof, and expire on the tenth anniversary of the date of grant. The Directors received no stock option grants in fiscal 2000 or fiscal 2001. 32 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table contains certain information regarding beneficial ownership of our common stock as of September 29, 2001 by (a) each person that we know owns beneficially more than 5% of our common stock, (b) each of our directors, (c) our Chief Executive Officer and our two other most highly compensated executive officers and (d) all of our directors and executive officers as a group:
SHARES BENEFICIALLY PERCENT OF NAME OWNED CLASS (1) Non-Employee Directors Herbert M. Dwight, Jr. 40,000 (2) 0.1% Harold R. Frank. 308,906 (2)(3) 0.4% Jerry E. Goldress. 35,000 (2) 0.0% R.C. Mercure, Jr 45,533 (2) 0.1% Executive Officers: Craig Crisman 119,643 (4) 0.2% John S. Foster 23,256 (5) 0.0% Peter T. Altavilla 7,858 (6) 0.0% All Directors and Named Executive Officers as a Group (seven persons). 580,196 (7) 0.8% Five Percent Stockholders: Kennilworth Partners II LP 50,345,898 (8) 45.26% The Chase Manhattan Bank, as Trustee for First Plaza 5,123,797 (9) 7.3% Group Trust Guardian Life Insurance Co. of America 7,000,000 9.9% - ------------------------------------------------------
(1) Calculation is based upon the number of shares of our common stock outstanding on September 29, 2001, 70,574,306. (2) Includes, as to each of Messrs. Dwight and Mercure, options, exercisable within 60 days, to purchase 40,000 shares, and as to each of Messrs. Frank and Goldress, options, exercisable within 60 days, to purchase 35,000 shares, in each case under our 1994 Non-Employee Directors' Stock Option Plan. (3) Does not include 233,807 shares held by Wilmington Trust Company, as sole Trustee under irrevocable trusts for three of Mr. Frank's grandchildren, as to all of which he disclaims any beneficial interest. Includes 1,558 shares held by Mr. Frank as custodian under the California Uniform Transfers to Minors Act, as to which shares he disclaims any beneficial interest. Includes options, exercisable within 60 days, to purchase 35,000 shares under the 1994 Non-Employee Directors' Stock Option Plan. (4) Includes options, exercisable within 60 days, to purchase 119,643 shares. 33 (5) Includes options granted under employee stock option plans to purchase 19,681 shares exercisable within 60 days. (6) Includes options, exercisable within 60 days, granted under employee stock option plans to purchase 5,000 shares. (7) Includes options, exercisable within 60 days, to purchase 294,324 shares. (8) Includes options, exercisable within 60 days, to acquire 40,798,226 shares. As of September 29, 2001, our stock is held of record by 1,847 persons. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following is a list of exhibits filed as a part of this report. Exhibit Number Description ------ ----------- 2.1 Debtor's Third Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Dated as of September 24, 2001 (incorporated by reference to Exhibit 2.1 the Company's Current Report on Form 8-K filed November 20, 2001). 3.1 Amended and Restated Certificate of Incorporation.* 3.2 Amended and Restated Bylaws of Innovative Micro Technology, Inc.* 4.1 Form of Warrant Agreement between the Company and Certain Claimants Under the Plan of Reorganization.* 4.2 Warrant Agreement between the Company and L-3 Communications Corporation, dated August 1, 2002 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed August 13, 2002). 10.1 Change in Control Agreement between the Company and John Foster, dated April 15, 2002.* 10.2 Change in Control Agreement between the Company and Peter T. Altavilla, dated April 15, 2002.* 34 10.3 Form of Indemnification Agreement for directors and officers.* 10.4 Stock Purchase Agreement between the Company and L-3 Communications Corporation, dated August 1, 2002 (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed August 13, 2002). 10.5 2001 Stock Incentive Plan.* 10.6 Form of Stock Option Agreement under 2001 Stock Incentive Plan.* 10.7 Form of Restricted Stock Agreement under 2001 Stock Incentive Plan.* 10.8 Fixed Rate Note of the Company, payable to Owens Financial Group, Inc., dated December 20, 2001.* 10.9 Deed of Trust, Security Agreement and Assignment of Leases and Rents, between the Company, Owens Financial Group, Inc. and Investors Yield, Inc., dated December 20, 2001.* 10.10 Worldwide Cash Profit Sharing Plan (incorporated by reference to Exhibit 10 to Amendment No. 1 to the Company's Report on Form 10-Q filed March 4, 1996). 10.11 Recapitalization Agreement, dated as of March 20, 1999 and as amended by Amendment No. 1 dated as of April 9, 1999, among MDT Holdings, LLC, Applied Magnetics Corporation, DDCI, LLC, Vestro Investments Group Limited, Milestone Acquisitions II, LLC and Magnetic Data Technologies, LLC (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed April 26, 1999). *Filed with this report. (b) Reports on Form 8-K. None. 35 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVATIVE MICRO TECHNOLOGY, INC. /s/ John S. Foster John S. Foster Chairman and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John S. Foster January 13, 2003 - ------------------- Chairman, Director and Chief Executive Officer /s/ Peter T. Altavilla January 13, 2003 - ----------------------- Peter T. Altavilla Chief Financial Officer and Secretary /s/Daniel Armel January 13, 2003 - ---------------- Daniel Armel Director /s/ Scott Avila January 13, 2003 - ---------------- Scott Avila Director /s/Calvin Quate January 13, 2003 - ---------------- Dr. Calvin Quate Director 36 Innovative Micro Technology, Inc. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Related Information Financial Statements: Independent Auditor's Report F-2 Balance Sheet as of September 29 2001 F-3 Statements of Operations for the years ended September 29, 2001 and September 30, 2000 F-4 Statements of Shareholders' Deficiency for the years ended September 29, 2001 and September 30, 2000 F-5 Statements of Cash Flows for the years ended September 29, 2001 and September 30, 2000 F-6 Notes to Financial Statements F-7 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Innovative Micro Technology, Inc. Goleta, California We have audited the accompanying balance sheet of Innovative Micro Technology, Inc. (Debtor-in-Possession) ("The Company") as of September 29, 2001, and the related statements of operations, shareholders' deficiency and cash flows for the years ended September 29, 2001 and September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Innovative Micro Technology, Inc. as of September 29, 2001, and the results of its operations and its cash flows for the years ended September 29, 2001 and September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. As discussed in Note 1 to the financial statements, on November 16, 2001, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective after the close of business on November 16, 2001. Under the plan of reorganization, the Company is required to comply with certain terms and conditions as more fully described in Note 1. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company's recurring losses from operations, negative working capital, and shareholders' deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP - ------------------------- Deloitte & Touche LLP Los Angeles, California January 8, 2003 F-2 Innovative Micro Technology, Inc BALANCE SHEET (In Thousands, except share and par value data) ASSETS
As of --------------- September 29, 2001 ASSETS Current assets: Cash $ 1,697 Accounts receivable, net of allowance for doubtful accounts of $11 733 Inventories 454 Prepaid expenses and other 299 ------------- Total current assets 3,183 ------------- Property, plant and equipment, at cost: Land 8,750 Buildings 10,725 Manufacturing equipment 1,683 Construction in progress 23 ------------- Total property, plant and equipment, at cost 21,181 Less-accumulated depreciation and amortization (1,215) ------------- Total property, plant and equipment 19,966 ------------- Other assets 6,206 ------------- Total assets $ 29,355 ============= LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Current portion of long-term debt $ 2,000 Accounts payable 518 Accrued payroll and benefits 207 Accrued audit and legal 3,897 Accrued property taxes 63 Deferred revenue 784 Other current liabilities 28 ------------- Total current liabilities 7,497 ------------- Other long-term liabilities 174 ------------- Liabilities subject to compromise under reorganization proceedings 315,709 Shareholders' Deficiency: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding - Common stock, $.10 par value, 120,000,000 shares authorized, 70,574,306 shares issued and outstanding at September 29, 2001 7,057 Paid-in capital 345,100 Accumulated deficit (644,601) ------------- (292,444) Treasury stock, at cost (130,552 shares at September 29, 2001) (1,581) ------------- Total shareholder's deficiency (294,025) ------------- Total liabilities and shareholder's deficiency $ 29,355 ============= The accompanying Notes to Financial Statements are an integral part of these statements.
F-3 Innovative Micro Technology, Inc STATEMENTS OF OPERATIONS (In Thousands, except per share data)
For the Years Ended ----------------------------------- September 29, September 30, 2001 2000 --------------- ------------- Net sales MEMS and Other $ 2,498 $ 452 Rental income 275 4 -------------- ------------- Total 2,773 456 Cost of sales MEMS and Other 6,303 4,027 Rental income 194 32 -------------- ------------- Total 6,497 4,059 -------------- ------------- Gross loss (3,724) (3,603) -------------- ------------- Research and development expenses 347 281 Selling, general and administrative expenses 1,595 1,128 Impairment of long-lived assets 2,465 - -------------- ------------- Loss from Operations (8,131) (5,012) -------------- ------------- Interest income 31 4 Interest expense (1,472) (4,582) Gain on troubled debt restructuring bond conversion - 882 -------------- ------------- Other income (expense) (1,441) (3,696) Reorganization Costs 2,255 2,008 -------------- ------------- Loss from continuing operations before income taxes (11,827) (10,716) Provision for income taxes 1 - Discontinued operations, net - (23,048) -------------- ------------- Net loss $ (11,828) $ (33,764) ============== ============= Net loss per share: Loss from continuing operations per common share $ (0.17) $ (0.16) Discontinued operations, net 0.00 (0.33) -------------- ------------- Loss per common share - basic and diluted $ (0.17) $ (0.49) ============== ============= Common shares - basic and diluted 70,444 69,598 ============== ============= The accompanying Notes to Financial Statements are an integral part of these statements.
F-4 Innovative Micro Technology, Inc STATEMENTS OF SHAREHOLDERS' DEFICIENCY (In Thousands, except share amounts)
Common Stock Treasury Stock --------------------------------- ------------------------------- Accumulated Stock Number of Paid-in Accumulated Number of Subscription Shareholders' Shares Amount Capital Deficit Shares Amount Receivable Deficiency ------------ -------------------- ---------- ---------- ---------------------------------- Balance, October 2, 1999 65,026,634 $6,502 $333,927 $(599,009) 130,552 $(1,581) $(1,200) (261,361) Stock exchanged for 7% Convertible Debenture Bonds 2,000,000 200 7,610 7,810 Stock exchanged for 14% Convertible Debenture Bonds 3,547,672 355 1,645 2,000 Troubled debt restructuring bond conversion 1,918 1,918 Net loss (33,764) (33,764) -------------------------------------------------------------------------------------------- Balance, September 30, 2000 70,574,306 7,057 345,100 (632,773) 130,552 (1,581) (1,200) (283,397) -------------------------------------------------------------------------------------------- Stock Subscription Received 1,200 1,200 Net loss (11,828) (11,828) -------------------------------------------------------------------------------------------- Balance, September 29, 2001 70,574,306 $7,057 $345,100 $(644,601) 130,552 $(1,581) $ - $(294,025) ============================================================================================ The accompanying Notes to Financial Statements are an integral part of these statements.
F-5 Innovative Micro Technology, Inc STATEMENTS OF CASH FLOWS (In Thousands)
For the Years Ended ------------------------------- September 29, September 30, 2001 2000 -------------- ------------- Cash Flows from Operating Activities: Net loss $ (11,828) $ (33,764) Adjustments to reconcile net loss to net cash provided by operating activities: Loss from discontinued operations - 23,048 Gain on troubled debt restructuring bond conversion - (882) Impairment of long-lived assets 2,465 - Depreciation and amortization 1,804 974 Amortization of loan costs 24 - Gain on sale of assets (34) - Bad debt provision 4 - Non-cash interest 1,427 4,576 Non-cash property taxes 316 832 Changes in assets and liabilities: Accounts receivable (554) 1,021 Inventories (454) - Prepaid expenses and other (75) (44) Other assets (380) (213) Accounts payable 294 224 Accrued payroll and benefits 78 (671) Accrued property taxes 63 - Accrued audit and legal 2,160 1,609 Deferred revenue 784 - Other current liability (125) 69 Other liabilities 174 - - ---------------------------------------------------------------------------------------------- Net cash flows used in continuing operations (3,857) (3,221) Net cash flows used in discontinued operations - (20,250) - ---------------------------------------------------------------------------------------------- Net cash flows used in operating activities (3,857) (23,471) - ---------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Purchases of property, plant and equipment (103) (3,102) Proceeds from sale of fixed assets 1,581 4,660 Proceeds from sale of businesses - 1,707 - ---------------------------------------------------------------------------------------------- Net cash flows provided by investing activities 1,478 3,265 - ---------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from note payable - 100 Repayment of note payable (100) - Proceeds from issuance of debt 2,000 7,625 Debt issuance costs (84) - Proceeds from issuance of convertible debentures - 5,000 Expenses related to conversion of convertible debentures - (190) Proceeds from stock issuance to investors 1,200 - - ---------------------------------------------------------------------------------------------- Net cash flows provided by continuing operations 3,016 12,535 Net cash flows provided by discontinued operations - - - ---------------------------------------------------------------------------------------------- Net cash flows provided by financing activities 3,016 12,535 - ---------------------------------------------------------------------------------------------- Net increase (decrease) in cash 637 (7,671) Cash at beginning of year 1,060 8,731 - ---------------------------------------------------------------------------------------------- Cash at end of year $ 1,697 $ 1,060 - ---------------------------------------------------------------------------------------------- Supplemental Cash Flow Data: Interest paid $ - - ============= ============= Income taxes paid $ 1 - ============= =============
Supplemental Schedule of non-cash activities: On October 7, 1999, the Company completed a private placement which provided the Company with additional financing of $5.0 million through 2% convertible debt instruments. This transaction also included conversion of $5M of 7% convertible subordinated debentures due in March 2006 with an adjusted common stock conversion price of $16.15 to $2M of 2% convertible debentures due in September 2004 with a common stock conversion price of $1.00. The transaction was treated as a troubled debt restructuring under FAS 15 "Accounting for Debtors and Creditors for Troubled Debt Restructurings". The fair value of the conversion feature of the newly issues debt was calculated as $1.9 million using the Black-Scholes option pricing model; assuming a 5.8% risk-free interest rate, anticipated volatility of 200%, expected life of 5 years and zero dividend yield. The $1.9 million was recorded as paid in capital. A gain of $0.9 million was recorded on the exchange. The accompanying Notes to Financial Statements are an integral part of these statements. F-6 Innovative Micro Technology, Inc NOTES TO FINANCIAL STATEMENTS 1. Reorganization, Basis of Presentation Innovative Micro Technology, Inc. (the "Company") was incorporated in California in 1957 and was reincorporated in Delaware in 1987. Prior to the commencement of the Chapter 11 Reorganization, on January 7, 2000, the Company operated in one industry segment namely, components for the computer peripheral industry with one major product group, recording heads for hard disk drives which are used in computer applications. The Company has incurred net losses and losses from operations for each quarter since 1999. The Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy, all of the previously issued and outstanding common stock was canceled without consideration to the holders. The Company incurred net losses of $11.8 million for the fiscal year ended September 29, 2001. It expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable. Even if the Company does achieve profitability, it may not be able to sustain or increase profitability in the future. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. As a result, it will need to significantly increase its revenues to achieve profitability. Although the Company's revenues have increased, the growth may not continue at the current rate or at all. The above items raise substantial doubt about the Company's ability to continue as a going concern. The Company exited its Chapter 11 Reorganization process on November 16, 2001 ("Effective Date"). The Company will adopt the fresh start reporting requirements of Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the fresh start reporting requirements, the reorganization value of the Company will be allocated to the Company's assets in conformity with the procedures specified by SFAS No. 142, "Goodwill and Other Intangible Assets". As provided for under the Company's reorganization plan (the "Plan"), the Company will convert approximately $185 million of debt discharge and $131 million of trade credit and operating leases to equity in the reorganized entity. The Company is in the process of implementing the Plan. One of the steps of the Plan was the increase of a mortgage that is secured by the property that the Company has for sale. This loan was completed on January 3, 2002. The Company initially completed a short-term loan of $2.0 million in August 2001 and increased the amount to $5.4 million as of January 3, 2002. The loan has an annual interest rate of 12% and requires interest only monthly payments for three years. The loan is due on December 5, 2004 and is secured by the Company's Hollister property. The Company's Malaysian subsidiary had credit facilities with five Malaysian Banks ("Malaysian Banks") that were guaranteed by the parent corporation, which provided them with a senior credit position to the Company's note holders. Another provision of the Plan related to the treatment of these F-7 subordinated Note claims. The Company's 14% Note, 2% Notes and 7% Notes each contain subordination provisions. Pursuant to these provisions the Malaysian Banks, the holder of the 14% Note, the holders of the 2% Notes, and the holders of the 7% Notes have certain Subordination Rights and Subordination Claims. The Company guaranteed the bank loans for its Malaysian subsidiary. A Warrant Agreement was developed to provide a method for the subordinated claimants to participate in the anticipated future growth in value of the Company's Common Stock to be issued pursuant to the Plan ("New Common Stock"). Pursuant to the Warrant Agreement, one million Warrants will be issued. Each Warrant will represent the right: (1) to purchase 0.946805 shares of New Common Stock at a price per share of $20.00; (2) to purchase 0.423822 shares of New Common Stock at a price of $22.50 per share; (3) to purchase 0.509937 shares of New Common Stock at a price of $27.50 per share; and (4) to receive the Cash Asset Sale Distribution, as defined in the agreement. Each Warrant will automatically vest upon issuance, and will be exercisable, in whole or in part, during the period of three (3) years from the Effective Date and will expire and be of no further force and effect thereafter. Each Warrant will be freely transferable. The total number of new shares that the warrants may convert to during this three year period is 1,880,564. Of the 4,500,000 shares of New Common Stock to be issued under the Plan to the former creditors of the Company, 946,805 shares will have a legend identifying them as being subject to repurchase by the Company during the three year period from the Effective Date by the Company at a price of $20.00 per share, 423,822 shares will have a legend identifying them as being subject to repurchase during the three year period from the Effective Date by the Company at a price of $22.50 per share and 509,937 shares will have a legend identifying them as being subject to repurchase during the three year period from the Effective Date by the Company at a price of $27.50 per share. The shares can be settled with cash, if the Company is acquired by an independent third party. An additional 231,600 shares will have a legend identifying them as being subject to repurchase at a price of $0.01 per share in connection with a cash sale of the Company. The Company will be responsible for processing the Warrant payment and the subsequent mandatory Call and payment for the legend shares. This process does not create any additional outstanding shares of stock for the Company. The Company issues the same number of new shares to the Warrant holders as it retires upon transacting the Call for the legend shares. Another provision of the Plan relates to the treatment of the unpaid professional persons involved in the Chapter 11 Reorganization. The total amount owed to these professional persons as of the Effective Date was $4.1 million. The Bankruptcy Code provides that each Professional Person, defined as the law firms and investment bankers employed by the Company during the Chapter 11 reorganization, is entitled to be paid cash, in full, at the Effective Date an amount equal to their Professional Person's Allowed Administrative Claim. In consideration for each Professional Person waiving this right and agreeing to accept a convertible note, the Plan provides for each Professional Person to have an Allowed Administrative Claim as of the Effective Date. Each professional person, shall receive on account of its deferred Allowed Administrative Claim (the "Professional Person's Deferred Claim") a convertible note for the amounts specified in the Plan: monthly interest payments based upon 12% per annum, simple interest and payment on the two year anniversary of the Effective Date of an amount equal to the remaining balance; adjusted by any amount converted to the Company's new common stock. The convertible note is secured by a lien on the Company's equipment and real property. F-8 Pursuant to the Plan, for a period through the second anniversary of the Effective Date, a Professional Person may elect to convert its note to shares of New Common Stock based on the Bankruptcy assigned entity value of $8.20 per share ($41 million valuation divided by 5 million shares of new common stock). The $41 million valuation was prepared by a third party, at the request of the creditor committee. The Company used the Chapter 11 Reorganization to reposition itself in the MEMS business. MEMS is an acronym for micro-electro-mechanical system, and MEMS devices are sometimes referred to as "micromachines." The core competency of the Company is wafer manufacturing and assembly in high volume. To that end, the Company has determined that the MEMS business allows use of the manufacturing facility, many of the manufacturing techniques, and the skills of its employees obtained while manufacturing magnetic recording heads in the past. Statistical quality control techniques, operator training protocols, and general practices for volume manufacturing are employed to ensure high quality production at low costs. The Company's three additional lines of business are: "Santa Barbara Tool and Die," "Insight Analytical" and leasing of excess space in its owned facility under long-term lease contracts. Santa Barbara Tool and Die's technology permits high precision manufacturing of tooling, and the organization features electron-discharge machining (EDM) which includes metals and ceramics capabilities. Insight Analytical's laboratory technology includes electron microscopy in a variety of forms and features operation of a focused ion beam tool which can precisely make three-dimensional cuts in samples and reveal detailed information as to dimension, material makeup, and material crystal properties. Santa Barbara Tool and Die and Insight Analytical are strategic parts of the core company in that their services are used to make the core business more competitive and both use the capacity that exceeds internal Company needs to provide services to outside customers. The Company has approximately 51,000 square feet of building space available to lease. As of September 29, 2001, approximately 34,000 square feet were under long-term lease arrangements. 2. Summary of Significant Accounting Policies Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of the consolidated financial statements. Depreciation and Amortization Policies: Property, plant and equipment are accounted for on a historical cost basis and are depreciated or amortized over their estimated useful lives using the straight-line method except for leasehold improvements which are amortized over the shorter of the estimated useful life or the life of the lease. F-9 Estimated useful lives are as follows: Average Useful Life ------------------- Buildings 25 Years Manufacturing equipment 3 - 5 Years Other equipment 1 - 5 Years Building improvements 10 Years Depreciation and amortization expense from continuing operations amounted to $1.8 million and $1.0 million in 2001 and 2000, respectively. Long-lived Assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset's carrying value may exceed the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the carrying value, the asset will be reduced to an amount equal to the net present value of the expected future cash flows and an impairment loss will be recognized. The Company adjusted its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. Reorganization Costs: Expenditures directly related to the Chapter 11 filing are classified as reorganization costs and were expensed as incurred. These expenses primarily consist of professional fees. See "Note 10 Reorganization Costs." Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for purchased parts and manufacturing supplies is based on replacement costs and for other inventory classifications on net realizable value. Inventory at September 29, 2001 was all work in process of $0.5 million related to capitalized cost under completed contract method of accounting as described below. Revenue Recognition and Warranty Policies: The Company uses the completed contract method of accounting for its product development projects due to the inability to accurately estimate percentage of completion during performance of the contract. Costs are capitalized during the project as inventories and expensed at its completion along with the recognition of revenue. Santa Barbara Tool and Die delivers a finished product to the customer and revenue is recognized at the time the product is shipped and title passes. Insight Analytical has service related revenue and this revenue is recognized upon completion of the service for the customer. The Company's MEMS development contracts do not have any rights of return. Santa Barbara Tool and Die and Insight Analytical did not have any sales returns in fiscal 2001 or 2000. The Company's warranty policy provides for the replacement of defective parts when the customer's return request is approved within thirty days of the original shipment date. To date, warranty costs have not been significant. F-10 A portion of the Company's facilities are leased to tenants under long-term contracts. The terms of the leases expire within the next five years with renewal at the option of the tenant. Future minimum lease income for agreements as of September 29, 2001 are as follows (in thousands): Rental Income ------ 2002 $ 493 2003 493 2004 493 2005 493 Thereafter 462 ------ Total minimum income 2,434 ===== Fair Value of Financial Instruments: The carrying amounts of cash and cash equivalents, customer receivables, trade accounts payable and other accrued liabilities approximate their fair value because of the short maturity of these financial instruments. As a result of the Company's Chapter 11 filing, instruments included as liabilities subject to compromise are recorded at their historical value, however, the liabilities will not be settled at this amount. The liabilities not under compromise approximate fair value due to their short-term nature or market rate of interest. Net Loss per Common Share: Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted loss per share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. However, in the case of a loss per share, dilutive securities outstanding would be antidilutive and would, therefore, be excluded from the computation of diluted loss per share. All of the following dilutive securities were canceled or are no longer convertible due to the bankruptcy which occurred on January 7, 2000; options to purchase 3.8 million shares of common stock at prices ranging from $1.90 to $43.13, warrants to purchase 1.5 million shares of common stock at the lower of (i) the current market price on the vesting date, as defined or (ii) $7.00, subject to adjustments defined in the agreement and approximately 58.1 million common shares from potential conversion of certain Convertible Debentures. Research and Development Expenses: The Company is actively engaged in basic technology and applied research and development programs which are designed to develop new products and product applications and related manufacturing processes. The costs of these programs are classified as research and development expenses and are charged to operations as incurred. Income Taxes: Income taxes are computed using the liability method. The provision for income taxes includes income taxes payable for the current F-11 period and the deferred income tax consequences of transactions that have been recognized in the Company's financial statements or income tax returns. The carrying value of deferred income tax assets is determined based on an evaluation of whether the realization of such assets is more likely than not. Temporary differences result primarily from accrued liabilities, valuation allowances, depreciation and amortization, and state franchise taxes. The valuation allowance is reviewed periodically to determine the amount of deferred tax asset considered realizable. Recent Accounting Pronouncements: SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company adopted SFAS 133 effective October 1, 2000. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was issued by the Financial Accounting Standards Board. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 specifies that goodwill and indefinite lived intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Intangible assets with a determinable useful life will continue to be amortized over their expected lives. The Company will implement SFAS 142 beginning in its fiscal year 2003 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued by the Financial Accounting Standards Board. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the provisions of SFAS 144 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In May of 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued by the Financial Accounting Standards Board. The statement rescinds FASB No. 4, "Reporting Gains and Losses from extinguishment of Debt," and an amendment of that statement, FASB No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be aggregated and classified as an extraordinary item, net of related income tax effect, in the statement of operations. Instead, such gains and losses will be classified as extraordinary items only if they meet the criteria of unusual or infrequently occurring items. SFAS No. 145 also requires that gains and losses from debt extinguishments, which were classified as extraordinary items in prior periods, be reclassified to continuing operations if they do not meet the criteria for extraordinary items. The provisions related to this portion of the statement are required to be applied in fiscal years beginning after May 15, 2002, with earlier application encouraged. The Company is currently evaluating the provisions of F-12 SFAS 145 and it has not determined the impact, if any, that this statement will have on its financial position or results of operations. In June of 2002, SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies EITF issue 94-3, was issued by the Financial Accounting Standards Board. SFAS 146 is effective for exit and disposal activities that are initiated after December 31, 2002 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, in contrast to the date of an entity's commitment to an exit plan, as required by EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146, but does not expect a material impact on its financials position or results of operations. Risk Concentrations: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. The table below shows the sales by customer and indicates that Fidelica Microsystems, Inc. represented 34% and 19% of fiscal 2001 and 2000 sales, respectively. The Company had accounts receivable from this same customer of approximately $0.3 million that represented approximately 34% of total accounts receivable at September 29, 2001. Sales by Customer: For the Years Ended: -------------------- -- ------------------ September 29, September 30, (As a percentage of sales) 2001 2000 -------------------- ------------------ Fidelica Microsystems, Inc. 34% 19% All Others 66% 81% -------------------- ------------------ Total 100% 100% ==================== ================== Prepaids and Other Current Assets: The major components of prepaids and other current assets include prepaid insurance of $0.1 million, current portion of deferred rent and realtor commissions of $0.1 million related to one of our tenant agreements and $0.1 million of debt issuance costs related to the $2.0 million short-term loan secured by the Company on September 5, 2001. F-13 Other Assets: Other assets includes the following: Other Assets ($000's) Building held for sale $ 5,500 Deferred rent 184 Lease commission 110 Equipment deposit 95 Employee loans 91 Letter of credit 87 Insurance premium 81 Other 58 ------------ Total $ 6,206 ============ The building held for sale was initially offered for sale in the summer of 1999. The Company entered into a sale agreement with a buyer with the plan of raising additional working capital, but the transaction was cancelled before the end of 1999. However, shortly after the Chapter 11 filing on January 7, 2000, the Company placed the building for sale again. The Company is continuing to market its Hollister property for sale. The asset is held in the MEMS business segment. The Company adjusted the carrying value to the expected sales price of $5.5 million in fiscal 1999. The Company recognized a loss of $13.2 million in fiscal 1999 due to this adjustment. Advertising: The Company expenses advertising costs when incurred. Advertising expense was immaterial for both fiscal 2001 and 2000. Fiscal Year: The Company's fiscal year ends on the Saturday closest to September 30. Fiscal years 2001 and 2000 ended on September 29, 2001 and September 30, 2000, respectively. Both fiscal year 2001 and 2000 included 52 weeks. References to years in this annual report relate to fiscal years rather than calendar years. 3. Segments of Business Indicated below is the information required to comply with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, "operating segments" are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company operates in four segments of business. It manufactures MEMS devices for several industries. It also operates a machine, model and die shop, a materials science analytical lab and leases excess space in its owned facility to tenants under long-term lease contracts. The Company's assets are all located F-14 in the United States and 100% of the sales for fiscal 2001 and 2000 were to customers located in the United States. MEMS is an acronym for micro-electro-mechanical system, and MEMS devices are sometimes referred to as "micromachines." Santa Barbara Tool and Die's technology permits high precision manufacturing of tooling, and the organization features electron-discharge machining (EDM) which includes metals and ceramics capabilities. Insight Analytical's laboratory technology includes electron microscopy in a variety of forms and features operation of a focused ion beam tool which can precisely make three-dimensional cuts in samples and reveal detailed information as to dimension, material makeup, and material crystal properties. The Company has approximately 51,000 square feet of building space available to lease. As of September 29, 2001, approximately 34,000 square feet were under long-term lease arrangements. The Company is continuing to market its Hollister property for sale. The Company's management evaluates performance of each segment primarily on the net sales and gross profit (loss). The information in the following table is derived directly from the segments' internal financial reporting used for corporate management purposes. Research and development and general and administrative expenses are not allocated to and/or among the segments. The following table represents net sales, gross profit (loss) and long lived assets by segment (in thousands):
($000's) Santa Barbara Insight Rental MEMS Tool and Die Analytical Income Total --------------------------------------------------------------------- 2001 Net sales $ 1,631 $ 657 $ 210 $ 275 $ 2,773 ===================================================================== Intercompany Sales $ 26 $ 60 $ 303 $ - ===================================================================== Gross profit (loss) $ (3,976) $ 5 $ 166 $ 81 $ (3,724) ===================================================================== Long Lived Assets $ 16,896 $ 203 $ 93 $ 2,774 $ 19,966 ===================================================================== 2000 Net sales $ 195 $ 234 $ 27 $ - $ 456 ===================================================================== Intercompany Sales $ 9 $ 48 $ 74 $ - ===================================================================== Gross (loss) $ (3,541) $ (43) $ (19) $ - $ (3,603) ===================================================================== Long Lived Assets $ 23,872 $ 119 $ 275 $ - $ 24,266 =====================================================================
Capital additions for fiscal 2001 and 2000 were $0.1 million and $3.1 million, respectively. The fiscal 2001 additions were related to the Santa Barbara Tool and Die portion of the business and the fiscal 2000 additions were predominantly related to the MEMS portion of the business with $0.2 million for Insight Analytical. F-15 The Company did not have any sales to customers outside of the United States in fiscal 2001 or 2000. 4. Income Taxes The provision for income taxes for the following fiscal years consists of (in thousands):
2001 2000 ------------ ------------ Federal Income Taxes Current $ - $ - Deferred - - State Income Taxes Current 1 - Deferred - - ---------------------------- $ 1 $ - ============================
Reconciliation of the actual provisions for income taxes to the income tax calculated at the United States Federal rates for operations were as follows (in thousands):
2001 2000 ------------ ------------ Income tax benefit at the United States federal income tax rate $ (4,022) $ (2,785) State income taxes, net of federal income tax benefit (708) (492) Change in valuation allowance 4,731 3,277 ---------------------------- $ 1 $ - ============================
The components of deferred income taxes at September 29, 2001 and September 30, 2000 are as follows (in thousands):
2001 2000 ------------ ------------ Net operating loss carryforwards $ 6,708 $ 3,277 Basis difference in property, plant and equipment 986 - Deferred revenue 314 - ---------------------------- Subtotal 8,008 3,277 Valuation allowance (8,008) (3,277) ---------------------------- Total net deferred tax asset (liability) $ - $ - ============================
SFAS 109 requires that all deferred tax balances be determined using the tax rates and limitations expected to be in effect when the taxes will actually be paid or recovered. Consequently, the income tax provision will increase or decrease in the period in which a change in tax rate or limitation is enacted. As of September 29, 2001, the Company had total deferred tax assets of $8.0 million compared to $3.3 million at the end of fiscal 2000 for an increase of $4.7 million. The Company recorded a valuation allowance in the amount of $8.0 F-16 million and $3.3 million at September 29, 2001 and September 30, 2000, respectively, against the amount by which deferred tax assets exceed deferred tax liabilities. The change in valuation allowance was $4.7 million and $3.3 million for 2001 and 2000, respectively. The valuation reserve at September 29, 2001 has been provided due to the uncertainty of the amount of future taxable income. The valuation allowance has been provided after determining that under the criteria of SFAS No. 109, the Company does not have a basis to conclude that it is more likely than not that it will realize the deferred tax assets. Under the terms of the bankruptcy, the Company may not be able to receive any benefit from previously accumulated net operating loss carryforwards prior to the bankruptcy. Portions of the Company's pre-bankruptcy tax losses may be eligible for use in future periods. The Company is currently evaluating these amounts. Since January 7, 2000, the Company has accumulated net operating loss carryforwards of approximately $16.8 million for federal tax purposes and $8.4 million for state tax purposes as of September 29, 2001. Once the Company has utilized these remaining net operating loss carry forwards, future U.S. earnings will be taxed at the U.S. statutory rates less available tax credits, if any. To the extent not used, the net operating loss carryforwards for federal and state purposes expire in varying amounts beginning in 2021 and 2011, respectively. At September 29, 2001, all identified deferred tax assets are reduced by a valuation allowance therefore, any additional operating loss carryforwards not recognized would not result in a benefit in the provision for income taxes due to the uncertainty of future realization of those additional operating loss carryforwards. 5. Liabilities Subject to Compromise: Liabilities subject to compromise consists of the following (in thousands): As of ---------------- September 29, 2001 Secured Liabilities: Property Mortgage $ 10,375 Property taxes 1,575 ---------------- 11,950 ---------------- Unsecured Liabilities: Accounts payable trade 10,661 Borrowings outstanding under: Offshore guaranteed bank loans 59,961 Accounts payable offshore subsidiary 45,582 7% convertible subordinated debentures 87,891 14% convertible debenture 24,711 2% convertible debenture 12,262 Operating leases 55,217 Other accrued expenses 7,474 ---------------- 303,759 ---------------- Total 315,709 ================ F-17 The aggregate principal payments of secured liabilities for the years subsequent to September 29, 2001 is: 2002 - $0.8 million, 2003 and 2004 - $0.2 million, 2005 - $0.2 million, 2006 - $10.6 million. These amounts relate to the property tax and a property mortgage, which are secured by the two California properties owned by the Company. The Plan calls for the unsecured liability amounts to be converted to New Common Stock of the Company. The long-term liabilities of $0.2 million relate to the deposits the Company received as part of the lease arrangements with its tenants. On the Petition Date the Company stopped accruing interest on all unsecured debt in accordance with SOP 90-7. Contractual interest expense not accrued or recorded on certain pre-petition debt totaled $7.2 million in fiscal 2000 and $10.1 million in fiscal 2001. 6. Debt In the first quarter of fiscal 2000, $5.0 million of 7% convertible subordinated debentures due in March 2006 with an adjusted common stock conversion price of $16.15 were converted to $2.0 million of 2% convertible debentures due in September 2004 with a common stock conversion price of $1.00. The transaction was treated as a troubled debt restructuring under FAS 15 "Accounting for Debtors and Creditors for Troubled Debt Restructurings". The fair value of the conversion feature of the newly issued debt was calculated as $1.9 million using the Black-Scholes option pricing model; assuming a 5.8% risk-free interest rate, anticipated volatility of 200%, expected life of 5 years and zero dividend yield. The $1.9 million was recorded as paid-in capital. A gain of $.9 million was recorded on the exchange. The gain had an impact of $.01 on earnings per share for fiscal 2000. On September 5, 2001 the Company completed a mortgage of $2.0 million secured by one of its California properties. The loan had a three month term with the ability to extend it for an additional nine months. The loan requires interest-only monthly payments at 12% annual interest rate. The loan also provided an option for the Company to borrow an additional $3.4 million at 12% annual interest rate with a three year term for the entire $5.4 million. The Company exercised this option in December of 2001 (see footnote 10). 7. Commitments and Contingencies The Company uses hazardous chemicals in its manufacturing and is subject to a variety of environmental and land use regulations related to their use, storage and disposal. If the Company fails to comply with present or future regulations, liability, production suspension or delay could result. In addition, environmental or land use regulations could restrict the Company's ability to expand its current production facilities or establish additional facilities in other locations, or could require the Company to acquire costly equipment, or to incur other significant expenses for compliance with environmental regulations or to clean up prior discharges. F-18 The Company has been subject to regulatory and legal proceedings related to past environmental contamination, and other proceedings could arise in the future. The Company has recently been advised by the U.S. Environmental Protection Agency that it may be required to pay for part of the remediation of a solvent and refrigerant recycling and treatment facility formerly operated by the Omega Chemical Company in Whittier, California, and may be required to pay an additional amount which management does not expect to be material. The EPA alleges that the Company provided solvent and refrigerant waste to this facility for recycling and disposal. The Company is still exploring legal defenses, including defenses arising out of the bankruptcy proceedings. At this time, the Company intends to defend this matter vigorously. The Company is also remediating and monitoring ground water contaminated with volatile organic compounds ("VOCs") at a former Company site in Goleta, California under an order of the California Regional Water Quality Control Board ("CRWQCB"). VOC contamination at the site has been reduced and the Company does not expect further expenditures at the site to be material. The Company is in the process of selling an unneeded facility in California, the Hollister property. The environmental testing performed by the Company in support of this sale determined that the soil showed no metal or volatile organic compound ("VOC") contamination. Ground water samples showed low levels of VOC contamination. The CRWQCB required the Company to install one monitoring well and test results confirmed the low level VOC concentration. The owners of the property adjacent to the Company are conducting a remediation project on their site for this same VOC and the CRWQCB has requested this property to place monitoring wells between the two properties to make a determination of possible intrusion from the adjacent site. The results of their testing showed by-products of the pertinent VOC. They have been asked to conduct bi-annual sampling of the wells. Purchase commitments associated with capital expenditures were $0.4 million at September 29, 2001. 8. Discontinued Operations In January 2000, the Company developed plans to discontinue its core business of manufacturing magnetic recording heads for hard disk drives used in computer applications. After the Company filed for Chapter 11, plans were developed and approved by the creditor's committee to retain and use the assets based in the United States for the manufacture of MEMS. The MEMS business allows use of the manufacturing facility, many of the manufacturing techniques, and the skills of its employees obtained while manufacturing magnetic recording heads in the past. The Company recorded a charge for discontinued operations of $23.0 million in the first fiscal quarter of 2000. Discontinued operations included approximately $7.6 million of revenue and $30.6 million of expenses associated with the Company's former business of the manufacture of components for the disk drive industry. During fiscal 2000, the Company completed the sale of its Applied Magnetics Korea, LTD. subsidiary to a private group of investors. The sales proceeds from this transaction were $1.7 million. The sales proceeds approximated the carrying value of the assets sold. The Company's Applied F-19 Magnetics (Malaysia) SDN. BHD. subsidiary was submitted to receivership in March of 2000 and KPMG Corporate Services SDN. BHD. was appointed liquidator. 9. Benefit Plans The Company has a qualified retirement plan (the "401(k) Plan") under the provisions of section 401(k) of the Internal Revenue Code, in which eligible employees may participate. Substantially all participants in this plan are able to defer compensation up to the annual maximum amount allowable under Internal Revenue Service regulations. The Company has a 401(k) cash match program which matches one half of the first five percent of an employee's contributions. This matching contribution was less than $.1 million in both fiscal 2000 and 2001. The Company's 401(k) Plan has a provision that provides management with an option to make a discretionary contribution to the plan. Additionally, the Company has a profit sharing plan, in which all eligible employees participate. There was no compensation expense recorded under the cash profit sharing plan and the Company made no discretionary 401(k) contributions during fiscal 2000 and fiscal 2001 under this plan. 10. Stock, Stock Option and Financing Transactions Restricted Stock and Option Program: The Company's stock option and long-term incentive plans were cancelled as part of the Chapter 11 Reorganization Plan ("Plan"). The Company had approximately 3.8 million options outstanding as of the Petition Date. The Plan provided for future stock incentives for the employees and directors of the Company. Pursuant to the Plan the Company, as of the Effective Date, adopted the Employee Restricted Stock and Option Program, authorizing the grant of Employee Restricted Stock and New Options to purchase shares of New Common Stock to employees as provided for in the Employee Restricted Stock and Option Program. Pursuant to the Plan, the Company will issue as of the Effective Date, from time to time, Employee Restricted Stock and New Options allocated and vested as provided for in the Employee Restricted Stock and Option Program. Pursuant to the Plan, 2,250,000 shares of New Common Stock are reserved for the Employee Restricted Stock and the New Options to be issued pursuant to the New Employee Restricted Stock and Option Agreement and the Employee Restricted Stock and Option Program. There will be issued 500,000 shares of Employee Restricted Stock and each class of New Options shall represent the right to purchase, in the aggregate, that number of shares of New Common Stock as follows: --------------------------------------------------------------------- Number Of Shares Of New Class Common Stock --------------------------------------------------------------------- New Employee Options 1,000,000 --------------------------------------------------------------------- Employee/Director Reserved Options 750,000 --------------------------------------------------------------------- F-20 Each New Employee Option will provide for a purchase price for each share of New Common stock of $5.00 per share. Each Employee/Director Reserved Option will provide for a purchase price for each share of New Common Stock as determined by the Board of Directors, which price shall be the then fair market value of the New Common Stock as determined by the Board of Directors. The vesting schedule is two years for the Employee Restricted Stock and three years for the New Employee Options. Upon vesting, the New Employee Options can be exercised if and only if all of the following conditions have been satisfied: (i) not more than ten (10) years after the issuance of the New Option has lapsed; and (ii) the recipient of the New Option is employed by the Company at the time the recipient seeks to exercise the Employee Restricted Stock and New Option (or not more than ninety (90) days have passed since such employee's employment has been terminated); provided, however, if the recipient is not employed by the Company at the time of exercise by reason of the recipient's death, the recipient's heir (or estate) can exercise the Employee Restricted Stock and New Option; The New Employee Restricted Stock and Option Agreement will provide for accelerated vesting upon certain specified conditions. Financing transaction: The Company completed an equity financing transaction with a strategic investor on August 2, 2002 for $5 million in cash. The Company issued the investor 935,000 shares of common stock along with two warrants. The first warrant has a term of eighteen months and is convertible into 167,000 shares of common stock at a price of $5.35 per share. The second warrant has a term of thirty six months and is convertible into 700,000 shares of common stock at a price of $7.29 per share. 11. Impairment of long lived assets. The Company adjusted its machinery and equipment to market value in the fourth fiscal quarter of 2001. An orderly liquidation value appraisal was performed by a third party at the request of the Company, and the valuation indicated that the equipment, similar to that used by semiconductor manufacturers, required a reduction in value of approximately $2.5 million. F-21 12. Summarized Quarterly Financial Data (Unaudited)
(In thousands, except per share data) Three months ended December 30 March 31 June 30 September 29 ------------------------------------------------------------------- Fiscal 2001 Net sales $ 446 $ 730 $ 770 $ 827 Gross loss (975) (836) (947) (966) Net loss (2,168) (2,287) (2,200) (5,173) Net loss per share: Loss per common share - basic and diluted $ (0.03) $ (0.03) $ (0.03) $ (0.08) Weighted average number of common shares outstanding: Common shares - basic and diluted 70,444 70,444 70,444 70,444 Three months ended ------------------------------------------------------------------- January 1 April 1 July 1 September 30 Fiscal 2000 Net sales $ 0 $ 14 $ 189 $ 253 Gross loss 0 (960) (1,333) (1,310) Loss from continuing operations (2,524) (2,495) (2,894) (2,803) Loss from discontinued operations (23,048) Net loss (25,572) (2,495) (2,894) (2,803) Net loss per share: Loss from continuing operations per common share $ (0.04) $ (0.04) $ (0.04) $ (0.04) Discontinued operations, net (0.33) 0.00 0.00 (0.00) Loss per common share - basic and diluted (0.37) (0.04) (0.04) (0.04) Weighted average number of common shares outstanding: Common shares - basic and diluted 66,976 70,444 70,444 70,444
F-22 13. Unaudited Proforma balance Sheet Innovative Micro Technology, Inc. This schedule displays the changes required to the Company's balance sheet due to the confirmation of the Company's bankruptcy plan of reorganization. The Company's plan of reorganization became effective on November 16, 2001. Proforma Balance Sheet (In thousands, except share and par value data)
Pre Exchange Debt Exchange Confirmation to Debt Discharge of Stock Fresh-Start Adjusted ---------------------------------------------------------------- ASSETS Current assets: Cash $ 1,697 - - - - $ 1,697 Accounts receivable, net of allowance for doubtful accounts of $11 733 - - - - 733 Inventories 454 - - - - 454 Prepaid expenses and other 299 - - - - 299 ---------------------------------------------------------------- Total current assets 3,183 - - - - 3,183 ---------------------------------------------------------------- Property, plant and equipment, at cost: Land 8,750 - - - - 8,750 Buildings 10,725 - - - $ (1,215) 9,510 Manufacturing equipment 1,683 - - - - 1,683 Construction in progress 23 - - - - 23 ---------------------------------------------------------------- Total property, plant and equipment, at cost 21,181 - - - (1,215) 19,966 Less-accumulated depreciation and amortization (1,215) - - - 1,215 0 ---------------------------------------------------------------- Total property, plant and equipment 19,966 - - - - 19,966 ---------------------------------------------------------------- Other assets 6,206 - - - - 6,206 ---------------------------------------------------------------- Total assets $ 29,355 - - - - $ 29,355 ================================================================ LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Current portion of long-term debt $ 2,000 $ 188 - - - $ 2,188 Accounts payable (1) 518 3,642 - - - 4,160 Accrued payroll and benefits 207 - - - - 207 Accrued audit and legal (2) 3,897 (3,642)$ (127) - - 128 Accrued property taxes (3) 63 635 - - - 698 Deferred revenue 784 - - - - 784 Other current liabilities 28 - - - - 28 ---------------------------------------------------------------- Total current liabilities 7,497 823 (127) - - 8,193 ---------------------------------------------------------------- Long Term Debt - 11,127 - - - 11,127 ---------------------------------------------------------------- Other long-term liabilities 174 - - 174 ---------------------------------------------------------------- Liabilities subject to compromise under reorganization proceedings (4) 315,709 (11,950) (303,759) - - - Shareholders' Deficiency: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding at September 29, 2001, no par value, 2,500,000 shares authorized, none issued and outstanding "as adjusted for fresh start accounting." - Common stock, $.10 par value, 120,000,000 shares authorized, 70,574,306 shares issued and outstanding at September 29, 2001, $.0001 par value, 25,000,000 shares authorized, 4,500,000 to be issued "as adjusted for fresh start accounting." 7,057 - - $ (7,057) - - Paid-in capital 345,100 - 303,886 (639,125) - 9,861 Accumulated deficit (644,601) (0.0) - 644,601 - - ---------------------------------------------------------------- (292,444) (0.0) 303,886 (1,581) - 9,861 Treasury stock, at cost (130,552 shares at September 29, 2001) (1,581) - - 1,581 - - Total shareholder's deficiency (294,025) (0.0) 303,886 - - 9,861 Total liabilities and shareholder's deficiency $ 29,355 $ - $ - $ - $ - $ 29,355 ================================================================
Notes: (1) Professional fees associated with the Reorganization that were converted to a two year interest bearing convertible note in the second quarter of fiscal 2002. (2) Secured county property taxes required to be paid in cash. (3) Secured property mortgage required to be paid in cash per the terms of the original agreement. (4) Unsecured liabilities that will be converted to equity and warrants in the reorganized Company. F-23 EX-1 3 imt10k2001ex3-1.txt EXHIBIT 3.1 ----------- CERTIFICATE OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION UNDER SECTION 242 AND 245 Pursuant to Sections 303 and 103 of Title 8 of the General Corporation Law of the State of Delaware, John Foster and Peter T. Altavilla do hereby certify that: 1. They are the chief executive officer and the secretary, respectively, of Applied Magnetics Corporation, a corporation organized and existing under the laws of the State of Delaware. 2. The Certificate of Incorporation of the corporation is amended and restated in its entirety to read as follows: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF APPLIED MAGNETICS CORPORATION Applied Magnetics Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies that: 1. The name of the Corporation is Applied Magnetics Corporation. The date of filing of its original Certificate of Incorporation with the Secretary of State was January 23, 1987. 2. This Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of this Corporation by (a) changing the name of the Corporation; (b) changing the authorized capital stock of the Corporation; and (c) eliminating the authority to issue nonvoting stock to the extent prohibited by the U.S. Bankruptcy Code. 3. The text of the Certificate of Incorporation as amended or supplemented heretofore is further amended hereby to read as herein set forth in full: ARTICLE 1 NAME The name of this corporation is INNOVATIVE MICRO TECHNOLOGY, INC. -1- ARTICLE 2 REGISTERED OFFICE The address of the Corporation's registered office and registered agent in the State of Delaware is The Corporation Trust Company 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801. ARTICLE 3 PURPOSE The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE 4 CAPITAL STOCK A. The corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares of stock which the corporation is authorized to issue is 25,000,000 shares, 22,500,000 of which shall be Common Stock with a par value of $.0001 per share, and 2,500,000 of which shall be Preferred Stock with a par value of $.0001 per share. B. The Board of Directors of this corporation is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights that have been or may be granted to the Preferred Stock or any series thereof in any Certificate of Designation or this corporation's Certificate of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation or acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of -2- that series, but not below the number of shares of such series then outstanding or reserved for issuance upon conversion of such series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE 5 AMENDMENT OF BYLAWS AND ELECTION OF DIRECTORS In furtherance and not in limitation of the powers conferred by statute, the board of directors of this corporation is expressly authorized to make, alter or repeal the bylaws of this corporation. Elections of directors need not be by written ballot except and to the extent provided in the bylaws of this corporation. ARTICLE 6 LIABILITY To the fullest extent permitted by the law of the State of Delaware as it now exists or may hereafter be amended, no director or officer of this corporation shall be liable to this corporation or its stockholders for monetary damages arising from a breach of fiduciary duty owed by such director or officer, as applicable, to this corporation or its stockholders; provided, however, that liability of any director or officer shall not be eliminated or limited for acts or omissions which involve any breach of a director's or officers duty of loyalty to this corporation or its shareholders, intentional misconduct, fraud or a knowing violation of law, under Section 174 of the General Corporation Law of the State of Delaware or for transaction from which the officer or director derived an improper personal benefit. ARTICLE 7 DIRECTOR RELIANCE A director shall be fully protected in relying in good faith upon the books of account or other records of this corporation or statements prepared by any of its officers or by independent public accountants or by an appraiser selected with reasonable care by the Board of Directors as to the value and amount of the assets, liabilities and/or net profits of this corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which this corporation's capital stock might properly be purchased or redeemed. 3 ARTICLE 8 NONVOTING STOCK Notwithstanding any contrary provision herein, the corporation will not issue nonvoting capital stock to the extent prohibited by Section 1123(a)(6) of Section 365 of Title 11 of the United States Code as in effect on the effective date of the Debtor's Third Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Dated as of September 24, 2001 (the "Bankruptcy Code"); provided, however, that this Article 8 (a) will have no further force and effect beyond that required under Section 1123 of the Bankruptcy Code, (b) will have such force and effect, if any, only for so long as such Section is in effect and applicable to the corporation, and (c) in all events may be amended or eliminated in accordance with applicable law as from time to time in effect. 4. The foregoing Restated Certificate of Incorporation was provided for under that certain Debtor's Third Amended and Restated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Dated as of September 24, 2001, which has been confirmed by the order of the United States Bankruptcy Court for the Central District of California, and accordingly is deemed approved by the stockholders of the Corporation under Section 303 of the General Corporation Law of the State of Delaware. Date: November 20, 2001 - -------------------------------------- John Foster, Chief Executive Officer - ------------------------------------ Peter T. Altavilla, Secretary -4- EX-2 4 imt10k2001ex3-2.txt EXHIBIT 3.2 ----------- AMENDED AND RESTATED BYLAWS OF INNOVATIVE MICRO TECHNOLOGY, INC. a Delaware corporation TABLE OF CONTENTS Page ARTICLE I Offices.........................................................1 Section 1.1 Registered Office..........................................1 Section 1.2 Other Offices..............................................1 ARTICLE II. Stockholders' Meetings..........................................1 Section 2.1 Place of Meetings..........................................1 Section 2.2 Annual Meetings............................................2 Section 2.3 Special Meetings...........................................2 Section 2.4 Notice of Meetings.........................................2 Section 2.5 Quorum and Voting..........................................4 Section 2.6 Voting Rights..............................................5 Section 2.7 Voting Procedures and Inspectors of Elections..............6 Section 2.8 List of Stockholders.......................................7 Section 2.9 Stockholder Proposals at Annual Meetings...................8 Section 2.10 Nominations of Persons for Election to the Board of Directors................................................8 Section 2.11 Action Without Meeting.....................................9 ARTICLE III Directors.......................................................11 Section 3.1 Number and Term of Office..................................11 Section 3.2 Powers.....................................................12 Section 3.3 Vacancies..................................................12 Section 3.4 Resignations and Removals..................................12 Section 3.5 Meetings...................................................13 Section 3.6 Quorum and Voting..........................................14 Section 3.7 Action Without Meeting.....................................14 Section 3.8 Fees and Compensation......................................14 Section 3.9 Committees.................................................15 ARTICLE IV Officers........................................................14 Section 4.1 Officers Designated........................................16 Section 4.2 Tenure and Duties of Officers..............................16 ARTICLE V Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation...............18 Section 5.1 Execution of Corporate Instruments.........................18 -i- Section 5.2 Voting of Securities Owned by Corporation..................18 ARTICLE VI Shares of Stock.................................................19 Section 6.1 Form and Execution of Certificates.........................19 Section 6.2 Lost Certificates..........................................20 Section 6.3 Transfers..................................................20 Section 6.4 Fixing Record Dates........................................20 Section 6.5 Registered Stockholders....................................21 ARTICLE VII. Other Securities of the Corporation............................21 ARTICLE VIII. Corporate Seal.................................................22 ARTICLE IX. Indemnification of Officers, Directors, Employees and Agents...22 Section 9.1 Right to Indemnification...................................22 Section 9.2 Authority to Advance Expenses..............................23 Section 9.3 Right of Claimant to Bring Suit............................23 Section 9.4 Provisions Nonexclusive....................................24 Section 9.5 Authority to Insure........................................24 Section 9.6 Survival of Rights.........................................24 Section 9.7 Settlement of Claims.......................................25 Section 9.8 Effect of Amendment........................................25 Section 9.9 Subrogation................................................25 Section 9.10 No Duplication of Payments.................................25 ARTICLE X. Notices........................................................25 ARTICLE XI. Amendments.....................................................27 -ii- AMENDED AND RESTATED BYLAWS OF INNOVATIVE MICRO TECHNOLOGY, INC. a Delaware Corporation ARTICLE I. Offices Section 1.1 Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. Section 1.2 Other Offices. The corporation shall also have and maintain an office or principal place of business at 75 Robin Hill Road, Goleta, California 93117, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II. Stockholders' Meetings Section 2.1 Place of Meetings. (a) Meetings of stockholders may be held at such place, either within or without this State, as may be designated by or in the manner provided in these bylaws or, if not so designated, as determined by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by paragraph (b) of this Section 2.1. (b) If authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, -1- stockholders and proxyholders not physically present at a meeting of stockholders may, by means of remote communication: (1) Participate in a meeting of stockholders; and (2) Be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (A) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (B) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (C) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation. (c) For purposes of this Section 2.1, "remote communication" shall include (1) telephone or other voice communications and (2) electronic mail or other form of written or visual electronic communications satisfying the requirements of Section 2.11(b). Section 2.2 Annual Meetings. The annual meetings of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors, or, if not so designated, then at 10:00 a.m. on June 1 in each year if not a legal holiday, and, if a legal holiday, at the same hour and place on the next succeeding day not a holiday. Section 2.3 Special Meetings. Special Meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the Chairman of the Board or the President or the Board of Directors at any time, as provided in Section 2.1. Section 2.4 Notice of Meetings. (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, if any, date and hour and purpose or purposes of the meeting, and the -2- means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote thereat, directed to his address as it appears upon the books of the corporation; except that where the matter to be acted on is a merger or consolidation of the Corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than 20 nor more than 60 days prior to such meeting. (b) If at any meeting action is proposed to be taken which, if taken, would entitle shareholders fulfilling the requirements of section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. (c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which the adjournment is taken unless the adjournment is for more than thirty days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and, to the extent permitted by law, will be waived by any stockholder by his attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the corporation under any provision of Delaware General Corporation Law, the certificate of incorporation, or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if (i) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent, and (ii) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability -3- as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this subparagraph (e) shall be deemed given: (1) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (2) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (3) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (4) if by any other form of electronic transmission, when directed to the stockholder. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of these bylaws, "electronic transmission" means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process. Section 2.5 Quorum and Voting. (a) At all meetings of stockholders except where otherwise provided by law, the Certificate of Incorporation or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. (b) Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. (c) Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes present in person or represented by proxy shall constitute a quorum entitled to take action with -4- respect to that vote on that matter, and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 2.6 Voting Rights. (a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. (b) Every person entitled to vote or to execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary of the corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three (3) years from its date unless the proxy provides for a longer period. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority: (1) A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. (2) A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telephone, telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that -5- any such telephone, telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telephone, telegram, cablegram or other electronic transmission was authorized by the stockholder. Such authorization can be established by the signature of the stockholder on the proxy, either in writing or by a signature stamp or facsimile signature, or by a number or symbol from which the identity of the stockholder can be determined, or by any other procedure deemed appropriate by the inspectors or other persons making the determination as to due authorization. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 2.7 Voting Procedures and Inspectors of Elections. (a) The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. -6- (d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Sections 211(e) or 212(c)(2) of the Delaware General Corporation Law, or any information provided pursuant to Section 211(a)(2)(B)(i) or (iii) thereof, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. Section 2.8 List of Stockholders. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. The corporation need not include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. -7- Section 2.9 Stockholder Proposals at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the previous year's annual meeting of stockholders (or the date on which the corporation mails its proxy materials for the current year if during the prior year the corporation did not hold an annual meeting or if the date of the annual meeting was changed more than 30 days from the prior year). A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in Section 2.1 and this Section 2.9, provided, however, that nothing in this Section 2.9 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of Section 2.1 and this Section 2.9, and if he should so determine he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section 2.9 shall affect the right of a stockholder to request inclusion of a proposal in the corporation's proxy statement to the extent that such right is provided by an applicable rule of the Securities and Exchange Commission. Section 2.10 Nominations of Persons for Election to the Board of Directors. -8- In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the previous year's annual meeting of shareholders (or the date on which the corporation mails its proxy materials for the current year if during the prior year the corporation did not hold an annual meeting or if the date of the annual meeting was changed more than 30 days from the prior year). Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 2.11 Action Without Meeting. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual -9- or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. To be effective, a written consent must be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation in accordance with this Section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (b) A telegram, cablegram or other electronic transmission consent to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (i) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder, and (ii) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission may be otherwise delivered to the principal place of business of the corporation or to an officer or agent -10- of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded if to the extent and in the manner provided by resolution of the Board of Directors of the corporation. (c) Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. ARTICLE III. Directors Section 3.1 Number and Term of Office. The number of directors of the corporation shall not be less than five (5) nor more than nine (9) until changed by amendment of the Certificate of Incorporation or by a Bylaw amending this Section 3.1 duly adopted by the vote or written consent of holders of a majority of the outstanding shares or by the Board of Directors. The exact number of directors shall be fixed from time to time, within the limits specified in the Certificate of Incorporation or in this Section 3.1, by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote, or by the Board of Directors. Subject to the foregoing provisions for changing the number of directors, the number of directors of the corporation has been fixed at six (6). The directors shall be divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as the then total number of directors permits. At the 2002 annual meeting of stockholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of stockholders beginning in 2003, successors to the class of directors whose terms expire at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a -11- term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the applicable terms of these Bylaws and any certificate of designation creating such class or series of Preferred Stock, and such directors so elected shall not be divided into classes pursuant to this Section 3.1 unless expressly provided by such terms. Any amendment, change or repeal of this Section 3.1, or any other amendment to these Bylaws that will have the effect of permitting circumvention of or modifying this Section 3.1, shall require the favorable vote, at a stockholders' meeting, of the holders of at least 80% of the then-outstanding shares of stock of the Corporation entitled to vote. Except as otherwise required by law or by the order of any court, and except as provided in Section 3.3 of this Article III, the directors shall be elected by a plurality vote of the shares represented in person or by proxy, at the stockholders annual meeting in each year and entitled to vote on the election of directors. Elected directors shall hold office until the next annual meeting for the years in which their terms expire and until their successors shall be duly elected and qualified. Directors need not be stockholders. If, for any cause, the Board of Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. Section 3.2 Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by or under the direction of the Board of Directors. Section 3.3 Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office for the unexpired portion of the term of the director whose place shall be vacant and until his successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in Section 3.4 below) to elect the number of directors then constituting the whole Board. -12- Section 3.4 Resignations and Removals. (a) Any director may resign at any time by delivering his resignation to the Secretary in writing or by electronic transmission, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. (b) At a special meeting of stockholders called for the purpose in the manner hereinabove provided, the Board of Directors or any individual director may be removed from office, with or without cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors. Section 3.5 Meetings. (a) The annual meeting of the Board of Directors shall be held immediately after the annual stockholders' meeting and at the place where such meeting is held or at the place announced by the Chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary, and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. Regular meetings of the Board of Directors may also be held at any place, within or without the State of Delaware, which has been designated by resolutions of the Board of Directors or the written consent of all directors. (c) Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board or, if there is no Chairman of the Board, by the President, or by any two directors. (d) Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by telegram or facsimile transmission or other form of electronic transmission at least 48 hours before the start of the meeting, or sent by first class mail at least 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat. -13- Section 3.6 Quorum and Voting. (a) A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 3.1 of Article III of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board at which a quorum is present, all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation, or these Bylaws. (c) Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (d) The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.7 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or electronic transmission or transmissions are filed with the minutes of -14- proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Section 3.8 Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 3.9 Committees. (a) Executive Committee: The Board of Directors may, by resolution passed by a majority of the whole Board, appoint an Executive Committee of not less than one member, each of whom shall be a director. The Executive Committee to the extent permitted by law shall have and may exercise, when the Board of Directors is not in session, all powers of the Board in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement or merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution, or to amend these Bylaws. (b) Other Committees: The Board of Directors may, by resolution passed by a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) Term: The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 3.9, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of -15- any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings: Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 3.9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof; or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. ARTICLE IV. Officers Section 4.1 Officers Designated. The officers of the corporation shall be a President, a Secretary and a Treasurer. The Board of Directors or the President may also appoint a Chairman of the Board, one or more Vice-Presidents, assistant secretaries, assistant treasurers, and such other officers and agents with such powers and duties as it or he shall deem necessary. The order of the seniority of the Vice- Presidents shall be in the order of their nomination unless otherwise determined by the Board of Directors. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. -16- Section 4.2 Tenure and Duties of Officers. (a) General: All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. (b) Duties of the Chairman of the Board of Directors: The Chairman of the Board of Directors (if there be such an officer appointed) when present shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (c) Duties of President: The President shall be the chief executive officer of the corporation and shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) Duties of Vice-Presidents: The Vice-Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of the President is vacant. The Vice-President shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties of Secretary: The Secretary shall attend all meetings of the stockholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the corporation, which may be maintained in either paper or electronic form. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the stockholders and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any assistant secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each assistant secretary shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. -17- (f) Duties of Treasurer: The Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any assistant treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each assistant treasurer shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. ARTICLE V. Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation Section 5.1 Execution of Corporate Instruments. (a) The Board of Directors may in its discretion determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. (b) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the President; such documents may also be executed by any Vice-President and by the Secretary or Treasurer or any assistant secretary or assistant treasurer. All other instruments and documents requiring the corporate signature but not requiring the corporate seal may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (c) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. -18- (d) Execution of any corporate instrument may be effected in such form, either manual, facsimile or electronic signature, as may be authorized by the Board of Directors. Section 5.2 Voting of Securities Owned by Corporation. All stock and other securities of other corporations owned or held by the corporation for itself or for other parties in any capacity shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the President, or by any Vice-President. ARTICLE VI. Shares of Stock Section 6.1 Form and Execution of Certificates. The shares of the corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President or any Vice-President and by the Treasurer or assistant treasurer or the Secretary or assistant secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided -19- that, except as otherwise provided in section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 6.2 Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the corporation in such manner as it shall require and/or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. Section 6.3 Transfers. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. Section 6.4 Fixing Record Dates. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record -20- entitled notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing or by electronic transmission without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing or by electronic transmission without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent or electronic transmission setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded; provided that any such electronic transmission shall satisfy the requirements of Section 2.11(b) and, unless the Board of Directors otherwise provides by resolution, no such consent by electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing or by electronic transmission without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. -21- Section 6.5 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII. Other Securities of the Corporation All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice-President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an assistant secretary, or the Treasurer or an assistant treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an assistant treasurer of the corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon has ceased to be an officer of the corporation before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE VIII. Corporate Seal The corporate seal shall consist of a die bearing the name of the corporation and the state and date of its incorporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. -22- ARTICLE IX. Indemnification of Officers, Directors, Employees and Agents Section 9.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "Proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent (hereafter an "Agent"), shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended or interpreted (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the corporation to provide broader indemnification rights than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement, and any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any Agent as a result of the actual or deemed receipt of any payments under this Article) reasonably incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding (hereinafter "Expenses"); provided, however, that except as to actions to enforce indemnification rights pursuant to Section 9.3 of this Article, the corporation shall indemnify any Agent seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if the Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Article shall be a contract right. Section 9.2 Authority to Advance Expenses. The right to indemnification provided in Section 1 of this Article shall include the right to be paid, in advance of a Proceeding's final disposition, Expenses incurred in defending that Proceeding; provided, however, -23- that if required by the Delaware General Corporation Law, as amended, the payment of such expenses incurred by an officer or director acting in his capacity as such (and not in any other capacity) in advance of the final disposition of the Proceeding shall be made only upon delivery to the corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized under this Article or otherwise. Any obligation to reimburse the corporation for Expense advances shall be unsecured and no interest shall be charged thereon. Section 9.3 Right of Claimant to Bring Suit. If a claim under Section 9.1 or 9.2 of this Article is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 9.4 Provisions Nonexclusive. The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate, agreement, or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. -24- Section 9.5 Authority to Insure. The corporation may purchase and maintain insurance to protect itself and any Agent against any Expense, whether or not the corporation would have the power to indemnify the Agent against such Expense under applicable law or the provisions of this Article. Section 9.6 Survival of Rights. The rights provided by this Article shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 9.7 Settlement of Claims. The corporation shall not be liable to indemnify any Agent under this Article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 9.8 Effect of Amendment. Any amendment, repeal, or modification of this Article shall not adversely affect any right or protection of any Agent existing at the time of such amendment, repeal, or modification. Section 9.9 Subrogation. In the event of payment under this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Agent, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights. Section 9.10 No Duplication of Payments. The corporation shall not be liable under this Article to make any payment in connection with any claim made against the Agent to the extent the Agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. -25- ARTICLE X. Notices Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given either (1) in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent, or (2) by a means of electronic transmission that satisfies the requirements of Section 2.4(e) of these Bylaws, and has been consented to by the stockholder to whom the notice is given. Any notice required to be given to any director may be given by either of the methods hereinabove stated, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of electronic communication) such e-mail address, facsimile telephone number or other form of electronic address as such director shall have filed in writing or by electronic communication with the Secretary of the corporation, or, in the absence of such filing, to the last known post office address of such director. If no address of a stockholder or director be known, such notice may be sent to the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by means of electronic transmission shall be deemed to have been given as at the sending time recorded by the electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. -26- Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. ARTICLE XI. Amendments These Bylaws may be repealed, altered or amended or new Bylaws adopted by written consent of stockholders in the manner authorized by Section 2.11 of Article II, or at any meeting of the stockholders, either annual or special, by the affirmative vote of a majority of the stock entitled to vote at such meeting, unless a larger vote is required by these Bylaws or the Certificate of Incorporation. The Board of Directors shall also have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws (including, without limitation, the amendment of any Bylaws setting forth the number of directors who shall constitute the whole Board of Directors) by unanimous written consent or at any annual, regular, or special meeting by the affirmative vote of a majority of the whole number of directors, subject to the power of the stockholders to change or repeal such Bylaws and provided that the Board of Directors shall not make or alter any Bylaws fixing the qualifications, classifications, or term of office of directors. -27- CERTIFICATE OF SECRETARY The undersigned, Secretary of Innovative Micro Technology, Inc., a Delaware corporation, hereby certifies that the foregoing is a full, true and correct copy of the Bylaws of said corporation, with all amendments to date of this Certificate. WITNESS the signature of the undersigned this 20th day of November, 2001. /s/ Peter T. Altavilla ---------------------- Peter T. Altavilla, Secretary EX-3 5 imt10k2001ex4-1.txt EXHIBIT 4.1 ----------- WARRANT AGREEMENT dated as of November 16, 2001 FOR WARRANTS TO PURCHASE UP TO 1,880,565 SHARES OF COMMON STOCK EXPIRING NOVEMBER 15, 2004 between INNOVATIVE MICRO TECHNOLOGY, INC. and THE HOLDERS LISTED ON ANNEX I HERETO NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES SUBJECT TO THIS AGREEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. WARRANT AGREEMENT THIS WARRANT AGREEMENT, dated as of November 16, 2001, is made between Innovative Micro Technology, Inc. a Delaware corporation (the "Company"), and the Persons listed on Annex I hereto (the "Initial Holders") WHEREAS, pursuant to that certain Third Amended Debtor's Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Dated as of September 24, 2001 (the "Plan"), the Company has agreed to issue to the Initial Holders warrants (the "Warrants") to purchase up to an aggregate of 1,880,564 shares of the Company's common stock, par value $.0001 per share (the "Common Stock"); WHEREAS, in accordance with the Plan, the Initial Holders and the allocation of shares of Common Stock to be purchasable by each are set forth on Annex I hereto; WHEREAS, the Company has duly authorized the execution and delivery of this Warrant Agreement to provide for the issuance of the Warrants, on such terms and conditions as shall be fixed as hereinafter provided. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES Section 1.1 Issuance of Warrants. On the earliest practicable date hereafter, the Company shall issue to the Initial Holders Warrants to purchase a total of 1,880,564 shares of Common Stock, allocated on the basis of 1,000,000 Warrant Units. Each "Warrant Unit" represents 0.946805 shares of Common Stock at an initial exercise price of $20.00 per share, 0.423822 shares of Common Stock at an initial exercise price of $22.50 per share, and 0.509937 shares of Common Stock at an initial exercise price of $27.00 per share. Each Initial Holder shall receive, subject to the provisions contained herein and in the certificate therefor, a Warrant to purchase the number of Warrant Units set forth beside such Initial Holder's name on Annex I. Section 1.2 Terms of Warrants. The shares of Common Stock purchasable upon exercise of the Warrants are hereinafter referred to as the "Warrant Shares" and, where appropriate, such term shall also mean the other securities or property purchasable and deliverable upon exercise of a Warrant as provided in Section 2.6.3 at the price specified herein and therein, in each case subject -1- to adjustment as provided herein and therein. The initial exercise price or, if such price has been adjusted, the price per Share as last adjusted pursuant to the terms hereof, is referred to as the "Exercise Price" herein. Section 1.3 Form of Warrant Certificates. As soon as practicable after the date hereof the Company shall execute and deliver to each Holder a Warrant Certificate substantially in the form set forth in Exhibit A attached hereto, dated the date on which countersigned, evidencing the Warrant to be issued to such Holder. Section 1.4 Registrar And Warrant Register. The Company will keep, at the office or agency maintained by the Company for such purpose, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of, and registration of transfer and exchange of, Warrants as provided in this Article. Each Person designated by the Company from time to time as a Person authorized to register the transfer and exchange of the Warrants is hereinafter called, individually and collectively, the "Registrar." The Company will at all times designate one Person (who may be the Company and who need not be a Registrar) to act as repository of a master list of names and addresses of the Holders (the "Warrant Register"). The Company will act as such repository unless and until some other Person is designated by the Company to act as such. ARTICLE II DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE Section 2.1 Duration of Warrants. Subject to the terms and conditions established herein, the Warrants shall expire at 5:00 p.m., Los Angeles time on November 15, 2004 (the "Expiration Date"). Each Warrant may be exercised on any Business Day (as hereinafter defined) on or after its issue date. Any Warrant not exercised before the close of business on the Expiration Date shall become void, and all rights of the Holder under the Warrant Certificate evidencing such Warrant and under this Warrant Agreement shall cease. Section 2.2 Exercise; Issuance of Certificates; Payment for Shares. Each Warrant may be exercised by the Holder, in whole or in part (but not as to a fractional Share), and on one or more occasions, by sending written notice (using the form set forth in Exhibit B hereto) to the Company at its principal office at 75 Robin Hill Road, Goleta, California 93117 (or such other office or agency of the Company as it may from time to time designate by notice in writing to the Holder) at any time within the period above named and by payment to the Company by cashier's check or wire transfer of the aggregate Exercise Price for the number of Shares for which the Warrant is exercised (but not more than the number of Shares for which the Warrant then remains unexercised). The Company agrees that the Shares so purchased will be deemed to have been issued to the Holder as the record owner of such Shares as of the close of business on the date on which such notice is received and payment made as aforesaid. Certificates for the Shares so purchased will be delivered to the Holder within a reasonable time, not exceeding fifteen (15) Business Days, after the Warrant has been exercised, and, unless the Warrant has expired, it will continue in effect with respect to the number of Shares, if any, as to which it has not then been exercised. -2- Section 2.3 Automatic Exercise. Upon the occurrence of a Corporate Transaction, as defined below, the Warrants shall automatically and immediately be deemed exercised by each Holder as of the effective date of such Corporate Transaction. The effect of the automatic exercise shall be as follows: (a) if, within twenty (20) days of mailing by the Company of the notice of the automatic exercise, the Holder delivers the Exercise Price of any Warrant or portion thereof to the Company, the resulting Warrant Shares shall be issued to the Holder. (b) as to any Warrant for which the Holder has not tendered the Exercise Price within twenty (20) days of mailing by the Company of the notice of the automatic exercise, each such Warrant or portion of a Warrant having an Exercise Price that is less than the Fair Market Value of the Common Stock ("In-the-Money Warrant") shall be deemed exercised, with the result that each such Warrant shall be canceled and a number of Warrant Shares shall be issued as of the effective date of the Corporate Transaction to the Holder equal to the PRODUCT of: (W) the number of Warrant Shares issuable upon a cash exercise of the In-the-Money Warrant MULTIPLIED by (X) the QUOTIENT of: (i) the DIFFERENCE of: (Y) the aggregate Fair Market Value of the Common Stock (after taking into account the related Corporate Transaction) issuable upon the exercise of the In-the-Money Warrant on the Effective Date; MINUS (Z) the aggregate Exercise Price of the In-the-Money Warrant on the Effective Date; DIVIDED by (ii) the aggregate Fair Market Value of the Common Stock (after taking into account the occurrence of the related Corporation Transaction) issuable upon the exercise of the In-the-Money Warrant on the Effective Date; (c) as to any Warrant for which the Holder has not tendered the Exercise Price within twenty (20) days of mailing by the Company of the notice of the automatic exercise, each such Warrant or portion of a Warrant whose Exercise Price is equal to or greater than the Fair Market Value of the Common Stock (after taking into account the occurrence of the related Corporate Transaction) shall be deemed canceled and thereafter be void for all purposes. Section 2.4 Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees as follows: 2.4.1 All Shares issued upon the exercise of a Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. -3- 2.4.2 The Company will from time to time take all actions required to assure that the par value (if any) per Share issuable upon exercise of any Warrant is at all times equal to or less than the Exercise Price per Share. 2.4.3 During the period within which any Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance or transfer upon exercise of the Warrants a sufficient number of Shares to provide for the exercise of all outstanding Warrants. Section 2.5 Adjustment of Price and Number of Purchasable Shares. The Warrants shall be subject to adjustment in Exercise Prices and number of purchasable shares as provided below. 2.5.1 Liquidating Dividends. If the Company declares a dividend upon the Common Stock payable otherwise than out of consolidated earnings or consolidated earned surplus determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries, and such dividend is payable in cash or property other than securities of the Company, the Company will pay each Holder on the dividend payment date, the amount of cash or such property the Holder would have received if the Holder had exercised its Warrant in full to purchase Shares and had been the record holder of such Shares on the record date for such dividend, or, if a record is not taken, the date as of which the holders of Shares of record entitled to such dividend are determined. For the purposes of the foregoing, a dividend other than in cash will be considered payable out of earnings or surplus (other than revaluation or paid-in surplus) only to the extent that such earnings or surplus are charged an amount equal to the fair value of such dividend as determined in good faith by the Board of Directors of the Company. 2.5.2 Subdivision or Combination of Shares. If the Company at any time while any Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under the Warrant exist, into a different number of securities of the same class, or declare a dividend in securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or stock dividend or proportionately increased in the case of a combination. Upon each adjustment of the Exercise Price under this Section 2.5.2, the Holder will thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Shares obtained by multiplying the Exercise Price in effect immediately before such adjustment by the number of Shares purchasable pursuant to the Warrant immediately before such adjustment and dividing the product by the Exercise Price resulting from such adjustment. 2.5.3 Reclassification. If the Company, at any time while a Warrant, or any portion thereof, remains outstanding and unexpired, by reclassification of securities or otherwise shall change any of the securities as to which purchase rights under any Warrant exist into the same or a different number of securities of any other class or classes, each Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under the Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted. -4- 2.5.4 Adjustments for Dividends in Stock or Other Securities or Property. If while any Warrant, or any portion thereof, remains outstanding and unexpired, the holders of the securities as to which purchase rights under the Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash or securities of the same class as those subject to the Warrant) of the Company by way of dividend, then and in each case, the Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of the Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash or securities of the same class as those subject to the Warrant) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of the Warrant on the date hereof and had thereafter, during the period from the date hereof and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period. 2.5.5 Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the Shares of the Company, or any consolidation or merger of the Company with another Person, or the sale of all or substantially all of the Company's assets to another corporation (other than a Corporate Transaction) will be effected in such a way that holders of Shares will be entitled to receive Shares, securities or assets with respect to or in exchange for Shares, then, upon any actual or deemed exercise of a Warrant, the Holder will thereafter have the right to receive such Shares, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Shares equal to the number of Shares immediately theretofore purchasable and receivable upon the exercise of the Warrant. If a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding Shares of the Company, the Company will not effect any consolidation, merger or sale with the Person, as defined below, making such offer or with any Affiliate, as defined below, of such Person, unless, before the consummation of such consolidation, merger or sale, the Holder of a Warrant is given at least ten (10) business days notice prior to the scheduled closing date (the "Closing Date") of such transaction (which notice shall specify the material terms of such transaction and the proposed Closing Date). In the event the Holder elects to exercise a Warrant or any portion thereof following such notice and such consolidation, merger or sale is not consummated within ten (10) days of the proposed Closing Date (or any subsequent proposed Closing Date), then the Holder may rescind its exercise of the Warrant by providing written notice thereof to the Company, the Company shall take all actions consistent therewith (including without limitation the immediate return of the Exercise Price paid with respect to such rescinded exercise) and the Warrant shall continue in full force and effect. 2.5.6 Notice of Adjustment. Upon any adjustment of the Exercise Price, the Company will give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder at the address of such Holder as shown on the books of the Company, which notice will state (i) the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Shares purchasable at such price upon the exercise of the Warrant, setting forth in reasonable detail the method of -5- calculation and the facts upon which such calculation is based, and (ii) whether, after giving effect to such adjustment, the maximum number of Shares issuable upon the exercise of the Warrant will constitute more than 5% of the total number of then issued and outstanding Shares (including in such total number the maximum number of Shares issuable upon the exercise of the Warrant). Section 2.6 Closing of Books. The Company will at no time close its transfer books against the transfer of the Warrants or of any Shares issued or issuable upon the exercise of a Warrant in any manner which interferes with the timely exercise of the Warrant. Section 2.7 No Voting Rights. The Warrants will not entitle any Holder to any voting rights or other rights as a stockholder of the Company. Section 2.8 Vesting. The Warrants shall vest immediately upon issuance and be fully exercisable by the Holder without condition. ARTICLE III CASH ASSET SALE DISTRIBUTION Section 3.1 Cash Asset Sale Distribution. If the Company completes a Cash Asset Sale, then for each Warrant Share issuable but not yet issued under any unexercised Warrant or portion thereof (an "Unexercised Warrant Share"), and in lieu of any other rights under such Warrant, the Holder shall receive, immediately after the consummation of a Cash Asset Sale, a distribution of an amount of cash (the "Cash Asset Sale Distribution") as follows: 3.1.1 If the Net Cash Proceeds in the Cash Asset Sale are less than $18.33 per share of Common Stock of the Company, the Cash Asset Sale Distribution will be zero. 3.1.2 If the Net Cash Proceeds in the Cash Asset Sale are greater than $18.33 per share of Common Stock of the Company but less than $25 per share, the Cash Asset Sale Distribution shall be the Net Cash Proceeds per share minus $18.34, multiplied by 0.461829. 3.1.3 If the Net Cash Proceeds in the Cash Asset Sale are equal to or greater than $25 per share of Common Stock of the Company, the Cash Asset Sale Distribution shall be $6.666, multiplied by 0.461829. ARTICLE IV MISCELLANEOUS Section 4.1 Defined Terms. Unless otherwise defined in this Warrant Agreement, the capitalized terms set forth below and used in this Warrant Agreement shall have the meanings given to such terms below: "Affiliate" of a Person means any Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such other Person. A Person will be deemed to control a corporation or other business entity if such Person possesses, directly or indirectly, the power to direct or cause the -6- direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Business Day" means any Monday, Tuesday, Wednesday, Thursday and Friday on which (i) banks in Goleta, California or the city in which the principal office of the Company is located, and (ii) the principal national securities exchange or market, if any, on which the Common Stock is listed or admitted to trading, in each case, are not obligated by law or executive order to be closed. "Cash Asset Sale" means a sale for cash of all, or substantially all, of the assets of the Company that is consummated before the Expiration Date. "Cash Asset Sale Distribution" has the meaning set forth in Section 3.1. "Closing Price" means, per share of Common Stock or any other security, on any date specified herein: (i) the last sale price, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange on which the Common Stock or other security is then listed or admitted to trading; and (ii) if the Common Stock or other security is not then listed or admitted to trading on any national securities exchange, but is quoted for trading on the National Association of Securities Dealers Annotated Quotation System ("NASDAQ"), the average of the reported closing bid and asked prices on such date. "Corporate Transaction" means, (i) other than a Cash Asset Sale, a sale of all or substantially all of the assets of the Company (in one or a series of transactions), (ii) a transaction or a series of transactions whereby fifty percent (50%) of the issued and outstanding shares of Common Stock (prior to any dilution for unvested shares of Restricted Stock or unexercised Options) are held by a Person (including such Person's affiliates), excluding that percent of the issued and outstanding shares of Common Stock held by such Person as of the Effective Date, unless such Person acquires additional shares of Common Stock after the Effective Date and such shares of Common Stock, when combined with the shares of Common Stock held by such Person as of the Effective Date, aggregate more than 49.9% of the issued and outstanding shares of Common Stock (prior to any dilution for unexercised Options), or (iii) a transaction or series of transactions whereby fifty-one percent (51%) of the issued and outstanding shares of Common Stock vote to sell the equity interests in or merge the Company and such sale or merger results in Persons holding fifty percent (50%) or more of the Common Stock of the Company that are other than the Persons holding fifty percent (50%) or more of the Common Stock of the Company immediately prior to such sale or merger. "Exercise Price" has the meaning set forth in Section 1.2. "Fair Market Value" means, per share of Common Stock or any other security, as of any date of determination, the arithmetic mean of the daily Closing Prices for the five (5) consecutive trading days -7- before such date of determination; provided, however, that if the Common Stock or such other security is then neither listed or admitted to trading on any national securities exchange, or quoted for trading on NASDAQ, then "Fair Market Value" means the fair market value of one share of the Common Stock as reasonably determined by the Board of the Directors of the Company. "Holder" means any record holder of a Warrant. "Initial Holder" has the meaning set forth in the preamble to this Warrant Agreement. "Net Cash Proceeds" means the gross cash received from a Cash Asset Sale less (i) all costs associated with the Cash Asset Sale paid by the Company, (ii) all liabilities that must be paid by the Company prior to making distributions to stockholders, including reserves for contingent liabilities, and (iii) all costs of liquidating the Company, including the costs of making distributions to stockholders. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Shares" means the Company's authorized common stock, $.0001 par value per share, as constituted on the date hereof and also includes any shares of any class of stock or other equity securities of the Company thereafter authorized which will not be limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided that, except as provided in Section 2.5.4, the Shares purchasable pursuant to a Warrant will include only Shares designated as "common shares" of the Company or, in the case of any reclassification of the outstanding Shares, the Shares, securities or assets provided for in Section 2.5.3 "Warrant Unit" means has the meaning set forth in Section 1.1. Section 4.2 Amendment. This Warrant Agreement and the terms of the Warrants may be amended by the Company without the consent of any Holder, for the purpose of curing any ambiguity, or for curing, correcting or supplementing any defective or inconsistent provision contained herein or therein or in any other manner which the Company may deem necessary or desirable and which shall not adversely affect in any respect the interests of the Holders, including without limitation changes required by a transfer agent or depositary as a condition to effecting and recording transactions in the Warrants. The Company may modify this Warrant Agreement and the terms of the Warrants with the consent of the Holders of not less than a majority in interest thereof (based on the number of remaining shares of Common Stock purchasable under the then outstanding Warrants, without regard to exercise price) for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this Warrant Agreement or modifying in any manner the rights of the Holders; provided, however, that no such modification that increases the Exercise Price, reduces the period of time during which the Warrants are exercisable hereunder, otherwise adversely affects the exercise rights of the Holders, reduces the percentage required for modification, or effects any -8- change to this Section 4.2, may be made with respect to an outstanding Warrant without the consent of the Holder of such Warrant. Any modification or amendment made in accordance with this Warrant Agreement will be conclusive and binding on all present and future Holders whether or not they have consented to such modification or amendment or waiver and whether or not notation of such modification or amendment is made upon such Warrant Certificates. Any instrument given by or on behalf of any Holder in connection with any consent to any modification or amendment will be conclusive and binding on all subsequent Holders. Section 4.3 Address for Notices to the Company and for Transmission of Documents. All notices hereunder to the Company shall be deemed to have been given when sent by certified mail, postage prepaid, or by telecopy, confirmed by First Class mail, postage prepaid, addressed as follows: Corporate Secretary Innovative Micro Technology, Inc. 75 Robin Hill Road Goleta, California 93117 Section 4.4 Notices to Holders. Notices to Holders shall be mailed to such Holders at their addresses shown in the Warrant Registry, which shall reflect the addresses of the Holders as they appear on Annex I hereto or as such Holders or transferees thereof have subsequently notified the Company in writing. Any such notice by the Company to Holders shall be sufficiently given if sent by first-class mail, postage prepaid. Section 4.5 Applicable Law. The validity, interpretation and performance of this Warrant Agreement and each warrant issued hereunder and of the respective terms and provisions thereof shall be governed by the laws of the state of Delaware. Section 4.6 Headings. The descriptive headings of the several Articles and Sections of this Warrant Agreement are inserted for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions hereof. The next page is the signature page. -9- IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the Company as of the day and year first above written. INNOVATIVE MICRO TECHNOLOGY, INC. By: ------------------------------ John Foster Chief Executive Officer -10- EXHIBIT A FORM OF WARRANT CERTIFICATE A-1 [FACE] No. [ ] WARRANT CERTIFICATE INNOVATIVE MICRO TECHNOLOGY, INC. This Warrant Certificate certifies that [______________] is the registered holder of a warrant (the "Warrant") to purchase shares of common stock, par value $0.0001 per share (the "Common Stock"), of Innovative Micro Technology, Inc., a Delaware corporation (the "Company"). The Warrant entitles the holder to purchase from the Company at any time on or after the date hereof and until 5:00 p.m., Los Angeles time, on November 15, 2004 (the "Expiration Date"), the number of fully paid and non-assessable shares of Common Stock set forth below (as such number may be adjusted from time to time, the "Warrant Shares," which may also include any other securities or property issuable upon exercise of a Warrant, such adjustment and inclusion each as provided in the Warrant Agreement) at the Exercise Price set forth below per Warrant Share upon surrender of this Warrant Certificate and payment of the Exercise Price at any office or agency maintained for that purpose by the Company, subject to the conditions set forth herein and in the Warrant Agreement: _____ Warrant Shares at $20.00 per share _____ Warrant Shares at $22.50 per share _____ Warrant Shares at $27.50 per share For each unexercised Warrant or unexercised portion thereof (and in lieu of any other rights under such Warrant), the Holder is entitled to receive the Cash Asset Sale Distribution provided for in Article III of the Warrant Agreement if the Company completes an applicable Cash Asset Sale. The Exercise Price shall be payable in cash or by certified or official bank check in the lawful currency of the United States of America that as of the time of payment is legal tender for payment of public or private debts. The Company has initially designated its principal executive offices in Goleta, California as the address for delivery of the Exercise Price. The number of Warrant Shares issuable upon exercise of the Warrant is subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. The Warrant is immediately exercisable from the date hereof. Any Warrant or portion thereof not exercised on or prior to 5:00 p.m., Los Angeles time, on November 15, 2004 shall thereafter be void. Reference is hereby made to the further provisions on the reverse hereof, which provisions shall for all purposes have the same effect as though fully set forth at this place. A-2 All capitalized terms used in this Warrant Certificate and not otherwise defined herein shall have the meanings ascribed thereto in the Warrant Agreement. THE WARRANT REPRESENTED BY THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. WITNESS the corporate seal of the Company and the signatures of its duly authorized officers. Dated: _______________, 2002 INNOVATIVE MICRO TECHNOLOGY, INC. By: Name: Title: A-3 [REVERSE SIDE] INNOVATIVE MICRO TECHNOLOGY, INC. The Warrant evidenced by this Warrant Certificate is part of a duly authorized issue of Warrants, each of which represents the right to purchase at any time on or after the date hereof and until 5:00 p.m., Los Angeles time, on November 15, 2004, that number of shares of Common Stock for the Exercise Price(s) set forth on the face thereof, subject to adjustment as set forth in the Warrant Agreement dated as of November 16, 2001 (the "Warrant Agreement"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the Holders. The Warrant may be exercised by (i) surrendering to the Company this Warrant Certificate with the form of Notice of Exercise set forth hereon duly completed and executed and (ii) tendering payment in full of the Exercise Price for the Warrant or portion thereof exercised and any other amounts required to be paid pursuant to the Warrant Agreement. If all of the items referred to in the preceding sentence are received by the Company prior to 5:00 p.m. on any Business Day on or prior to the Expiration Date, the exercise of the Warrant to which such items relate will be effective on such Business Day. Subject to the terms of the Warrant Agreement, as soon as practicable after the exercise of the Warrant or any portion thereof, the Company shall issue or cause to be issued to or upon the written order of the Holder of this Warrant Certificate, a certificate or certificates evidencing the Warrant Share or Warrant Shares to which such holder is entitled, registered in such name or names as may be directed by such holder pursuant to the Notice of Exercise, as set forth on the reverse of this Warrant Certificate. Such certificate or certificates evidencing the Warrant Share or Warrant Shares shall be deemed to have been issued and any Persons who are designated to be named therein shall be deemed to have become the holder of record of such Warrant Share or Warrant Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph. Upon a partial exercise, the Company shall issue to the Holder a new Warrant Certificate providing for the number of Warrant Shares remaining for purchase thereunder or return this certificate amended to so provide. The Company will not be required to issue fractional shares of Common Stock upon exercise of the Warrant or distribute Warrant Certificates that evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, there shall be paid to the Holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Fair Market Value per share of Common Stock as determined in accordance with the Warrant Agreement. A-4 EXHIBIT B NOTICE OF EXERCISE TO BE EXECUTED UPON EXERCISE OF WARRANT or a portion thereof ON THE EXERCISE DATE The undersigned hereby irrevocably elects to exercise the Warrant or a portion thereof represented by this Warrant Certificate and to purchase from the Warrant Shares issuable upon the exercise of the Warrant the following whole number of Warrant Shares: ______________ Warrant Shares at $20.00 per share; ______________ Warrant Shares at $22.50 per share; ______________ Warrant Shares at $27.00 per share; The undersigned herewith tenders payment for such Warrant Shares in the amount of $_____________ by wire transfer or by certified or official bank check, pursuant to Section 2.2 of the Warrant Agreement. The undersigned requests that a certificate representing such Warrant Shares be registered in the name of ___________________, whose address is ____________________, and that such certificate be delivered to _____________________, whose address is ____________________. Any cash payments to be paid in lieu of a fractional Warrant Share should be made to __________________, whose address is ____________________, and the check representing payment thereof should be delivered to ____________________, whose address is - ---------------------. Name of holder of Warrant Certificate: (Please Print) Tax Identification or Social Security Number: Signature: Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Dated: ___________, ____ * Indicate, as applicable, the form of consideration being provided. B-1 EXHIBIT C FORM OF ASSIGNMENT For value received, ____________________ hereby sells, assigns and transfers unto ____________________ the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated: _____________, ____ Signature: ___________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. The Company shall not be required to effect any assignment of this Warrant if, in the opinion of the Company or its counsel, such assignment would be in violation of the Securities Act of 1933, as amended, or any applicable state law. C-1 ANNEX I SCHEDULE OF HOLDERS (to be completed on execution of Warrant Agreement and issuance of Warrants) Each Warrant Unit represents 0.946805 shares of Common Stock at an initial exercise price of $20.00 per share, 0.423822 shares of Common Stock at an initial exercise price of $22.50 per share, and 0.509937 shares of Common Stock at an initial exercise price of $27.00 per share. Name and Address No. of Warrant Units I-1 TABLE OF CONTENTS Page ARTICLE I ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES.................1 Section 1.1 Issuance of Warrants.....................................1 Section 1.2 Terms of Warrants........................................1 Section 1.3 Form of Warrant Certificates.............................1 Section 1.4 Registrar And Warrant Register...........................1 ARTICLE II DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE...........................................1 Section 2.1 Duration of Warrants.....................................1 Section 2.2 Exercise; Issuance of Certificates; Payment for Shares...1 Section 2.3 Automatic Exercise.......................................1 Section 2.4 Shares to be Fully Paid; Reservation of Shares...........1 Section 2.5 Adjustment of Price and Number of Purchasable Shares.....1 Section 2.6 Closing of Books.........................................1 Section 2.7 No Voting Rights.........................................1 Section 2.8 Vesting..................................................1 ARTICLE III CASH ASSET SALE DISTRIBUTION.............................1 Section 3.1 Cash Asset Sale Distribution.............................1 ARTICLE IV MISCELLANEOUS............................................1 Section 4.1 Defined Terms............................................1 Section 4.2 Amendment................................................1 Section 4.3 Address for Notices to the Company and for Transmission of Documents..............................1 Section 4.4 Notices to Holders.......................................1 Section 4.5 Applicable Law...........................................1 Section 4.6 Headings.................................................1 -i- EXHIBITS AND ANNEXES EXHIBIT A - FORM OF WARRANT CERTIFICATE......................................A-1 EXHIBIT B - NOTICE OF EXERCISE...............................................B-1 EXHIBIT C - FORM OF ASSIGNMENT ..............................................C-1 ANNEX I - SCHEDULE OF HOLDERS................................................I-1 -ii- EX-4 6 imt10k2001ex10-1.txt EXHIBIT 10.1 ------------ INNOVATIVE MICRO TECHNOLOGY, INC. CHANGE IN CONTROL AGREEMENT --------------------------- THIS AGREEMENT (the "Agreement"), made and entered into as of the 15th day of April, 2002, by and between INNOVATIVE MICRO TECHNOLOGY, INC. a Delaware corporation (the "Company") and John S. Foster ("Executive"). W I T N E S S E T H: WHEREAS, the Company (including subsidiaries and divisions) has always followed compensation policies intended to reward executives for past services and to demonstrate to them that the Company is concerned with the welfare of its employees and intends to see that loyal executives are treated fairly; and WHEREAS, the Company regards the continued services of Executive to be in the best interests of the Company and its shareholders and desires to assure the continued services of Executive on an objective and impartial basis and without distraction or conflict of interest in the event of an attempt to change control of the Company; and WHEREAS, Executive is willing to remain in the employ of the Company upon the understanding that the Company will provide him or her with income security if his or her employment is terminated under certain conditions following a change in control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated: 1.1 "the Company" means and includes Innovative Micro Technology, Inc., and any subsidiary or division thereof, as the context may require. 1.2 "Base Amount" means the sum of (a) Executive's then monthly base salary; (b) Executive's then monthly car allowance, if any, and (c) one-twelfth of an amount equal to any bonus that Executive received or was entitled to receive for the fiscal year immediately preceding a Change in Control. 1.1 -1- 1.3 "Cause" means (a) Executive's continued failure to perform his duties after a written demand for substantive performance is delivered by the Company's Board of Directors to Executive documenting specific areas of repeated and continuing nonperformance, or (b) Executive's willful, reckless or grossly negligent misconduct materially injurious to the Company; provided, however, that "Cause" shall be deemed not to have occurred unless and until a resolution shall have been adopted by the affirmative vote of two-thirds of the entire membership of the Company's Board of Directors after reasonable notice to Executive of such Cause and reasonable opportunity for Executive and his or her counsel to be heard. 1.4 "Change in Control" means any of the following: (a) The Company is merged, consolidated or reorganized into or with another Person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of the combined Person immediately after such transaction are held in the aggregate by the holders of the combined voting power of the Voting Stock immediately prior to such transaction; (b) The Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other Person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of the Voting Stock of the Company immediately prior to such sale or transfer; or (c) Any Person becomes the beneficial owner (as the term "beneficial owner" is used in Section 13(d)(3) or Section 14(d)(2) of the 1934 Act) of securities representing 20% or more of the Voting Stock. 1.5 "Disability" means Executive's absence from his or her duties with the Company for a contiguous period of nine months as a result of Executive's incapacity due to physical or mental illness, provided that notice of Executive's termination due to Disability is provided to Executive within the 30-day period following such nine-month period. 1.6 "Medical Benefits" mean all group, life insurance, medical and dental care plans and all disability insurance provided by the Company to Executive immediately before Executive's Termination of Employment. 1.7 "Options" means all the options to purchase shares of Capital Stock of the Company granted to Executive under the Company's various employee benefit plans (as defined in Rule 405 promulgated under the Securities Act of 1933), whether or not such options are vested or not. 1.8 "Person" means any person or entity as defined or referred to in Sections 3(a) (9) and 13 (d) (1) et seq. of the Securities Exchange Act of 1934 and rules of the Securities and Exchange Commission promulgated thereunder. -2- 1.9 "Restricted Stock" means shares of the Company's Common Stock that have been issued to Executive and are subject to forfeiture or repurchase by the Company, or the sale of which is restricted unless certain financial objectives are achieved by the Company. 1.10 "Retirement" means termination by the Company or Executive of Executive's employment based on Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established with Executive's consent with respect to Executive. 1.11 "Termination of Employment" means the termination of Executive's employment with the Company, within three years after a Change in Control, by either (a) the Company (other than for "Cause"); or (b) Executive (other than by Retirement, death or Disability) following the occurrence, without Executive's consent, of any of the following events ("Good Reason"): (i) the assignment to Executive of duties inconsistent with and adverse to Executive's position, duties, responsibilities and status with the Company immediately prior to such Change in Control of the Company, or an adverse change in Executive's titles or offices as in effect immediately prior to such Change in Control of the Company, or a reduction of Executive's duties or responsibilities as in effect immediately prior to such change in Control of the Company, or any removal of Executive from or any failure to reelect Executive to any of such positions, except in connection with termination of Executive's employment for Disability, Retirement or Cause or as a result of Executive's death or by Executive other than for Good Reason; (ii) A reduction in Executive's base salary and bonus compensation unless such reduction is part of a uniformly applied program of reductions reasonably adopted due to the Company's then business condition; (iii) A failure to increase Executive's base salary on or before the later to occur of 12 months from the date of the last increase in Executive's base salary or 60 days following such Change in Control, in an amount not less than 50% of the average annual percentage base salary increase for all "Corporate Executives" of the Company in the 36 months preceding the date on which such increase shall be due. For purposes of this subparagraph (iii), "Corporate Executives" of the Company shall mean the Chief Executive Officer of the Company and each of the Company executives who report directly to the Chief Executive Officer. (iv) A failure of the Company to continue in effect any benefit or incentive plan or arrangement in which Executive is participating at the time of such Change in Control, or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan or arrangement or deprive Executive of any material fringe benefit enjoyed by Executive at the time of such Change in Control, unless such failure results from a uniformly applied program of reductions reasonably adopted due to the Company's then business condition; -3- (v) Executive is either (x) transferred to a principal work location which will require him to travel more than twenty-five (25) miles from his or her then principal residence to his or her new principal work location, or (y) he or she is required to engage in a substantially increased amount of travel on the Company's business; (vi) any material breach by the Company or any provision of this Agreement. 1.12 "Voting Stock" means, from time to time, the outstanding securities entitled to vote generally in the election of directors of the Company. 2. Payment Upon Termination of Employment. Subject to Section 10 below, within 10 days immediately following a Termination of Employment, the Company shall forthwith pay Executive a lump sum equal to twelve multiplied by the Base Amount. 3. Continuation of Insurance. For a period of 12 months following Executive's Termination of Employment or until such time that Executive shall be employed by an employer who provides Executive with medical benefits substantially similar to the Medical Benefits, Executive shall receive the same Medical Benefits that he or she (and his or her family, if applicable) received from the Company prior to his or her Termination of Employment; provided, however, that if the plans pursuant to which the Medical Benefits were provided to Executive have been or are modified, Executive shall be entitled to substantially similar Medical Benefits from other reputable sources. Executive shall be required to pay the same amount for such Medical Benefits as he or she paid prior to his or her Termination of Employment. 4. Acceleration of Options and Removal of Restrictions on Restricted Stock. Immediately upon or following Termination of Employment, (i) all shares covered by Executive's Options shall become immediately and fully exercisable, and shall remain exercisable until the expiration thereof, and Executive shall have the right to purchase, by exercise of such Options, all or any portion of the shares covered by such Options; provided however, that in no event may any Option be exercised after the expiration date thereof, and (ii) all Restricted Stock shall become fully vested and released from any repurchase or forfeiture rights; any restrictions on the sale of the Restricted Stock shall be removed and the Restricted Stock shall be fully saleable, subject to any other applicable restrictions that may affect the sale of the Restricted Stock. 5. Representation by Executive; No Employment Contract. Executive represents that it is his or her present intention to continue in the employ the Company and he or she is not currently aware of any facts or circumstances that would cause him or her to change such intention in the foreseeable future. Executive acknowledges that Executive has been advised and understands that this Agreement shall not, however, be deemed in any way to create a contract of employment between the Company and Executive. -4- 6. Expenses of Executive. the Company agrees to pay or reimburse Executive for all costs and expenses (including court costs and attorneys, fees) incurred by Executive (a) in the successful prosecution or settlement of any claim or action by Executive to enforce his or her rights under this Agreement, or (b) in any other action or proceeding, not involving such a claim or action by Executive, which challenges the validity or enforceability of this Agreement or any similar agreements with other employees of the Company. The Company further agrees to pay or reimburse Executive for all costs and expenses (including legal and accounting fees and expenses) incurred by Executive in connection with any audit or review by the Internal Revenue Service of any excise tax imposed on any payments under this Agreement. 7. Liability for Taxes. the Company shall have no liability for any tax liability of Executive attributable to any payment made under this Agreement. The Company may withhold from any such payment such amounts as may be required by applicable provisions of the Internal Revenue Code, other tax laws, and the rules and regulations of the Internal Revenue Service and other tax agencies, as in effect at the time of any such payment. 8. Termination of Agreement. This Agreement shall terminate and be of no further effect (except to the extent that any obligation of the Company hereunder remains unpaid as of such time) upon the first to occur of (a) termination of Executive's employment with the Company for any reason, whether voluntarily or involuntary, prior to a Change in Control; (b) termination of Executive's employment by the Company due to Executive's death, Retirement, Disability or for Cause or by Executive other than for Good Reason; (c) 36 months from the date of a Change of Control, or (d) 12 months following the date that written notice of termination of this Agreement is provided to Executive by the Company's Board of Directors, if a Change in Control does not occur within that 12-month period. 9. Other Plans. To the extent that Executive shall receive payments under this Agreement, he or she shall not be eligible to receive severance benefits under the Company's standard severance policy; provided, however, that notwithstanding the previous sentence, Executive shall be entitled to receive paid time off and shall be entitled to such other benefits as described in Section 3 of this Agreement. 10. Taxes. The Company shall not make the payment provided in Section 2 above to the extent that such payment, after taking into account any other payments in the nature of compensation payable to (or for the benefit of) the Executive contingent on a Change in Control, would result in "parachute payments" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). This determination shall be made by a nationally recognized accounting firm (the "Accounting Firm") within 15 days after the date on which the payment provided in Section 2 is otherwise triggered. The Accounting Firm shall be selected by the Company. The Accounting Firm shall provide the Company and the Executive with detailed calculations supporting its determinations. All fees and expenses of the Accounting Firm shall be borne by the Company. 11. No Obligation to Mitigate. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by -5- Executive as the result of employment by another employer after the date of termination, or otherwise. 12. General Provisions. 12.1 Subject to the provisions of Section 12.4 below, no right, benefit or interest hereunder shall be subject to assignment except by operation of law to the personal representative or heirs of Executive if Executive dies after Termination of Employment but prior to the making of the payment required by section 2, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process. 12.2 Except as provided in Section 8, this Agreement may not be amended, modified or canceled except by written agreement of the parties. 12.3 In the event that the scope of any provision of this Agreement, or portion thereof, shall be determined to be unenforceable to its full extent, then such provision, or portion thereof, shall be enforced to the maximum extent permitted by law. In the event that any provision of this Agreement, or portion thereof, is determined to be invalid in its entirety, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. 12.4 This Agreement shall be binding upon and inure to the benefit of Executive (and his or her personal representative), the Company, and any successor organization or organizations which shall succeed to substantially all of the business and property of the Company, whether by means of merger, consolidation, acquisition of substantially all of the assets of the Company or otherwise, including by operation of law. 12.5 This Agreement has been made in and shall be governed by and construed in accordance with the laws of the State of California. 12.6 This Agreement shall supersede and replace in its entirety any previous agreement between the parties relating to the same subject matter. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation By /s/ John S. Foster ------------------ Name: John S. Foster Title: Chairman and CEO EXECUTIVE /s/ John S. Foster ------------------ John S. Foster Name: -6- EX-5 7 imt10k2001ex10-2.txt EXHIBIT 10.2 ------------ INNOVATIVE MICRO TECHNOLOGY, INC. CHANGE IN CONTROL AGREEMENT --------------------------- THIS AGREEMENT (the "Agreement"), made and entered into as of the 15th day of April, 2002, by and between INNOVATIVE MICRO TECHNOLOGY, INC. a Delaware corporation (the "Company") and Peter T. Altavilla ("Executive"). W I T N E S S E T H: WHEREAS, the Company (including subsidiaries and divisions) has always followed compensation policies intended to reward executives for past services and to demonstrate to them that the Company is concerned with the welfare of its employees and intends to see that loyal executives are treated fairly; and WHEREAS, the Company regards the continued services of Executive to be in the best interests of the Company and its shareholders and desires to assure the continued services of Executive on an objective and impartial basis and without distraction or conflict of interest in the event of an attempt to change control of the Company; and WHEREAS, Executive is willing to remain in the employ of the Company upon the understanding that the Company will provide him or her with income security if his or her employment is terminated under certain conditions following a change in control of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated: 1.1 "the Company" means and includes Innovative Micro Technology, Inc., and any subsidiary or division thereof, as the context may require. 1.2 "Base Amount" means the sum of (a) Executive's then monthly base salary; (b) Executive's then monthly car allowance, if any, and (c) one-twelfth of an amount equal to any bonus that Executive received or was entitled to receive for the fiscal year immediately preceding a Change in Control. 1.1 -1- 1.3 "Cause" means (a) Executive's continued failure to perform his duties after a written demand for substantive performance is delivered by the Company's Board of Directors to Executive documenting specific areas of repeated and continuing nonperformance, or (b) Executive's willful, reckless or grossly negligent misconduct materially injurious to the Company; provided, however, that "Cause" shall be deemed not to have occurred unless and until a resolution shall have been adopted by the affirmative vote of two-thirds of the entire membership of the Company's Board of Directors after reasonable notice to Executive of such Cause and reasonable opportunity for Executive and his or her counsel to be heard. 1.4 "Change in Control" means any of the following: (a) The Company is merged, consolidated or reorganized into or with another Person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of the combined Person immediately after such transaction are held in the aggregate by the holders of the combined voting power of the Voting Stock immediately prior to such transaction; (b) The Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other Person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of the Voting Stock of the Company immediately prior to such sale or transfer; or (c) Any Person becomes the beneficial owner (as the term "beneficial owner" is used in Section 13(d)(3) or Section 14(d)(2) of the 1934 Act) of securities representing 20% or more of the Voting Stock. 1.5 "Disability" means Executive's absence from his or her duties with the Company for a contiguous period of nine months as a result of Executive's incapacity due to physical or mental illness, provided that notice of Executive's termination due to Disability is provided to Executive within the 30-day period following such nine-month period. 1.6 "Medical Benefits" mean all group, life insurance, medical and dental care plans and all disability insurance provided by the Company to Executive immediately before Executive's Termination of Employment. 1.7 "Options" means all the options to purchase shares of Capital Stock of the Company granted to Executive under the Company's various employee benefit plans (as defined in Rule 405 promulgated under the Securities Act of 1933), whether or not such options are vested or not. 1.8 "Person" means any person or entity as defined or referred to in Sections 3(a) (9) and 13 (d) (1) et seq. of the Securities Exchange Act of 1934 and rules of the Securities and Exchange Commission promulgated thereunder. -2- 1.9 "Restricted Stock" means shares of the Company's Common Stock that have been issued to Executive and are subject to forfeiture or repurchase by the Company, or the sale of which is restricted unless certain financial objectives are achieved by the Company. 1.10 "Retirement" means termination by the Company or Executive of Executive's employment based on Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established with Executive's consent with respect to Executive. 1.11 "Termination of Employment" means the termination of Executive's employment with the Company, within three years after a Change in Control, by either (a) the Company (other than for "Cause"); or (b) Executive (other than by Retirement, death or Disability) following the occurrence, without Executive's consent, of any of the following events ("Good Reason"): (i) the assignment to Executive of duties inconsistent with and adverse to Executive's position, duties, responsibilities and status with the Company immediately prior to such Change in Control of the Company, or an adverse change in Executive's titles or offices as in effect immediately prior to such Change in Control of the Company, or a reduction of Executive's duties or responsibilities as in effect immediately prior to such change in Control of the Company, or any removal of Executive from or any failure to reelect Executive to any of such positions, except in connection with termination of Executive's employment for Disability, Retirement or Cause or as a result of Executive's death or by Executive other than for Good Reason; (ii) A reduction in Executive's base salary and bonus compensation unless such reduction is part of a uniformly applied program of reductions reasonably adopted due to the Company's then business condition; (iii) A failure to increase Executive's base salary on or before the later to occur of 12 months from the date of the last increase in Executive's base salary or 60 days following such Change in Control, in an amount not less than 50% of the average annual percentage base salary increase for all "Corporate Executives" of the Company in the 36 months preceding the date on which such increase shall be due. For purposes of this subparagraph (iii), "Corporate Executives" of the Company shall mean the Chief Executive Officer of the Company and each of the Company executives who report directly to the Chief Executive Officer. (iv) A failure of the Company to continue in effect any benefit or incentive plan or arrangement in which Executive is participating at the time of such Change in Control, or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan or arrangement or deprive Executive of any material fringe benefit enjoyed by Executive at the time of such Change in Control, unless such failure results from a uniformly applied program of reductions reasonably adopted due to the Company's then business condition; (v) Executive is either (x) transferred to a principal work location which will require him to travel more than twenty-five (25) miles from his or her then principal residence to his or her new principal work location, or (y) he or she is required to engage in a substantially increased amount of travel on the Company's business; -3- (vi) any material breach by the Company or any provision of this Agreement. 1.12 "Voting Stock" means, from time to time, the outstanding securities entitled to vote generally in the election of directors of the Company. 2. Payment Upon Termination of Employment. Subject to Section 10 below, within 10 days immediately following a Termination of Employment, the Company shall forthwith pay Executive a lump sum equal to twelve multiplied by the Base Amount. 3. Continuation of Insurance. For a period of 12 months following Executive's Termination of Employment or until such time that Executive shall be employed by an employer who provides Executive with medical benefits substantially similar to the Medical Benefits, Executive shall receive the same Medical Benefits that he or she (and his or her family, if applicable) received from the Company prior to his or her Termination of Employment; provided, however, that if the plans pursuant to which the Medical Benefits were provided to Executive have been or are modified, Executive shall be entitled to substantially similar Medical Benefits from other reputable sources. Executive shall be required to pay the same amount for such Medical Benefits as he or she paid prior to his or her Termination of Employment. 4. Acceleration of Options and Removal of Restrictions on Restricted Stock. Immediately upon or following Termination of Employment, (i) all shares covered by Executive's Options shall become immediately and fully exercisable, and shall remain exercisable until the expiration thereof, and Executive shall have the right to purchase, by exercise of such Options, all or any portion of the shares covered by such Options; provided however, that in no event may any Option be exercised after the expiration date thereof, and (ii) all Restricted Stock shall become fully vested and released from any repurchase or forfeiture rights; any restrictions on the sale of the Restricted Stock shall be removed and the Restricted Stock shall be fully saleable, subject to any other applicable restrictions that may affect the sale of the Restricted Stock. 5. Representation by Executive; No Employment Contract. Executive represents that it is his or her present intention to continue in the employ the Company and he or she is not currently aware of any facts or circumstances that would cause him or her to change such intention in the foreseeable future. Executive acknowledges that Executive has been advised and understands that this Agreement shall not, however, be deemed in any way to create a contract of employment between the Company and Executive. -4- 6. Expenses of Executive. the Company agrees to pay or reimburse Executive for all costs and expenses (including court costs and attorneys, fees) incurred by Executive (a) in the successful prosecution or settlement of any claim or action by Executive to enforce his or her rights under this Agreement, or (b) in any other action or proceeding, not involving such a claim or action by Executive, which challenges the validity or enforceability of this Agreement or any similar agreements with other employees of the Company. The Company further agrees to pay or reimburse Executive for all costs and expenses (including legal and accounting fees and expenses) incurred by Executive in connection with any audit or review by the Internal Revenue Service of any excise tax imposed on any payments under this Agreement. 7. Liability for Taxes. the Company shall have no liability for any tax liability of Executive attributable to any payment made under this Agreement. The Company may withhold from any such payment such amounts as may be required by applicable provisions of the Internal Revenue Code, other tax laws, and the rules and regulations of the Internal Revenue Service and other tax agencies, as in effect at the time of any such payment. 8. Termination of Agreement. This Agreement shall terminate and be of no further effect (except to the extent that any obligation of the Company hereunder remains unpaid as of such time) upon the first to occur of (a) termination of Executive's employment with the Company for any reason, whether voluntarily or involuntary, prior to a Change in Control; (b) termination of Executive's employment by the Company due to Executive's death, Retirement, Disability or for Cause or by Executive other than for Good Reason; (c) 36 months from the date of a Change of Control, or (d) 12 months following the date that written notice of termination of this Agreement is provided to Executive by the Company's Board of Directors, if a Change in Control does not occur within that 12-month period. 9. Other Plans. To the extent that Executive shall receive payments under this Agreement, he or she shall not be eligible to receive severance benefits under the Company's standard severance policy; provided, however, that notwithstanding the previous sentence, Executive shall be entitled to receive paid time off and shall be entitled to such other benefits as described in Section 3 of this Agreement. 10. Taxes. The Company shall not make the payment provided in Section 2 above to the extent that such payment, after taking into account any other payments in the nature of compensation payable to (or for the benefit of) the Executive contingent on a Change in Control, would result in "parachute payments" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). This determination shall be made by a nationally recognized accounting firm (the "Accounting Firm") within 15 days after the date on which the payment provided in Section 2 is otherwise triggered. The Accounting Firm shall be selected by the Company. The Accounting Firm shall provide the Company and the Executive with detailed calculations supporting its determinations. All fees and expenses of the Accounting Firm shall be borne by the Company. 11. No Obligation to Mitigate. Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by -5- Executive as the result of employment by another employer after the date of termination, or otherwise. 12. General Provisions. 12.1 Subject to the provisions of Section 12.4 below, no right, benefit or interest hereunder shall be subject to assignment except by operation of law to the personal representative or heirs of Executive if Executive dies after Termination of Employment but prior to the making of the payment required by section 2, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process. 12.2 Except as provided in Section 8, this Agreement may not be amended, modified or canceled except by written agreement of the parties. 12.3 In the event that the scope of any provision of this Agreement, or portion thereof, shall be determined to be unenforceable to its full extent, then such provision, or portion thereof, shall be enforced to the maximum extent permitted by law. In the event that any provision of this Agreement, or portion thereof, is determined to be invalid in its entirety, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. 12.4 This Agreement shall be binding upon and inure to the benefit of Executive (and his or her personal representative), the Company, and any successor organization or organizations which shall succeed to substantially all of the business and property of the Company, whether by means of merger, consolidation, acquisition of substantially all of the assets of the Company or otherwise, including by operation of law. 12.5 This Agreement has been made in and shall be governed by and construed in accordance with the laws of the State of California. 12.6 This Agreement shall supersede and replace in its entirety any previous agreement between the parties relating to the same subject matter. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation By /s/ Peter T. Altavilla ---------------------- Name: Peter T. Altavilla Title: CFO and Secretary EXECUTIVE /s/ John S. Foster ------------------ John S. Foster Name: -6- EX-6 8 imt10k2001ex10-3.txt EXHIBIT 10.3 ------------ FORM OF INDEMNIFICATION AGREEMENT This Agreement is made as of the day of _____________, 200_, by and between Innovative Micro Technology, Inc., a Delaware corporation (the "Company"), and the undersigned Director and/or Officer of the Company (the "Indemnitee "), with reference to the following: A. The Indemnitee is willing, under certain circumstances, to serve as an Director and/or Officer of the Company. The Indemnitee has indicated that he does not regard the indemnities available under the Company's By-laws as adequate to protect him against the risks associated with his service to the Company. In this connection, the Company and the Indemnitee now agree that they should enter into this Indemnification Agreement in order to provide greater protection to Indemnitee against such risks of service to the Company. B. Section 145 of the General Corporation Law of the State of Delaware, under which Law the Company is organized, empowers corporations to indemnify a person serving as a director, officer, employee or agent of the Company and a person who serves at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, and said Section 145 and the By-laws of the Company specify that the indemnification set forth in said Section 145 and in the By-laws, respectively, shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise. C. In order to induce the Indemnitee to serve as an Director and/or Officer of the Company and in consideration of his continued service, the Company hereby agrees, as of the date first set forth above, to indemnify the Indemnitee as follows: 1. Indemnity. The Company will indemnify the Indemnitee, his executors, administrators or assigns, for any Expenses (as defined below) which the Indemnitee is or becomes legally obligated to pay in connection with any Proceeding. As used in this Agreement the term "Proceeding" shall include any threatened, pending or completed claim, action, suit or proceeding, whether brought by or in the right of the Company and/or otherwise and whether of a civil, criminal, administrative or investigative nature, in which the Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was, or has agreed to become, a Director and/or Officer of the Company, by reason of any actual or alleged error or misstatement or misleading statement made or suffered by the Indemnitee, by reason of any action taken by him or of any inaction on his part while acting as such Director and/or -1- Officer, or by reason of the fact that he was serving at the request of the Company as a director, trustee, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise; provided, that in each such case Indemnitee acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Company, and, in the case of a criminal proceeding, in addition had no reasonable cause to believe that his conduct was unlawful. As used in this Agreement, the term "other enterprise" shall include (without limitation) employee benefit plans and administrative committees thereof, and the term "fines" shall include (without limitation) any excise tax assessed with respect to any employee benefit plan. 2. Expenses. As used in this Agreement, the term "Expenses" shall include (without limitation) damages, judgments, fines, penalties, settlements and costs, attorneys' fees and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. 3. Enforcement. If a claim or request under this Agreement is not paid by the Company, or on its behalf, within thirty (30) days after a written claim or request has been received by the Company, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Indemnitee shall also be entitled to be paid the Expenses of prosecuting such suit. The Company shall have the right to recoup from the Indemnitee the amount of any item or items of Expenses theretofore paid by the Company pursuant to this Agreement, to the extent such Expenses are not reasonable in nature or amounts. 4. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be reasonably necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 5. Exclusions. The Company shall not be liable under this Agreement to pay any Expenses in connection with any claim made against the Indemnitee: (a) to the extent that payment is actually made to the Indemnitee under a valid, enforceable and collectible insurance policy; (b) to the extent that the Indemnitee is indemnified and actually paid otherwise than pursuant to this Agreement; (c) in connection with a judicial action by or in the right of the Company, in respect of any claim, issue or matter as to which the Indemnitee -2- shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company unless and only to the extent that any court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper; (d) if it is proved by final judgment in a court of law or other final adjudication to have been based upon or attributable to the Indemnitee's in fact having gained any personal profit or advantage to which he was not legally entitled; (e) for a disgorgement of profits made from the purchase and sale by the Indemnitee of securities pursuant to Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless a judgment or other final adjudication thereof adverse to the Indemnitee shall establish that he committed (i) acts of active and deliberate dishonesty, (ii) such acts with actual dishonest purpose and intent, (iii) acts which were material to the cause of action so adjudicated; or (g) for any judgment, fine or penalty which the Company is prohibited by applicable law from paying as indemnity or for any other reason. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against any and all Expenses incurred in connection therewith. 7. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses to which the Indemnitee is entitled. 8. Advance of Expenses. Expenses incurred by the Indemnitee in connection with any Proceeding, except the amount of any settlement, shall be paid by the Company in advance upon request of the Indemnitee that the Company pay such Expenses. The Indemnitee hereby undertakes to repay to the Company the amount of any Expenses theretofore paid by the Company to the extent that it is -3- ultimately determined that such Expenses were not reasonable or that the Indemnitee is not entitled to indemnification. 9. Approval of Expenses. No Expenses for which indemnity shall be sought under this Agreement, other than those in respect of judgments and verdicts actually rendered, shall be incurred without the prior consent of the Company, which consent shall not be unreasonably withheld. 10. Notice of Claim. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to the Company notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to the Company shall be given at its principal office and shall be directed to the Corporate Secretary (or such other address as the Company shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid U.S. certified mail, return receipt requested, properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within the Indemnitee's power. 11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one instrument. 12. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of the Company and amendments thereto or under law. 13. Governing Law. This Agreement shall be governed by and construed in accordance with Delaware law, without regard to the conflicts of law provisions thereof. 14. Saving Clause. Wherever there is conflict between any provision of this Agreement and any applicable present or future statute, law or regulation contrary to which the Company and the Indemnitee have no legal right to contract, the latter shall prevail, but in such event the affected provisions of this Agreement shall be curtailed and restricted only to the extent necessary to bring them within applicable legal requirements. 15. Coverage. The provisions of this Agreement shall apply with respect to the Indemnitee's service as a Director and/or Officer of the Company or any subsidiary of the Company prior to the date of this Agreement and with respect to all periods of such service after the date of this Agreement, even though the Indemnitee may have ceased to be a Director and/or Officer of the Company. -4- (Signature Page Follows) -5- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INNOVATIVE MICRO TECHNOLOGY, INC. By: __________________________________ John Foster, President "INDEMNITEE" By: ___________________________________ Name: ____________________________ -6- EX-7 9 imt10k2001ex10-5.txt EXHIBIT 10.5 ------------ Innovative Micro Technology, Inc. 2001 STOCK INCENTIVE PLAN ------------------------- Termination Date: November 16, 2011 1. PURPOSE OF THE PLAN. The purpose of this 2001 Stock Incentive Plan (the "Plan") is to provide incentives and rewards to selected eligible directors, officers, employees and consultants of Innovative Micro Technology, Inc. (the "Company") or its affiliates in order to assist the Company and its affiliates in attracting, retaining and motivating those persons by providing for or increasing the proprietary interests of those persons in the Company, and by associating their interests in the Company with those of the Company's stockholders. 2. DEFINITIONS (a) "Affiliate" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "Bankruptcy Plan" means the Debtor's Plan of Bankruptcy under Chapter 11 of the Bankruptcy Code dated as of July 6, 2001 and filed with the Bankruptcy Court for the Central District of California on September 24, 2001, as such Plan may be modified from time to time. (c) "Board" means the Board of Directors of the Company. (d) "Cause," with respect to any Participant, means (except as otherwise provided in the applicable Stock Award Agreement or an applicable written employment contract executed by an authorized officer of the Company and such Participant) such Participant's (i) conviction of any felony or any crime involving moral turpitude or dishonesty, (ii) participation in a fraud or act of dishonesty against the Company, (iii) conduct that, based upon a good faith and reasonable factual investigation and determination by the Company, demonstrates such Participant's gross unfitness to serve, (iv) failure, based upon a good faith and reasonable factual determination by the Company, to meet the minimum performance requirements of his or her position as established by the Company, or (v) intentional, material violation of any contract between the Company and such Participant or any statutory duty of such Participant to the Company that such Participant does not correct within thirty (30) days after written notice to such Participant thereof. A Participant's physical or mental disability shall not constitute "Cause." (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (g) "Common Stock" means the Class A Common Stock, par value $.0001 per share, of the Company. (h) "Company" means Innovative Micro Technology, Inc., a Delaware corporation. (i) "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. -1- (j) "Continuous Service" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (k) "Corporate Transaction" means after the Effective Date, (i) a sale of all or substantially all of the assets of the Company (in one or a series of transactions), (ii) a transaction or a series of transactions whereby fifty percent (50%) of the issued and outstanding shares of Common Stock (prior to any dilution for unvested shares of Restricted Stock or unexercised Options) are held by a Person (including such Person's affiliates), excluding that percent of the issued and outstanding shares of Common Stock held by such Person as of the Effective Date, unless such Person acquires additional shares of Common Stock after the Effective Date and such shares of Common Stock, when combined with the shares of Common Stock held by such Person as of the Effective Date, aggregate more than 49.9% of the issued and outstanding shares of Common Stock (prior to any dilution for unexercised Options, or (iii) a transaction or series of transactions whereby fifty-one percent (51%) of the issued and outstanding shares of Common Stock vote to sell the equity interests in or merge the Company and such sale or merger results in Persons holding fifty percent (50%) or more of the Common Stock that are other than the Persons holding fifty percent (50%) or more of the Common Stock immediately prior to such sale or merger. (l) "Covered Employee" means the chief executive officer, or an individual acting in such capacity, and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (m) "Director" means a member of the Board of Directors of the Company. (n) "Disability" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (o) "Employee" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (p) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (q) "Fair Market Value" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (r) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- (s) "Non-Employee Director" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for s rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (t) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (u) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (v) "Option" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (w) "Option Agreement" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (x) "Optionholder" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (y) "Outside Director" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (z) "Participant" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (aa) "Plan" means this Innovative Micro Technology, Inc. 2001 Stock Incentive Plan. (bb) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (cc) "Securities Act" means the Securities Act of 1933, as amended. (dd) "Stock Award" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. (ee) "Stock Award Agreement" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ff) "Ten Percent Stockholder" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. -3- 3. ADMINISTRATION. (a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 14. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) Delegation to Committee. (i) General. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) Committee Composition when Common Stock is Publicly Traded. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non- Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code; and/or (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. -4- (d) Effect of Board's Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. 4. AVAILABLE AWARDS. (a) Common Stock and Derivative Security Awards. Awards authorized under the Plan shall consist of any type of arrangement with a Participant that is not inconsistent with the provisions of the Plan and that, by its terms, include, but need not be limited to, sales, bonuses and other transfers of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock or securities convertible into or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares, or any other type of Award which the Board shall determine is consistent with the objectives and limitations of the Plan. An Award may consist of one such security or benefit, or two or more of them in tandem or in the alternative. (b) Consideration. Common Stock may be issued pursuant to an Award for any lawful consideration as determined by the Board, including, without limitation, a cash payment, services rendered, or the cancellation of indebtedness. (c) Guidelines. The Board may adopt, amend or revoke from time to time written policies implementing the Plan. Such policies may include, but need not be limited to, the type, size and term of Awards to be made to participants and the conditions for payment of such Awards. 5. SHARES SUBJECT TO THE PLAN. (a) Share Reserve. Subject to the provisions of Section 12 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 2,250,000 shares of Common Stock. (b) Reversion of Shares to the Share Reserve. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. (c) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 6. ELIGIBILITY. (a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) Section 162(m) Limitation. Subject to the provisions of Section 12 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than one million (1,000,000) shares of Common Stock during any calendar year. (d) Consultants. (i) A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or -5- because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. (ii) Form S-8 generally is available to consultants and advisors only if (i) they are natural persons; (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities. (e) Suspension or Termination of Awards. If the Company believes that a Participant has committed an act of misconduct as described in the next sentence, the Company may suspend the Participant's rights under any then outstanding Award pending a determination by the Board. If the Board determines that a Participant has committed an act of embezzlement, fraud, nonpayment of any obligation owed to the Company or any subsidiary, breach of fiduciary duty or deliberate disregard of the Company's rules resulting in loss, damage or injury to the Company, or if a Participant makes an unauthorized disclosure of trade secret or confidential information of the Company, engages in any conduct constituting unfair competition, or induces any customer of the Company to breach a contract with the Company, neither the Participant nor his or her estate shall be entitled to exercise any rights whatsoever with respect to such Award. In making such determination, the Board shall act fairly and shall give the Participant a reasonable opportunity to appear and present evidence on his or her behalf to the Board. 7. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) Term. Subject to the provisions of subsection 6(b) regarding Ten Percent Stockholders, no Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) Exercise Price of an Incentive Stock Option. Subject to the provisions of subsection 6(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) Exercise Price of a Nonstatutory Stock Option. The exercise price of each Nonstatutory Stock Option shall be not less than ninety-five percent (95%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) Consideration. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that -6- is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) Vesting Generally. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 7(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (g) Termination of Continuous Service. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date ninety (90) days following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement; provided however, that if the Participant is terminated for reasons other than Cause and the Participant, upon such termination is entitled under an employment contract to be automatically vested in any benefit program, the Participant can exercise the Option (and any related warrants). If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (h) Extension of Termination Date. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 7(a) or (ii) the expiration of a period of ninety (90) days after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (i) Disability of Optionholder. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (j) Death of Optionholder. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the -7- Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (k) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option. (l) Re-Load Options. (i) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Unless otherwise specifically provided in the Option, the Optionholder shall not surrender shares of Common Stock acquired, directly or indirectly from the Company, unless such shares have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). (ii) Any such Re-Load Option shall (1) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (2) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. (iii) Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 9(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 5(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 6(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 8. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) Stock Bonus Awards. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: -8- (i) Consideration. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) Vesting. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) Termination of Participant's Continuous Service. In the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) Transferability. Rights to acquire shares of Common Stock under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) Restricted Stock Awards. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) Purchase Price. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. The purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated, provided that the purchase price of any Restricted Stock established in the Bankruptcy Plan shall be conclusively deemed to comply with this paragraph. . (ii) Consideration. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; or (ii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) Vesting. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) Termination of Participant's Continuous Service. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) Transferability. Rights to acquire shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. -9- 9. COVENANTS OF THE COMPANY. (a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep reserved and available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 11. MISCELLANEOUS. (a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) No Employment or other Service Rights. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without Cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant -10- is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) Withholding Obligations. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock. (g) Cancellation and Re-Grant of Options. (i) Authority to Reprice. The Board shall have the authority to effect, at any time and from time to time, (1) the repricing of any outstanding Options under the Plan and/or (2) with the consent of any adversely affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Common Stock. The exercise price per share of Common Stock shall be not less than that specified under the Plan for newly granted Stock Awards. Notwithstanding the foregoing, the Board may grant an Option with an exercise price lower than that set forth above if such Option is granted as part of a transaction to which Section 424(a) of the Code applies. (ii) Effect of Repricing under Section 162(m) of the Code. Shares of Common Stock subject to an Option which is amended or canceled in order to set a lower exercise price per share of Common Stock shall continue to be counted against the maximum award of Options permitted to be granted pursuant to subsection 5(c). The repricing of an Option under this subsection 10(g) resulting in a reduction of the exercise price shall be deemed to be a cancellation of the original Option and the grant of a substitute Option; in the event of such repricing, both the original and the substituted Options shall be counted against the maximum awards of Options permitted to be granted pursuant to subsection 5(c). The provisions of this subsection 11(g)(ii) shall be applicable only to the extent required by Section 162(m) of the Code. 12. ADJUSTMENTS UPON CHANGES IN STOCK. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 5(a) and the maximum number of securities subject to award to any person pursuant to subsection 6(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) -11- 13. CORPORATE TRANSACTIONS. (a) Except as otherwise provided for in the Optionee's Option Agreement, in the event of a Corporate Transaction, the Company and the successor corporation may agree: (i) to terminate the Plan and cancel all outstanding Options and unvested shares of Restricted Stock; provided, however, subject to Subsection (b) below, the Company shall vest the Optionees in their outstanding Options and unvested Shares and shall give the Optionees 20 days to exercise their outstanding Options before they are cancelled; (ii) that the successor corporation or its parent will assume the Plan and all outstanding Options and unvested shares of Restricted Stock; (iii) to terminate the Plan and cancel all outstanding Options and unvested shares of Restricted Stock and replace such Options and unvested shares of Restricted Stock with comparable options and unvested shares in the successor corporation or parent thereof (the determination of comparability shall be made by the Administrator, and its determination shall be final, binding, and conclusive); or (iv) to terminate the Plan and cancel all outstanding Options and unvested shares of Restricted Stock and deliver to the Optionee in lieu thereof, (i) the difference between the Fair Market Value of a share of Common Stock on the date of the Corporate Transaction and the Exercise Price of the Optionee's Option, multiplied by the number of shares to which the Option relates, and (ii) cash equal to the Fair Market Value of a share of Common Stock on the date of the Corporate Transaction multiplied by the number of unvested Shares on such date. (b) The acceleration of vesting of Options or unvested shares of Restricted Stock provided for in subsection (a) above shall be subject to any limitations in any Change in Control Agreement between the holder and the Company. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) Amendment of Plan. Subject to the Bankruptcy Plan, the Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. With respect to Stock Awards issued prior to any such Plan amendment and still outstanding at any time thereafter, except as provided in subsection 14(d) below, such amendments shall apply to such Stock Awards. (b) Stockholder Approval. The Board may, in its sole discretion, subject to the Bankrupcy Plan, submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) No Impairment of Rights. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. -12- (e) Amendment of Stock Awards. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 16. EFFECTIVE DATE OF PLAN. The Plan is effective on the "Effective Date" as defined in the Bankruptcy Plan , as such Plan may be modified from time to time, subject to the approval by the affirmative votes of the holders of a majority of the securities of the Company entitled to vote. 17. FORM S-8 REGISTRATION STATEMENT. The Company intends to file a Registration Statement on Form S-8, or such other form as counsel for the Company determines appropriate, to register the issuance of shares by the Company upon the exercise of any options granted pursuant to the Plan. Prior to the filing and effectiveness of the Registration Statement, any shares issued upon the exercise of options granted pursuant to the Plan to U.S. resident shareholders will be issued pursuant to Section 4(2) of the Securities Act of 1933 and will be subject to appropriate restrictions on transfer. Any shares issued upon the exercise of options granted pursuant to the Plan to persons who are not U.S. Persons, as defined in Regulation S promulgated pursuant to the Securities Act of 1933, shall be issued in reliance of Regulation S and subject to the conditions of Regulation S including the agreement of the Participants not to resell the shares to a U.S. Person or for the account or benefit of a U.S. Person until expiry of the distribution compliance period. 18. GOVERNING LAW. The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. -13- EX-8 10 imt10k2001ex10-6.txt EXHIBIT 10.6 ------------ Innovative Micro Technology, Inc. STOCK OPTION AGREEMENT ---------------------- for Incentive and Nonstatutory Options under 2001 Stock Incentive Plan Pursuant to the 2001 Stock Incentive Plan Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Innovative Micro Technology, Inc. (the "Company") has granted you ("Participant") an option under its 2001 Stock Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in the Grant Notice at the exercise price indicated in the Grant Notice. Capitalized terms used but not defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. Vesting. Subject to the limitations contained herein, your option will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service, except as follows: a. In the event of a Corporate Transaction, any Options that are not assumed by the successor to the Company or the parent of such successor shall become immediately and fully exercisable 20 days prior to the consummation of the Corporate Transaction. b. If, within 12 months following a Corporate Transaction, there occurs without the Optionee's consent: (a) a material lessening of his or her duties and responsibilities as an Employee, (b) a material reduction in his or her title; (c) a material reduction in his or her base salary from the rate in effect as of the date of the Grant Notice, (d) a requirement that the Optionee's principal duties to the Company be performed at a location 30 miles or more away from the location they were performed prior to the Corporate Transaction; then, upon written notice by the Optionee to the Company (or any successor to the Company by reason of the Corporate Transaction) that the Optionee voluntarily terminates his or her employment, all outstanding Options covered by this Agreement shall become immediately and fully exercisable, provided that in no event may an Option be exercised after its expiration date; c. If, within 12 months following a Corporate Transaction, the Optionee's employment is terminated involuntarily by the Company (or any successor to the Company by reason of the Corporate Transaction) without Cause, all outstanding Options covered by this Agreement shall become immediately and fully exercisable, provided that in no event may an Option be exercised after its expiration date. 2. Number of Shares and Exercise Price. The number of shares subject to your option and your exercise price per share referenced in the Grant Notice may be adjusted from time to time for changes in stock, as provided in the Plan. -1- 3. Exercise prior to Vesting ("Early Exercise"). If permitted in the Grant Notice (i.e., if the "Exercise Schedule" indicates that "Early Exercise" of your option is permitted) and subject to the provisions of this option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the unvested portion of your option; provided, however, that: (a) a partial exercise of your option shall be deemed to cover first vested shares and then the earliest vesting installment of unvested shares; (b) any shares so purchased from installments which have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; (c) you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and (d) if your option is an incentive stock option, then, as provided in the Plan, to the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which your option plus all other incentive stock options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as nonstatutory stock options. 4. Method of Payment. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by the Grant Notice, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock that either have been held for the period required to avoid a charge to the Company's reported earnings (generally six months) or were not acquired, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time your option is exercised, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, your option may not be exercised by tender to the Company of Common Stock to the extent such tender would constitute a violation -2- of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 5. Whole Shares. Your option may be exercised for whole shares only. 6. Securities Law Compliance. Notwithstanding anything to the contrary contained herein, your option may not be exercised unless the shares issuable upon exercise of your option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing the option, and the option may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations. 7. Term. The term of your option commences on the Date of Grant and expires upon the earliest of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than Disability or death, provided that if during any part of such three (3) month period the option is not exercisable solely because of the condition set forth in paragraph 6, the option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates ; (d) the Expiration Date indicated in the Grant Notice; or (e) the tenth (10th) anniversary of the Date of Grant. If your option is an incentive stock option, note that, to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or your Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit, but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you provide services to the Company or an Affiliate as a Consultant or Director or if you exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates. 8. Exercise. (a) You may exercise the vested portion of your option (and the unvested portion of your option if the Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the -3- Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise, or (3) the disposition of shares acquired upon such exercise. (c) If your option is an incentive stock option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option. (d) By exercising your option you agree that the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) which are consistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your Common Stock until the end of such period. (e) No Transfer. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 9. Option not a Service Contract. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. Withholding Obligations. (a) At the time your option is exercised, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "same day sale" pursuant to a -4- program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. Your option is not exercisable unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 11. Notices. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 12. Governing Plan Document. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. The interpretation, performance and enforcement of this Agreement shall be governed by the internal substantive laws of the State of California. 13. Execution. In witness whereof, the parties hereto have entered into this Option Agreement on this ___ day of __________, 20__. COMPANY: INNOVATIVE MICRO TECHNOLOGY, INC. By_______________________________ Its______________________________ -5- PARTICIPANT: _______________________________ Signature _______________________________ Name By his or her signature below, the spouse of the Optionee agrees to be bound by all of the terms and conditions of the foregoing Option Agreement. PARTICIPANT'S SPOUSE: _______________________________ Signature _______________________________ Name -6- EX-9 11 imt10k2001ex10-7.txt EXHIBIT 10.7 ------------ Innovative Micro Technology, Inc. FORM OF RESTRICTED STOCK AGREEMENT ---------------------------------- under the 2001 Stock Incentive Plan 1. Terms of Purchase. On this 13th day of May, 2002 Innovative Micro Technology (the "Company") sells to (the "Holder"), pursuant to the Company's 2001 Stock Incentive Plan (the "Plan"), and holder hereby purchases, an aggregate of _________ shares (the "Shares") of the Company's Class A Common Stock, $.0001 par value, at a purchase price of $.0001 per share (the "Per Share Purchase Price") (for aggregate consideration of $_________) on the terms and conditions set forth herein and in the Plan, a copy of which is attached to this Agreement and which is incorporated herein by reference. Capitalized terms used but not defined in this Restricted Stock Agreement but defined in the Plan shall have the same definitions as in the Plan. 2. Company Right of Repurchase. (a) Of the Shares, ________ Shares, representing 50% of the aggregate number of Shares purchased hereunder, shall vest and become "Vested Shares" on the date one year from the Plan of Reorganization Effective date of November 16, 2002 (the "Initial Vesting Date") and the balance shall vest and become Vested Shares one year from the Initial Vesting Date; provided, however, that none of the Shares shall become Vested Shares until the later of the applicable date set forth in the preceding clause and the date the Vesting Conditions have been satisfied or waived by the Company. For purposes of this paragraph, "Vesting Conditions" means the listing of the Company's Common Stock on a national stock exchange or the quotation of the Company's Common Stock on the Nasdaq National Market or Nasdaq SmallCap Market, with a public float in any case of at least $20 million. All Shares other than Vested Shares shall be "Unvested Shares." In the event the Holder ceases to serve as an employee of the Company, whether voluntarily or involuntarily, for any reason (including disability or death), the Company may within 180 days after the date of such termination exercise its repurchase option under this Section 2 to purchase all or any portion of shares that were Unvested Shares on the date of such termination at a per share price equal to the Per Share Purchase Price. (b) In the event the Company exercises its repurchase option as set forth herein, the Company shall give to the -1- Holder a written notice specifying the number of Unvested Shares it is electing to repurchase, the price thereof, and the time for a closing hereunder, which closing shall be held at the Company's principal office and shall occur no earlier than 10 days and no later than 20 days after the date such notice is given. Upon the date of any such notice from the Company, the interest of the Holder in the Unvested Shares shall automatically terminate, except for the Holder's right to receive payment from the Company for such Unvested Shares. (c) If the Company exercises its repurchase option hereunder, the Holder shall at the closing duly endorse for transfer the certificate(s) representing the Unvested Shares to be sold to the Company, and the Company shall deliver to the Holder the purchase price for such Unvested Shares. (d) The Holder agrees to deliver and deposit with the Secretary of the Company, or such other person as designated by the Company, as escrow agent, a stock assignment duly endorsed (with date and number of shares blank) with the certificate or certificates evidencing the Shares until the first to occur of (i) such shares becoming Vested Shares and (ii) the Company's failure to exercise its repurchase option within the period specified in this Section 2. 3. Restrictions on Transfer. (a) No Unvested Shares shall be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Holder, and such Stock shall constitute "Restricted Stock" until fully Vested hereunder. Any attempt to transfer Stock in violation of this Section 3 shall be null and void and shall be disregarded by the Company. (b) The sale of the Shares hereunder has not been registered under the Securities Act. The Company shall make a notation regarding the restrictions on transfer of the Stock in its stockbooks, and shares of the Stock shall be transferred on the books of the Company only if fully vested and transferred or sold pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act") covering such shares, or pursuant to an opinion of counsel delivered by the Holder that such transfer is exempt from registration. (c) Until fully vested and sold pursuant to an effective registration statement under the Securities Act, or pursuant to an available exemption to registration, the shares of the Stock shall bear any legends required by applicable -2- securities or corporate laws, in addition to the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THAT CERTAIN RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE NAMED STOCKHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 4. Restricted Stock Agreement not a Service Contract. This agreement is not an employment or service contract, and nothing herein shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in herein shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 5. Withholding of Taxes. The Holder shall provide the Company with a copy of any timely election made pursuant to Section 83(b) of the Internal Revenue Code or similar provision of state law (collectively, an "83(b) Election"), a form of which election is attached hereto as Exhibit A . If the Holder makes a timely 83(b) Election, the Holder shall immediately pay the Company the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding requirements. If the Holder does not make a timely 83(b) Election, Holder shall, either at the time that the restrictions lapse under this Agreement or at the time withholding is otherwise required by any applicable law, pay the Company the amount necessary to satisfy any applicable federal, state, and local income and employment tax withholding requirements. If, upon written request by the Company, the Holder fails to pay the Company such amount in a timely manner, the Company shall have the right to deduct such amount from any sum(s) due the Holder from the Company and shall also have the right to sell a sufficient number of shares of the Shares to satisfy such tax obligation. The Holder acknowledges that it is Holder's responsibility to consult with Holder's own tax advisor as to the consequences and timing of an 83(b) election. Any adverse consequences to the Holder resulting from making or failing to make such election shall be the Holder's sole responsibility. 6. Equitable Relief and Consent to Jurisdiction. The Holder specifically acknowledges and agrees that in the event of a breach or threatened breach of the provisions of this Agreement, including the attempted transfer of the Shares by the Holder, monetary damages may not be adequate to compensate the -3- Company, and, therefore, in the event of such a breach or threatened breach, in addition to any right to damages, the Company shall be entitled to equitable relief in any court having competent jurisdiction. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for any such breach or threatened breach. 7. Notices. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 8. Execution. By the purchase of the Shares, the Holder agrees that such Holder is subject in all respects to the foregoing terms and conditions and to the Plan. This Agreement shall be binding on and inure to the benefit of the executor, administrator, legatees, heirs, legal representatives and assigns of the Holder and the successors and permitted assigns of the Company. In witness whereof, the parties hereto have entered into this Restricted Stock Agreement on the date first above written. COMPANY: INNOVATIVE MICRO TECHNOLOGY, INC. By_________________________________ Its_________________________________ HOLDER: _________________________________ Signature _________________________________ Name By his or her signature below, the spouse of the Holder agrees to be bound by all of the terms and conditions of the foregoing Agreement. HOLDER'S SPOUSE: _________________________________ Signature _________________________________ Name -4- EX-10 12 imt10k2001ex10-8.txt EXHIBIT 10.8 ------------ Loan #50759 December 20, 2001 Walnut Creek, California FIXED RATE NOTE INTEREST ONLY $5,400,000.00 FOR VALUE RECEIVED, the undersigned, as "Maker", promise to pay to OWENS FINANCIAL GROUP, INC., a California Corporation, or order, "Payee", at P.O. BOX 2400, Walnut Creek, California 94595, or at any other place that Payee designates by notice to Maker, in United States Dollars, the sum of Five Million Four Hundred Thousand and 00/100 Dollars plus interest from the date of disbursement, on the unpaid balance of the amount disbursed, at the rate set forth below, principal and interest to be paid as follows: 1. PAYMENTS. A) MONTHLY PAYMENTS. Maker's first interest-only payments will begin on February 1, 2002 and shall continue on the first day of each and every month thereafter until the Maturity Date. B) FINAL PAYMENT. The unpaid principal balance, together with all accrued and unpaid interest, shall be due and payable on December 5, 2004 "Maturity Date". 2. INTEREST RATE. The interest rate shall be Twelve Percent (12.00%) per annum. 3. DEED OF TRUST. This promissory note is secured by a deed of trust executed by INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation. 4. RIDER TO NOTE. Maker agrees that the covenants and agreements contained in the Note Rider of even date herewith shall be incorporated into and shall supplement the covenants and agreements of this note if the Note Rider is set forth in full herein and is a part of this note. 5. EXIT FEE. As additional consideration for the funding of this loan, Maker shall pay to Owens Financial Group, Inc., a Calif. Corp., an Exit Fee equal to N/A of the face amount of the Note. This fee shall be in addition to the principal, interest, or any other charges or costs agreed to be paid by Maker pursuant to the terms of the note and or any other Loan Documents. The Exit Fee shall be due and payable upon the Maturity Date or payoff of the loan, whichever occurs first, and shall also be due and payable in the event of foreclosure (judicial, non-judicial, or deed-in-lieu). If the Exit Fee is not paid in full or before the Maturity Date, it shall bear interest at the note rate, plus additional interest at the Default Rate, as set forth in section 1(B) of the Rider to Note. IN WITNESS WHEREOF, Maker has signed and delivered this note effective as of the date set forth above. INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation - ----------------------------------- John S. Foster, Chief Executive Officer, President and Chairman of the Board - ------------------------------------ Peter T. Altavilla, Chief Financial Officer, Controller and Secretary -7- RIDER TO NON-ASSUMABLE NOTE Loan #50759 THIS RIDER IS INCORPORATED INTO AND SHALL BE DEEMED TO SUPPLEMENT THE NOTE OF EVEN DATE HEREWITH, GIVEN BY THE UNDERSIGNED MAKER IN THE AMOUNT OF $5,400,000.00 1. LATE CHARGES AND ADDITIONAL INTEREST ON DELINQUENT PRINCIPAL BALANCES/PAYMENTS. A) LATE CHARGE. Maker recognizes that a default in making any of the payments required, pursuant to the Note, Deed of Trust and/or other agreement(s), securing the loan (the "Loan Documents") when due will result in Payee incurring additional expenses in servicing the loan, including, but not limited to, reasonable administrative, processing and accounting charges. If any installment and/or payment of principal and/or interest, including balloon payment, if any, is note received by Payee within ten (10) days from the due date of such installment and/or payment, Payee shall be entitled to damages for the extra time and expense incurred in handling the delinquent account, but since it is extremely difficult and impractical to ascertain the extent of such damages Maker therefore agrees that a reasonable estimate of such damages to Payee is an amount equal to TEN (10.00%) PERCENT of each payment which becomes delinquent, but such amount shall not exceed the maximum amount allowed by law. Maker therefore agrees to pay this late charge without demand by Payee and not later than the due date of the next payment and agrees that the late charge(s) shall be secured by the Loan Documents referred to herein. B) ADDITIONAL INTEREST ON DELINQUENT PRINCIPAL BALANCE, PAYMENTS AND/OR ADVANCES. Maker recognizes that Maker's failure to pay the principal balance upon maturity (or any portion thereof as otherwise required by the terms of the Note) or any other payments required to be made by Maker when due, (other than the regular monthly installments) including the Exit Fee, if any, or Maker's failure to reimburse Payee for any advances made by Payee to protect its interest (including but not limited to advances to a senior deed of trust, property taxes, fire insurance, and legal charges), will result in the loss to Payee of the use of its money, other administrative expenses, and in frustration to Payee in meeting its loan commitments. Payee shall be entitled to damages for the detriment caused thereby, but since it is extremely difficult and impractical to ascertain the extent of such damages, Maker therefore agrees that a reasonable estimate of such damages to Payee is an amount equal to interest on the delinquent and/or advanced amounts from the due date or date of such advance until paid in full at the rate of FIVE (5.00%) PERCENTAGE POINTS above the interest rate in effect under this note at the time of any such delinquency or default. This adjusted rate shall be referred to as the "Default Rate", but in no event to exceed the maximum rate permitted by law. Maker therefore agrees to pay this additional interest without demand by Payee and not later than the due date of the next payment and agrees that the additional interest shall be secured by the Loan documents referred to herein. C) RETURNED CHECKS. Maker agrees to pay Payee the sum of $50.00 for any returned checks. 2. PREPAYMENT PROVISION/PENALTY. If Maker intends to prepay all or part of the note, Maker shall provide Payee with written notice (via certified mail or receipted delivery) thereof, at least 0 days prior to the date of prepayment. A prepayment is any principal payment made before the due date of such payment. If Maker fails to timely provide the required notice, then, notwithstanding any other provision to the contrary in the Note or any other Loan Document, Maker shall pay to Payee the lesser of: (a) 0 days interest on the amount so prepaid, or (b) interest to maturity on the amount so prepaid INITIAL (P.A.) (J.F.) 3. INTEREST COMPUTATION. All interest required to be paid pursuant to the terms of the Note shall be computed on the basis of a three hundred sixty (360) day year. 4. USURY LIMITATION. Notwithstanding anything in the note to the contrary, to the extent the interest payments are subject to limitation by usury law, that portion of the interest paid that is subject to and exceeds applicable usury limitations shall be applied to reduce the principal due under the note. 5. DEFAULTS. A) Events of Default. Maker shall be in default of the note upon the occurrence of any of the following: (i) Failure of Maker to make any payments under the note when due; (ii) Failure of Maker to perform or observe any of Maker's obligations under the note, the deed of trust securing the note (the "Deed of Trust") or other agreements between the parties. (iii) Maker's sale, transfer and/or assignment of the security as provided for in Paragraph 7 of this Rider to Note; (iv) Maker's further encumbrance of the Security without Payee's written consent as provided for in Paragraph 6 of this Rider to Note. (v) The filing by Maker of a voluntary petition in bankruptcy, a petition for reorganization, arrangement or other relief under the United States Bankruptcy Act, or a voluntary petition for the appointment of a receiver or comparable relief from creditors under the laws of any state, or the making by Maker of an assignment of all or substantially all of its assets for the benefit of creditors; (vi) The adjudication of Maker as bankrupt or insolvent, the appointment of a receiver of all or substantially all of Maker's assets, or the entry of an order of reorganization of Maker under the United States Bankruptcy Act; (vii) Failure of Maker to make any payments under any promissory note secured by any deed of trust or other secured instrument senior to the deed of trust securing this promissory note, or to observe and fully and timely perform any of Maker's obligations under any senior or superior security Instrument or deed of trust. B) When Maker is in default, the entire unpaid balance of interest and principal of the note shall become immediately due and payable at the election of payee. 6. DUE ON ENCUMBRANCE. Should Maker further encumber the real property described in the deed of trust securing this Note, or any part thereof or any interest therein, without first obtaining the written consent of the Payee, which consent shall not be unreasonably withheld, then, at the option of Payee, all obligations secured by this Note may be declared due and payable. Consent to one transaction of this type will not constitute a waiver of the right to require consent to future or successive transactions. Maker shall provide Payee with a copy of the proposed promissory note, deed of trust, and/or any other security documents that Payee may reasonably request, prior to Payee considering any request for consent to a further encumbrance(s) on the real property. 7. SALE, TRANSFER AND/OR ASSIGNMENT OF THE SECURITY. If any part of the real property described in the Deed of Trust given as security for the note shall be sold, transferred or assigned or agreed to be sold, or transferred, or assigned, whether voluntary or involuntary or by operation of law, then the note shall at the option of the Payee, become immediately and payable. 8. ATTORNEY'S FEES AND COLLECTION COSTS. In the event that Payee should, prior to commencement of any legal action, incur any expenses or attorney's fees in enforcing the terms and conditions of the Note or Deed of Trust; or upon the commencement of Arbitration proceedings; or if legal action is instituted to enforce the terms of the Note; or upon any default by Maker and/or any other person liable on the Note and/or Deed of Trust, Payee shall be entitled to recover from Maker all costs of collection and enforcement, including reasonable attorney's fees. For purposes of this section, the award and recovery of attorney's fees shall survive the entry of any judgment thereon and shall include, without limitation, fees incurred in the following: (1) Post Judgment Motions; (2) Contempt Proceedings; (3) Garnishment, levy, debtor and third party examinations; (4) Discovery; (5) Bankruptcy proceedings or other litigation; and (6) appeals. 9. REMEDIES CUMULATIVE. The rights and remedies of Payee under the note, the Deed of Trust, and any other instrument or document securing the note are cumulative and may be pursued singly, successively, or together against Maker, or the property described in the Deed of Trust, and against any other funds or security held by Payee for Maker. 10. NO WAIVER. Failure of Payee to pursue any right or remedy under the note shall not constitute a waiver, release or election of Payee's right to pursue the right or remedy on the basis of the same or subsequent breach. 11. NOTICES. All notices given under the note shall be in writing. 12. PAYMENTS. Interest will be due for any portion of a day that the principal balance is outstanding. 13. RECONVEYANCE. Upon payment of all amounts owing on this note, Payee shall instruct the Trustee `under the Deed of Trust securing the note to reconvey the property from the lien of the Deed of Trust. 14. SEVERABILITY. If any part of the note is determined to be illegal or unenforceable, all other parts shall remain in effect. 15. GOVERNING LAW. The parties hereby stipulate that this Note shall be governed by and construed in accordance with the laws of the State of California and further stipulate that the proper jurisdiction for any action challenging the provisions of this Note and/or any of the other Loan documents shall, except where prohibited by law, be in the Superior Court of Contra Costa County, California. IN WITNESS WHEREOF Maker has signed and delivered this rider effective as of December 20, 2001 INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation /s/ John S. Foster _____________________________________ John S. Foster, Chief Executive Officer and Chairman of the Board /s/ Peter T. Altavilla ______________________________________ Peter T. Altavilla, Chief Financial Officer, Controller and Secretary EX-11 13 imt10k2001ex10-9.txt EXHIBIT 10.9 ------------ RECORDING REQUESTED BY Chicago Title Company 212645-MW WHEN RECORDED MAIL TO Owens Financial Group, Inc. P.0. Box 2400 Walnut Creek CA 94595 Loan #50759 - ------------------------------------------------------------------------------- DEED OF TRUST, SECURITY AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS Dated December 20, 2001 Made and entered into by and between INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation having a mailing address at: c/o Pete Altavilla 75 Robin Hill Rd., Goleta, CA 93117 hereinafter referred to as "Trustor", INVESTORS YIELD, INC., a California corporation whose address is: c/o Owens Financial Group, 2221 Olympic Blvd., Walnut Creek, CA 94595 hereinafter referred to as "Trustee" and OWENS FINANCIAL GROUP, INC., a California Corporation, whose address is: 2221 Olympic Blvd., Walnut Creek, CA. 94595 hereinafter referred to as "Beneficiary", WITNESSETH: That Trustor IRREVOCABLY GRANTS, BARGAINS, SELLS, CONVEYS, TRANSFERS and ASSIGNS to TRUSTEE, IN TRUST, WITH POWER OF SALE, the following property in the: County of Santa Barbara, State of California described to wit: SEE EXHIBIT 'A' ATTACHED FOR LEGAL DESCRIPTION APN: 73-050-20-00-2 TOGETHER WITH all of the following which with the above described property (sometimes hereinafter referred to as the "Premises") are (except where the context otherwise requires) hereinafter collectively called the "Trust Property": -1- (a) All tenements, hereditaments, and appurtenances and all estate and rights of Trustor in and to the premises and the reversion and reversions, remainder and remainders thereof and thereto; (b) All right, title and interest of Trustor in and to all streets, roads and public places, opened or proposed, and all easements and rights of way, public or private, now or hereafter used in connection with the premises; (c) All water and water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) in or hereinafter relating to or used in connection with the premises; (d) All buildings, improvements, fixtures, equipment, furniture, furnishings, construction materials and all other articles of personal property in which Trustor now has, or at any time hereafter acquires, an interest and which now are, or at any time hereafter are, attached to or situated in, on or about the premises or used in connection with or in the operation of the premises, and all renewals, replacements and substitutions thereof and additions thereto and proceeds thereof including, but not limited to, all heating, cooling, air conditioning, filtration and plumbing equipment, light fixtures, elevators and elevator equipment, all hot water heaters and water softeners, all floor coverings, all stoves, ovens, refrigerators, freezers, all wells, pumps, pipes, motors, engines and pumping apparatus and equipment, which specifically-described property Trustor represents are and shall be and are intended to be a part of the real property; (e) All of Trustor's accounts, accounts receivable, contract rights, inventory, chattel paper and general intangibles relating to the construction, use, operation or occupancy of the premises and which are now owned or are hereafter owned or acquired by Trustor and/or in which Trustor now has, or at any time hereafter acquires, an interest in, and all renewals, replacements and substitutions thereof and additions thereto and all proceeds thereof; (f) All of the Trustor's interest in all leases and rental agreements now or hereafter existing on or pertaining to all or any part of the Premises, and all of the rents, issues and profits of the property or arising from the use of enjoyment of all or any portion thereof, and all security deposits arising from the use or enjoyment of all or any portion of the Premises, and all utility deposits made to procure and maintain utility services to the Premises or any portion thereof; (g) Any and all awards, payments or other amounts including interest thereon, which may be made with respect to the Trust Property as a result of injury to or decrease in the value of the Trust Property or as a result of the exercise or threat of exercise of the power of eminent domain; (h) Any licenses, contracts, permits and agreements now or hereafter required or used in connection with the ownership, operation and maintenance of the Premises, and the right to use any trade name, trademark or service mark now or hereafter associated with the operation of any business of Trustor conducted on the Premises and any grazing or range rights related to or pertaining to the Premises; (i) All of the rents, issues (including but not limited to crops) and profits thereof; and -2- (j) Any proceeds derived from the sale, transfer, hypothecation, disposition, assignment, lease, or loss of any of the foregoing, to have and to hold unto Trustee, its successors and assigns forever. FOR THE PURPOSE OF SECURING: (1) payment of the sum of $5,400,000.00 Five Million Four Hundred Thousand and 00/1 00 Dollars with interest thereon, together with costs and attorney's fees, according to the terms of a promissory note, or notes (hereinafter referred to in the singular as "Note"), of even date herewith made by Trustor, payable to the order of Beneficiary, and all extensions or renewals thereof; (2) performance of each covenant, promise and agreement of Trustor contained herein or in any construction loan agreement executed by Beneficiary as lender and Trustor as borrower, of even date herewith (the "Loan Agreement"), if any, or incorporated herein by reference; (3) payment of all sums required to be made by Trustor pursuant to the terms hereof; and (4) payment of such additional sums as may be hereafter advanced by Beneficiary, its successors and assigns, to Trustor, or any successor in interest of Trustor, with interest thereon. TO PROTECT THE PROPERTY AND SECURITY GRANTED BY THIS TRUST DEED, IT IS AGREED: 1. Title. Trustor warrants that it is seized of good and merchantable fee simple title to the Trust Property, subject only to reservations in the patent, water right application, obligations arising in favor of water use or irrigation associations or companies (none of the assessments of which are delinquent), easements and restrictions of record, and none other, unless specifically set forth as follows: See attached Exhibit "B" 2. Payment and Performance. Trustor agrees to pay the Note referred to above, including principal, interest, costs and attorney's fees, in accordance with the terms of said Note, and to promptly and diligently comply with, observe and perform all other obligations contained in the Note, this Deed of Trust, the Loan Agreement and all other agreements and instruments executed in connection therewith. The promissory note secured by this Deed of Trust contains a provision which provides that upon Trustor's failure to make any of the payments required to be paid under the terms of the promissory note and/or Deed of Trust, or in the event Beneficiary, or his agent, advances sums on behalf of the Trustor to protect the security of this Deed of Trust, then said amounts shall accrue additional interest at the rate of FIVE PERCENTAGE (5.00%) points above the interest rate in effect under the promissory note at the time of such delinquency or default. The undersigned Trustor requests that a copy of any notice of default and of any notice of sale hereunder be mailed to him at this mailing address opposite his signature hereto. 3. Taxes and Other Charges. Trustor agrees to pay, before the same becomes delinquent, all future taxes, assessments, water, sewer and other charges levied or assessed upon or against the Trust Property, and in addition all charges for gas, electricity and other items furnished to or charged against the Trust Property. -3- Trustor agrees to pay, prior to delinquency, any and all ground rents and amounts payable under any lease, trust deed, mortgage or other instrument which may be an encumbrance on the Trust Property. Trustor shall exhibit to Beneficiary; upon request, receipt from the proper officers or persons evidencing all such payments. 4. Insurance. Trustor agrees to keep the improvements now or hereafter located on the Trust Property insured against loss by fire and other hazards and casualties in such amounts and for such periods as may be required from time to time by Beneficiary. Trustor agrees to pay the premiums on such insurance, when due and prior to delinquency, and furnish proof of such payment to Beneficiary. All insurance shall be carried in responsible insurance companies approved by Beneficiary. The policies shall be held by Beneficiary and shall have, at all times, loss payable clauses attached thereto in favor of Beneficiary as mortgagee and approved by Beneficiary and shall have a provision giving Beneficiary thirty (30) days prior written notice of cancellation or material change. In the event of any loss or damage to the improvements, Trustor will give immediate notice by mail to Beneficiary and make proper proof of loss (and if not made by Trustor, Beneficiary may make the same). Beneficiary may require that the payment for such loss be paid directly to Beneficiary only and not jointly to Trustor and Beneficiary. Beneficiary may, at its option, apply the payment to the reduction of the indebtedness secured hereby or may apply the same to the restoration or repair of the property damaged. Trustor hereby assigns to Beneficiary all such policies and the payments to be made thereunder. In the event of foreclosure of this trust deed, or exercise of the power of sale given to Trustee, or acquisition of the title to the property by Beneficiary or its assigns, all right title and interest of Trustor in and to the policies and proceeds thereof and sums payable thereunder shall forthwith pass automatically to the purchaser of said property. 5. Condition of Improvements. Trustor agrees to keep the buildings and other improvements on the property and other Trust Property at all times in good condition and repair. All apparatus and machinery shall be kept in good working order and properly serviced and repaired. If any of the Trust Property which constitutes personalty becomes worn out or obsolete, it shall, unless otherwise approved by Beneficiary, be replaced by comparable personalty which is new and/or better suited to the proper operation of the premises and is reasonably necessary to preserve and protect the value of such premises. Trustor will not allow nor commit any waste, and will not demolish nor structurally alter any buildings on the property, and will do no act to injure or depreciate the value of such property. The property and buildings thereon shall be kept in a reasonably clean, safe and sanitary condition and shall not be allowed to become dilapidated or rundown. Trustor agrees that it will not remove or allow to be removed any fixture or fixtures from the Trust Property without the prior written consent of Beneficiary. Trustor further agrees that in adding any new fixtures or in substituting fixtures on the Trust Property, prior proof will be furnished to Beneficiary that no security interest exists therein. Trustor agrees to complete, restore and reconstruct in good and workmanlike manner, to the condition required hereby, any building or improvement which constitutes a part of the premises which may be damaged -4- or destroyed; not to permit any lien of mechanics or materialsmen to attach to the Trust Property or any portion thereof; to comply with all laws, ordinances, regulations and governmental orders affecting the Trust Property or regarding any alterations or improvements thereto; not to commit, suffer or permit any act with respect to the Trust Property in violation of law or any covenants, conditions or restrictions pertaining thereto. Any alteration, addition, construction, reconstruction, improvement or major repair to be made upon the premises shall be commenced and prosecuted with due diligence pursuant to plans and specifications which have been approved by Beneficiary and in accordance with all building codes and other regulations applicable thereto all pursuant to the terms and conditions of the Loan Agreement. 6. Beneficiary's or Trustee's Actions. In the event Trustor fails to make any payment required to be made by it hereunder or fails to perform any of its other obligations hereunder or under any Loan Agreement or other loan instruments, Beneficiary may, but shall not be obligated to, make any such payment or perform any such obligation on behalf of Trustor (Trustor hereby granting Beneficiary the right to go upon the premises for such purpose without thereby becoming liable to Trustor or any person in possession thereof holding by, through or under Trustor). All expenditures made by Beneficiary shall be prima facie evidence of the necessity therefor and reasonableness thereof. Such expenditures, together with all incidental costs of Beneficiary, including reasonable attorney's fees if incurred, shall be immediately due and payable by Trustor to Beneficiary, shall bear interest at a rate contracted for in the Note (or if more than one note is secured hereby, then at the highest rate provided in any note selected by Beneficiary) until paid and shall be secured by this Trust Deed. Trustor hereby irrevocably constitutes and appoints Beneficiary, and each of its officers, Trustor's attorney-in-fact, coupled with an interest for the purpose of performing all acts on Trustor's behalf necessary to effectuate the intent of this section, and authorizes and empowers Beneficiary, and each of its authorized representatives and designees, to enter upon the Trust Property or any part thereof for the purposes of inspection and of complying with, observing and performing any rights of cure granted to Beneficiary in this Deed of Trust. The aforesaid power of attorney shall survive the death or disability of the principal, and Trustor hereby ratifies any and all acts which Beneficiary (or any of its agents or officers) shall lawfully do or cause to be done by virtue thereof. Nothing contained in this or any other Section hereof, however, shall be construed as requiring Beneficiary to advance or expend monies, incur any cost or expense or do any act for any purpose mentioned in such Sections or for any other purposes whatsoever. 7. Right of Entry and Inspection. Trustee and Beneficiary and their officers, employees, and agents may enter upon and inspect the Trust Property at any reasonable time or times. Beneficiary shall have no obligation to inspect, or liability to Trustor or third-parties for failing to inspect or for the manner in which it inspects. 8. Actions Affecting Trust Property. Trustor agrees to appear in and contest any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; and to pay all costs and expenses, including costs of evidence of title and attorney's fees, in any such action or proceeding in which Beneficiary or Trustee may appear. 9. Condemnation. The proceeds of any judgment, award or settlement in any condemnation or eminent domain proceeding shall be paid to Beneficiary, who may, at its option, either apply the proceeds to reduce the indebtedness secured -5- hereby (whether matured or to mature in the future) or release such proceeds to Trustor. Trustor hereby assigns and transfers to Beneficiary all such amounts and proceeds and all rights to make claim for, and to adjust, settle, compromise and collect any such awards or proceeds and agrees that Beneficiary may receive the same on behalf of Trustor. All costs and expenses incurred by Beneficiary in connection with the recovery of any such awards or proceeds shall be deducted from such award or proceeds. 10. Security Agreement. This Deed of Trust shall constitute a security agreement within the meaning of the Uniform Commercial Code as adopted in the State of California ("UCC") as to any of the Trust Property covered and encumbered by this Deed of Trust as to which the provisions may apply, and is intended to create a security interest in such property in favor of Beneficiary. This Deed of Trust shall be self-operative with respect to such property, but Trustor agrees to execute and deliver on demand such security agreements, financing statements and other instruments as Beneficiary may request in order to impose or perfect the lien hereof more specifically upon any of such property. Trustor also hereby irrevocably constitutes and appoints Beneficiary (and any officer or agent thereof) as its true and lawful attorney-in-fact, coupled with an interest, to execute and file on behalf of Trustor (and at Trustor's expense) any and all financing statements (including, without limitation, any original counterpart or carbon, photographic or other reproduction of this Deed of Trust, any of which, Trustor hereby agrees, may serve as a financing statement), and re-filings, continuations and terminations thereof, which Beneficiary, in its sole determination, shall deem necessary or prudent, in each case without the signature of Trustor thereon. The aforesaid power of attorney shall survive the death or disability of the principal, and Trustor hereby ratifies any and all acts which Beneficiary (or any of its agents or officers) shall lawfully do or cause to be done by virtue thereof. If the lien of this Deed of Trust on any property is now, or shall hereafter be, subject to a prior security interest covering such property, by reason of a purchase money security interest or otherwise, then in the event of any default hereunder, all the right, title and interest of Trustor in and to any and all deposits therein is hereby assigned to Beneficiary, together with the benefit of any payments now or hereunder made thereon. The previous sentence shall not, however, operate to authorize any such prior security interest. In the event Trustor owns or acquired only a lessee's interest in any such property, then, in addition to the foregoing requirements, before any of said property is placed in, on or about the premises or improvements at any time situate thereon: (i) the written approval of Beneficiary to the leasing agreements under which Trustor owns or acquires such lessee's interest shall have first been obtained; and (ii) the consent of the lessor of any such leasing agreements to such security interest of Beneficiary, and all agreements of the lessor in favor of Beneficiary deemed necessary by Beneficiary, shall first have been obtained to the satisfaction of Beneficiary. Trustor agrees that all property of every nature and description, whether real or personal, covered by this Deed of Trust, together with all property in which Beneficiary has a security interest by reason of a separate agreement or instrument, are encumbered as one unit. Upon default by Trustor under or with respect to any of the indebtedness secured hereby, or under any other instrument executed in favor of Beneficiary to secure such indebtedness, the security interest of Beneficiary may, at Beneficiary's option, be foreclosed or sold in the same proceeding by Beneficiary or Trustee, and all of the property (both realty and personalty) may, at Beneficiary's option, be sold as such in one unit as a going business, or Beneficiary may elect to sell -6- or cause the Trustee to sell the property which is realty (or which Beneficiary elects to treat as realty) in one proceeding as above provided and the property which consists of personal property in one or more separate proceedings and in any manner now or hereafter permitted by the UCC. The giving of ten (10) days prior written notice to Trustor by Trustee or Beneficiary of the time and place for the sale or other disposition of any Trust Property which is not real property, shall constitute reasonable notice to Trustor. Upon request of Beneficiary, Trustor shall assemble and make the Trust Property available to Beneficiary at the premises herein described. Failure to produce any item of the Trust Property for five (5) days after demand to inspect the same has been given to Trustor by Beneficiary and/or Trustee shall constitute a default hereunder. No Trust Property shall be removed from the premises above described without the prior written consent of Beneficiary. Trustor hereby expressly waives any right which it may have to direct the order in which any of the Trust Property shall be sold. The filing or recording of any financing statement relating to any property or rights or interests generally or specifically described herein shall not be construed to diminish or alter any of the Beneficiary's rights or priorities hereunder. 11. Assignment and Collection of Rents. Trustor hereby absolutely and presently assigns and transfers to Beneficiary all of Trustor's right, title and interest in and to all leases, rents, issues and profits or income from the Trust Property (collectively, the "rents") and each and every part thereof, including all present and future leases or rental agreements. This assignment may be enforced by Beneficiary without regard to the adequacy of the security hereof or the solvency of Trustor by any one or more of the following methods: (1) appointment of a receiver; (2) Beneficiary taking possession of the Trust Property; (3) Beneficiary collecting any moneys payable under leases or rental agreements directly from the parties obligated for payment; (4) injunction; or (5) any other method permitted by law. Unless and until Beneficiary shall elect to collect said rents Trustor shall have a revocable license, subject to the provisions hereof, to collect and receive the rents. Upon the occurrence of a default hereunder, however, Beneficiary may, at its option, elect to terminate such license without regard to the adequacy of the security hereunder, the value of the Trust Property, the solvency of Trustor or any showing of fraud or mismanagement on Trustor's part, and without further notice to or demand upon Trustor, and either in person, by agent or by a receiver, and in its own or in Trustor's name, enter upon and take possession of all or any part of the Trust Property, exclude Trustor and its agents therefrom, hold, store, use, operate, manage and control the Trust Property and protect its security as it sees fit, make, enforce, and, if the same be subject to modification or cancellation, modify or cancel leases upon such terms or conditions as Beneficiary deems proper, obtain and evict tenants, fix or modify rents, contract for and make repairs and alterations, sue for or otherwise collect and receive the rents (including, without limitation, those past due and unpaid) therefrom, and apply the same, after first deducting therefrom the costs and expenses of operation and collection (including, without limitation, attorney's fees and disbursements), against the indebtedness in such priority and proportions as Beneficiary, in its sole discretion, shall deem proper. Trustor hereby irrevocably authorizes and directs all tenants to pay the rents directly to Beneficiary upon receipt of written notice from Beneficiary asserting the existence of a default hereunder, and Trustor hereby relieves all `tenants from any liability to Trustor by reason of the payment of the rents to Beneficiary. -7- Any rents received by Beneficiary shall be applied to the cost of collection, second to any expenses Beneficiary may expend in making the property ready for or satisfactory to any lessee or tenant, and the remainder shall be applied on the indebtedness secured hereby (whether matured or unmatured) as Beneficiary may elect. Rents received by Beneficiary may be applied by Beneficiary in any manner and in any priority it deems advisable and such receipt shall not constitute a waiver of any right or claim of Beneficiary nor cure any default hereunder. Trustor shall not receive or collect more than one (1) months' rents in advance, and Trustor agrees not to default in performing its obligations under any leases on the property. Without the prior written consent of Beneficiary, Trustor shall neither do nor omit to do anything, nor allow anything to be done or to be omitted to be done, which might impair any of Beneficiary's rights or interests with respect to the rents and leases, including, without limitation, granting any concessions or abatements of rent, canceling or accepting a surrender of any lease, allowing any lease to be assigned or the space demised thereunder sublet, further assigning or pledging or granting a security interest in any rents or leases, suffering any waiver or release of the landlord's rights or committing any landlord's default. Neither Trustee nor Beneficiary shall be obligated to perform or discharge any obligation, duty or liability under any of the leases, or by reason of the foregoing assignment, and Trustor shall and does hereby agree to indemnify and hold Trustee and Beneficiary harmless from any liability, loss or damage which they may incur under any lease or under or by reason of the foregoing assignment and from any claims and demands which may be asserted against them or either of them by reason of any alleged obligation or undertaking on Trustee's or Beneficiary's part to perform or discharge any of the terms, covenants or agreements contained in the leases. Trustor specifically understands and agrees that neither the assignment to Beneficiary of the rents and leases, nor the exercise by Beneficiary of any of its rights or remedies under this section, shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Trust Property, or the use, occupancy, enjoyment or operation of all or any portion thereof, unless and until Beneficiary, in person or by agent, assumes actual possession thereof. Nor shall any appointment of a receiver for the Trust Property by any Court, either at the request of Beneficiary or by agreement with Trustor, or the entering into possession of the Trust Property or any part thereof by such receiver, be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Trust Property or the use, occupancy, enjoyment or operation of all or any portion thereof. 12. Hazardous Materials. For the purposes of this Deed of Trust, Trustor, Beneficiary and Trustee agree that, unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (A) "Environmental Law" shall mean any Law concerning environmental quality, health or safety and/or the protection of, or regulation of the discharge of Hazardous Materials into, the air, ground or water. -8- (B) "Hazardous Materials" shall mean radon, urea formaldehyde, asbestos, polychorinated biphenyls, petroleum and petroleum-based products underground storage tanks and all other pollutants and/or explosive, flammable, radioactive, dangerous, hazardous or toxic chemicals, materials, waste or substances defined as such in any Environmental Law or which by any Environmental Law require special handling or notification to any Governmental Authority in connection with their manufacture, use, collection, storage, treatment or. disposal. (C) "Hazardous Materials Contamination" shall mean the dumping, placement, storage, discharge, release, seepage, emission, leakage, use, manufacture, generation or existence of Hazardous Materials into, from, under, above, around, at, in or onto the Trust Property; or the contamination of the Trust Property, any other property or any buildings, facilities, soil, groundwater, air or other elements under, above, around, at, in or on the Trust Property or any other property as a result of Hazardous Materials at any time (whether before or after the date of this Deed of Trust) emanating from or under the Trust Property. (a) Trustor's Representations and Warranties. Trustor hereby represents and warrants that it shall not cause or permit and, to the best of its knowledge (after due inquiry), except as disclosed by Trustor to Beneficiary in the Environmental Disclosure form relating to the premises or in any environmental or soil reports, no other person has caused, suffered or permitted any Hazardous Materials to be dumped, placed, stored, held, located, used, manufactured, generated, leaked, discharged, released, seeped, emitted or disposed of into, from, on, under, above, around, in or at the Trust Property or any part thereof, and that no part of the Trust Property will be or, to the best of its knowledge (after due inquiry), has been used for the disposal, storage, treatment, processing, manufacturing, generation or other handling of Hazardous Materials. (b) Trustor's Covenants. Trustor agrees to: (i) give notice to Beneficiary immediately upon Trustor's acquiring knowledge of the use, presence or storage or alleged use, presence or storage of any Hazardous Materials at, under, above, around, in or on the Trust Property or of any Hazardous Materials Contamination, with a full description thereof and copies of all materials relating to the manner in which it acquired such knowledge; (ii) promptly comply. with all Environmental Laws requiring the removal, treatment or disposal of such Hazardous Materials or Hazardous Materials Contamination and provide Beneficiary with satisfactory evidence of such compliance; and (iii) deliver to Beneficiary, within thirty (30) days after demand by Beneficiary, a bond, letter of credit or similar financial assurance evidencing to Beneficiary's satisfaction that sufficient funds are available to pay the cost of removing, treating and disposing of such Hazardous Materials or Hazardous Materials Contamination and discharging any assessments which may be established on the Trust Property as a result thereof. (c) Superfund Lien. Trustor shall not cause or suffer any liens to be recorded against the Property as a consequence of, or in any way related to, the presence, remediation or disposal of Hazardous Material in or about the Property, including any state, federal or local so-called "Superfund" lien relating to such matters. (d) Trustor's Liabilities/Indemnity. Trustor shall at all times assume any and all liabilities arising from the presence, handling, treatment, storage, transportation, removal or disposal of Hazardous Material on or in the Trust Property. Regardless of whether any event of default shall have occurred and be -9- continuing or any remedies in respect of the Trust Property are exercised by Beneficiary, Trustor shall defend, indemnify and hold harmless Beneficiary and Trustee from and against any and all liabilities (including strict liability), suits, actions, claims, demands, penalties, damages (including, without limitation, lost profits, consequential damages, interest, penalties, fines and monetary sanctions), losses, costs or expenses (including, without limitation, consultants' fees, investigation and laboratory fees, reasonable attorneys' fees and remedial costs) (the foregoing are hereinafter collectively referred to as "Liabilities") which may now or in the future (whether before or after the culmination of the transactions contemplated by the Loan Agreement) be incurred or suffered by Beneficiary or Trustee by reason of, resulting from, in connection with, or arising in any manner whatsoever out of the breach of any warranty or covenant or the inaccuracy of any representation of Trustor contained or referred to in this section of this Deed of Trust or which may be asserted as a direct or indirect result of the presence on or under, or escape, seepage, leakage, spillage, discharge, emission or release from the Property of any Hazardous Materials or any Hazardous Materials Contamination or arise out of or result from the environmental condition of the Trust Property or the applicability of any Governmental requirements relating to Hazardous Materials, whether or not occasioned wholly or in part by any condition, accident or event caused by any act or omission of Trustor or Beneficiary. Such Liabilities shall include, without limitation: (i) injury or death to any person; (ii) damage to or loss of the use of any property; (iii) the cost of any demolition and rebuilding of the improvements, repair or remediation and the preparation of any activity required by any Governmental authority; (iv) any lawsuit or proceeding brought or threatened, good faith settlement reached, or governmental order relating to the presence, disposal, release or threatened release of any Hazardous Material on, from or under the Trust Property; and (v) the imposition of any lien on the Trust Property arising from the activity of Borrower or Borrower's predecessors in interest on the premises or from the existence of Hazardous Materials or Hazardous Materials Contamination upon the Trust Property. (e) Reassignment or Reconveyance. Beneficiary shall have the right, but without any obligation, to reassign or reconvey the Premises to Trustor, in the event that Beneficiary shall, at any time, determine that Hazardous Materials are located in, on or under the Trust Property or any part thereof or in the event that the Trust Property or any part thereof is affected by Hazardous Materials Contamination or subject to the lien or claim of lien of any governmental or quasi-governmental unit, body or agency or any third party for clean-up costs or other costs pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other similar statute, law, rule or regulation of any governmental or quasi-governmental unit, body or agency. This provision shall survive Beneficiary's acquisition of the Trust Property pursuant to a Trustee's sale hereunder, foreclosure hereunder or otherwise. This subparagraph (e) is for the sole benefit of Beneficiary or an assignee of Beneficiary's entire interest under this Deed of Trust or participating lenders in the loan evidenced by the Note which this Deed of Trust secures and shall not be for the benefit of any other person or entity. (f) Survival. The covenants and agreements contained in this section shall survive the consummation of the transactions contemplated by this Deed of Trust and payment and reconveyance or foreclosure of this Deed of Trust. -10- 13. Time of Essence. Time is of the essence of this Trust Deed and each and every provision thereof. No failure on the part of Beneficiary to exercise any of its rights hereunder shall be construed as a waiver of or prejudice to its rights in the event of any other subsequent default or breach. No delay on the part of Beneficiary in exercising any of its rights hereunder shall preclude it from the exercise thereof at any time during the continuance of any such default. The acceptance of late payments shall not waive the "time is of the essence" provision and shall not waive Beneficiary's right to declare default for failure to pay. All rights and remedies of Beneficiary are cumulative and concurrent, and may be exercised singly, severally or concurrently as Beneficiary may elect. 14. Default. In the event of any default by Trustor in the payment of the indebtedness secured hereby which remains uncured for ten (10) days following written notice thereof; or in the event of any default of Trustor in performing any of its obligations hereunder or any non-monetary obligations under the Loan Agreement or other document executed by Trustor and held by Beneficiary which (subject to Section 24 hereof) remains uncured for twenty (20) days following written notice thereof; or in the event Trustor, or any guarantor or surety (and, if this Trust Deed secures a construction loan, then Trustor's contractor) shall be adjudicated insolvent or bankrupt, or any proceedings are filed by or against them or any of them in the nature of bankruptcy or reorganization or arrangement with creditors which are not dismissed within thirty (30) days of commencement; or in the event any proceeding is filed to foreclosure or any Notice of Trustee's Sale is recorded on any other lien on the Trust Property (whether junior or senior to this Trust Deed); or in the event any Writ of Attachment or Execution or any similar process shall be filed or levied against the Trust Property which is not discharged within thirty (30) days; or if Trustor shall permit or suffer another party or governmental entity to acquire possession of, any interest in or any lien upon any of the Trust Property which is inconsistent with Beneficiary's rights hereunder or the provisions hereof, except by eminent domain; or in the event Trustor abandons the Trust Property or leaves the same unattended or unprotected; or in the event Beneficiary shall deem the security provided by this Trust Deed inadequate or in danger of being impaired or diminished from any cause whatsoever (any of such events being an event of default hereunder); then and in any such event Beneficiary may declare the entire debt and all indebtedness of Trustor to Beneficiary to be immediately due and payable without notice to Trustor. Beneficiary may thereupon, at is option, and without prior notice and without affecting the lien of this Trust Deed, do any one or more of the following: enter upon the premises and inspect, repair, improve and maintain the same, rent or lease the premises or portions thereof as Beneficiary shall see fit, and perform such other acts thereon as Beneficiary may deem necessary or advisable; sue for all or part of the indebtedness owing from Trustor to Beneficiary without affecting or without losing the security of this Trust Deed; foreclose this Trust Deed as a mortgage in the manner provided by law; cause the exercise of the power of sale granted herein; bring an action for damages; or exercise such other remedies or combination of remedies Beneficiary may have under this Deed of Trust, the Loan Agreement or any other agreement or instrument, or at law or in equity. 15. Release. Upon payment in full of all sums secured hereby and performance of all obligations of Trustor hereunder, the lien of this Trust Deed upon the Trust Property shall be released by a Deed of Reconveyance, which said reconveyance shall be without warranty and shall operate to reconvey the estate vested in trustee hereby. If reconveyance by Deed of Reconveyance is to be made by Trustee, Beneficiary shall deliver the original of this Trust Deed and the -11- Note secured hereby to Trustee with a request for reconveyance by Deed of Release. If Trustee shall perform any such acts or execute complete or partial reconveyances, it shall be paid a fee in accordance with its established fees and charges therefor. The Grantee in any Deed of Release executed pursuant to this Trust Deed may be described as "the person or persons legally entitled thereto," and the recitals therein of any matters or facts shall be conclusive proof of the truthfulness thereof. 16. Beneficiary's Powers. Beneficiary may, at any time, without notice, release any person liable for payment of any indebtedness secured hereby, release portions of the Trust Property from this Trust Deed, or extend or modify the time for payment or other terms of the indebtedness secured hereby or grant other indulgences, and any such release, extension, modification or other actions shall not affect the personal liability of any person for the payment of said indebtedness or the lien of this Trust Deed upon the remaining portion of said property. At any time, without liability therefor and without notice, and without affecting the personal liability of trustor or any other person for payment of the indebtedness secured hereby, Trustee may, with the consent of Beneficiary: (1) release and reconvey by Deed of Reconveyance any part of the Trust Property from the lien hereof; (2) consent to the making and recording of any maps or plats of the Trust Property; (3) join in granting any easement on the Trust Property; or (4) join in any extension agreement or any agreement subordinating or modifying the lien of charge hereof. If Trustee shall perform any such acts or execute complete or partial reconveyances it shall be paid a fee in accordance with its established fees and charges therefor. 17. Foreclosure. In the event of default hereunder, Beneficiary, if it desires Trustee to exercise the power of sale granted hereby, shall execute and deliver to Trustee a written declaration of default and demand for sale and shall surrender to Trustee this Trust Deed, the Note secured hereby and all documents evidencing any expenditures hereunder, together with such other documents as trustee may require. Beneficiary shall also execute and deliver to Trustee all notices to Trustor that must be signed by Beneficiary. Upon receipt thereof, Trustee shall give notice and sell the Trust Property as provided by law. Trustee may postpone the sale as provided by law. After sale of the Trust Property, Trustee shall deliver its deed to the purchaser conveying the property so sold but without any covenant or warranty, express or implied. The recital in any such deed of any matters or facts, stated either specifically or in general terms, or as conclusions of law or facts, shall be conclusive proof of the truthfulness thereof. If the Beneficiary shall be the purchaser at the sale, all or any portion of the amounts due to Beneficiary hereunder or under the Note secured hereby may be, applied in payment of all or any portion of the purchase price. In the event of default hereunder, at any time before the Trust Property has been legally sold pursuant to the power of sale granted hereby, this Trust Deed may be foreclosed in the manner provided by law for the foreclosure of mortgages on real property. -12- 18. Cancellation/Reinstatement. Beneficiary may, at any time, request cancellation of Trustee's Notice of Sale, whereupon Trustee shall execute and record, or cause to be recorded, a Cancellation of Notice of Sale in the same county in which the Notice of Sale was recorded. The exercise by Beneficiary of this right shall not constitute a waiver of any default then existing or subsequently occurring. In the event this Trust Deed and the indebtedness and obligations secured hereby are reinstated in the manner provided by law, Beneficiary shall forthwith notify Trustee thereof as provided by law. Upon such notification, Trustee shall record, or cause to be recorded, a Cancellation of Notice of Sale in the same county in which the Notice of Sale was recorded within the period then required by law. 19. Receiver. In the event of default hereunder, Beneficiary shall be entitled to the appointment of a Receiver to take charge of the property, collect the rents, issues and profits therefrom, care for and repair the same, improve the same when necessary or desirable, lease and rent the property or portions thereof (including leases existing beyond the term of receivership), and otherwise use and utilize the property, and to have such other duties as may be fixed by the court. Trustor specifically agrees that the Receiver may be appointed without any notice to Trustor whatsoever, and the court may appoint a Receiver without reference to the adequacy or inadequacy of the security, or the solvency or insolvency of Trustor, and without reference to other matters normally taken into account by courts in the discretionary appointment of Receivers, it being the intention of Trustor to hereby authorize the appointment of a Receiver when Trustor is in default and Beneficiary has requested the appointment of a Receiver. Trustor hereby agrees and consents to the appointment of the particular person or firm (including an officer or employee of Beneficiary) designated by Beneficiary as Receiver and hereby waives its rights to suggest or nominate any person or firm as Receiver in opposition to that designated by Beneficiary. 20. Substitute Trustee. Beneficiary may substitute another Trustee in the place of the Trustee herein named to exercise the rights, powers and duties granted by law and contained herein. Upon such appointment, and without the necessity of a conveyance to the successor Trustee, the latter shall be vested with all the title, powers and duties conferred upon the Trustee herein named. 21. Leases. Beneficiary or any purchaser at Trustee's sale or at any foreclosure sale may, if it so elects, be subrogated to and succeed to all the rights of Trustor under any or all leases on the property or portions thereof Beneficiary may, if it so elects, subordinate its rights hereunder to any lease on the property, or a portion thereof, and keep the lease in effect through and after any foreclosure action or Trustee's sale. 22. Subrogation. Beneficiary shall be subrogated to the lien, notwithstanding its release of record, of any prior mortgage, trust deed or other encumbrance paid or discharged from the proceeds of the Note secured hereby, or from any advance made by Beneficiary. -13- 23. Changes in Tax Laws. In the event of the passage after the date of this Trust Deed of any law levying any tax upon this Trust Deed or the debt secured hereby, which Beneficiary is obliged to pay, then Trustor agrees to pay said tax or reimburse Beneficiary for the payment of the same, provided that Trustor shall not be obligated to pay any amount which would be considered as interest at a rate higher than that allowed by law, and provided further that in the event of the enactment of any such law Beneficiary shall have the right, at its option, to declare the indebtedness secured hereby to be immediately due and payable. 24. Due on Sale or Encumbrance. Trustor shall not, without obtaining Beneficiary's prior written consent (which consent may be given or withheld in Beneficiary's sole and absolute discretion (and, if given, under such terms and conditions as Beneficiary, in its sole and absolute discretion, may deem appropriate under the circumstances then existing), grant, convey, sell, exchange, assign, lease, encumber, option, grant a right of first refusal, contribute to a partnership, joint venture, corporation or other legal entity or otherwise transfer or dispose of (whether directly or indirectly and whether voluntarily, involuntarily or by operation of law) the Trust Property or any part thereof or any interest therein, or enter into any agreement or make any arrangement to do any of the foregoing (individually or collectively, a "Transfer"). Any Transfer attempted or undertaken in violation of the provisions of this section shall, at Beneficiary's option, be null and void and of no force and effect whatsoever, and the same also shall constitute a default hereunder (without any requirement of notice or opportunity to cure) entitling Beneficiary, at its option, to avail itself of any and all rights, powers and remedies provided therefor in this Deed of Trust, or under the Note or under any other instrument relating thereto, or at Law or in equity. Consent to any particular Transfer shall not be deemed to be consent to any further or other Transfer. Whether or not Beneficiary has consented to any Transfer, Beneficiary may deal with Trustor's successor-in-interest (with respect to this Deed of Trust and the indebtedness secured hereby) in the same manner as with the Trustor herein named without in any way vitiating or discharging Trustor's liability hereunder or for the indebtedness. Beneficiary may condition its consent to any Transfer upon receipt of fees and/or modifications to the terms of the indebtedness (including, without limitation, changes to the rate of interest, maturity date and size and manner of repayment), to the extent permitted by law. All Transfers consented to hereunder shall be evidenced by a written instrument, duly and properly executed and acknowledged by each of the parties thereto and, if requested by Beneficiary, in form suitable for recording. No Transfer, whether or not undertaken in violation of this section, shall release Trustor from any of its obligations under this Deed of Trust or the Note, the Loan Agreement, or any other security document or reduce or diminish the same in any way. 25. Legal Actions. Trustee may, but shall be under no obligation or duty to, appear in or defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee. If Trustee shall take such action at the request of Beneficiary, it shall be paid therefor in accordance with its established fees and charges and shall be reimbursed for its costs and expenses actually incurred, including attorney's fees. 26. Miscellaneous. The Trust created hereby is irrevocable by Trustor. Trustee accepts this Trust when this Trust Deed, duly executed and acknowledged, is made a public record as provided by law, but acceptance is not required as a condition to the validity hereof, and this Trust Deed is effective upon delivery. Trustee shall not be obligated to notify any party hereto of pending sale under any other Trust Deed, or of any action or proceeding in which -14- Trustor, Beneficiary or Trustee shall be a party, except as required by law, and Trustor waives any requirements of presentment, demand for payment, notice of nonpayment or late payment, protest, notice of protest, notice of dishonor and all other similar formalities. Trustor further waives all right Trustor might otherwise have to require Trustee and/or Beneficiary to proceed against or exhaust the assets encumbered hereby or by any other security instrument securing any of the indebtedness due Beneficiary, or to pursue any other remedy available to Beneficiary in any particular manner or order, and Trustor agrees that Trustee and/or Beneficiary may proceed against any security in such manner and order as Beneficiary in its sole discretion may determine. No remedy herein conferred upon or reserved to Trustee or Beneficiary is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given hereunder and by any of the loan instruments to Trustee or Beneficiary or to which either of them may be otherwise entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by Trustee or Beneficiary and either of them may pursue inconsistent remedies. 27. No Merger or Extinguishment. It is the express intention and agreement of the parties that, if Beneficiary shall at any time hereafter acquire title to or any interest in all or any portion of the Trust Property, including but not Limited to any interest pursuant to an option agreement or purchase contract, then, until all of the indebtedness secured hereby shall have been paid in full, (a) the interests of Beneficiary hereunder and the lien of this Deed of Trust shall not be extinguished or merge or become merged in or with the estate or interests of Beneficiary as holder and owner of title to or any interest in all or any portion of the Trust Property, regardless of how such title was acquired (including, but not limited to, by foreclosure or trustee's sale of a lien or encumbrance prior or subordinate to the lien of this Deed of Trust), (b) if Beneficiary is also the owner at that time of a leasehold estate in the Trust Property, the leasehold estate of Beneficiary in the Trust Property shall not be extinguished or merge or become merged in or with the estate or interests of Beneficiary as holder and owner of fee title to the Trust Property and (c) until payment in full of all of the indebtedness secured hereby, the various estates and interests of Beneficiary in the Trust Property, the lien of this Deed of Trust and the interests of Beneficiary hereunder shall continue in full force and effect to the same extent as if Beneficiary had not acquired title to or such other interest in the Trust Property, and the indebtedness secured hereby shall not be deemed extinguished, satisfied or discharged. 28. Terminology. The word "Trustor" and the language of this instrument shall, where there is more than one Trustor, be construed as plural and be binding equally on Trustors. The obligations of Trustors hereunder and under the Note secured hereby shall be joint and several. This Trust Deed applies to, is binding upon, and inures to the benefit of all parties hereto, their heirs, executors, administrators, successors and assigns. The term "Beneficiary" shall include not only the original Beneficiary hereunder, but also any future owner and holder of the note secured hereby. 29. Severability. If any provision hereof should be held unenforceable or invalid, in whole or in part, then such unenforceable or void provision or part shall be deemed severable from the remaining provisions hereof and shall in no way affect the validity of this Trust Deed. -15- 30. Relationship of Parties. Nothing contained in this Deed of Trust shall be construed as creating a partnership, joint venture, principal-agent or other type of relationship between Trustor and Beneficiary (other than that of borrower-lender) or cause Beneficiary to be responsible in any way for the debts or obligations of Trustor. 31. Interest Rate. Notwithstanding any provisions herein, or in the Note secured hereby, or in any related agreement between Trustor and Beneficiary, the total liability of Trustor for payments in the nature of interest shall not exceed the limits now imposed by the laws of the State of California. Trustor agrees that all costs, fees, taxes, expenses, charges, goods, compensating balance requirements, things in action or any other sums of money or things of value (collectively the "Additional Sums") paid by or contracted to be paid by Trustor to or for the benefit of Beneficiary, or received directly or indirectly by Beneficiary, whether pursuant to the Note or the Deed of Trust or otherwise with respect to this transaction or indebtedness evidenced by the Note, or with respect to the security therefor, which, under the law of the State of California may be deemed to be interest with respect to such indebtedness, shall, for the purpose of any laws of the State of California which may limit the maximum rate of interest to be charged with respect to such indebtedness, be payable by Trustor as, and shall be deemed to be, additional interest, and for such purposes the agreed upon and contracted rate of interest described in the Note secured hereby shall be deemed to be increased by the Additional Sums. 32. Notices. Trustor requests that a copy of any Notice of Sale hereunder be mailed to him at his mailing address set forth below. Any notices required to be given to Trustor by mailing shall be effective and complete when mailed and shall be mailed to the address set forth below. Lack of receipt thereof shall in no way invalidate the notice or any sale by Trustee hereunder. If Trustor desires to change the address to which notices shall be mailed, such change shall be accomplished by a request as provided by law. 33. Trustee's Fees and Charges. Trustee shall be paid for all acts performed by it hereunder or in connection herewith in accordance with its established fees and charges. All such fees and charges shall be paid by Trustor, and if Beneficiary shall advance any such fees or charges, Trustor shall reimburse Beneficiary for same on demand, Payment thereof is secured by this Trust Deed. 34. Defects in Documents. Trustor will, upon request of Beneficiary, promptly correct any defect, error or omission which may be discovered in the contents of this Trust Deed or in the execution or acknowledgment hereof, and will execute, acknowledge and deliver such further instruments and do such further acts as may be necessary or as may be reasonably requested by Beneficiary; to carry out more effectively the purposes of this Trust Deed; to subject to the lien and security interest hereby created any of Trustor's properties, rights or interest covered or intended to be covered hereby; and, to perfect and maintain such lien and security interest. 35. Separate Taxation of Trust Property. For the purpose of securing separate taxation and assessment of the premises herein described, Trustor shall, if not already accomplished and if obtainable, obtain a separation of the Trust Property which is realty from all other adjacent lands. -16- 36. Change in Address. Trustor shall keep Beneficiary advised at all times of the address or addresses of Trustor's residence, place of business, and if more than one, Trustor's chief executive office, and Trustor shall immediately advise Beneficiary of any change in any such address. 37. Extension. The Note secured by this Deed of Trust contains a provision for the extension of the maturity date. INNOVATIVE MICRO TECHNOLOGY, INC., a Delaware corporation /s/ John S. Foster _________________________________ John S. Foster, Chief Executive Officer, President and Chairman of the Board /s/ Peter T. Altavilla _________________________________ Peter T. Altavilla, Chief Financial Officer, Controller and Secretary -17- FORM OF REQUEST TO CONVEY THE PROMISSORY NOTE OR NOTES, AND ANY EVIDENCES OF FURTHER AND/OR ADDITIONAL ADVANCES MUST BE PRESENTED WITH THIS REQUEST: Walnut Creek, California, Date______________________ To INVESTORS YIELD, INC., a California Corporation Trustee: You are hereby authorized and requested to execute a reconveyance hereunder and deliver the same to: - ------------------------------------------------------------------------------ Trustee - ------------------------------------------------------------------------------ Address ____________________________________________Regarding Order #___________________ Attention The undersigned hereby certifies that they are `the owner and holder of the debt mentioned in said deed of trust by recorded assignment. Beneficiary: - ------------------------------------------- - ------------------------------------------- -18- EXHIBIT "A" That portion of Ranchos Los Dos Pueblos, in the County of Santa Barbara, State of California, described as follows: Beginning at the Southeasterly corner of the tract of land described in the deed to Raytheon Manufacturing Company, recorded February 28, 1957 as Instrument No. 4219 in Book 1432, Page 370 of Official Records, records of said County, being a point on the Northerly line of Hollister Avenue, as shown on a map of survey filed in Book 24 at Page 52 of Record of Survey, in the Office of the County Recorder of said County; thence leaving said Northerly line of Hollister Avenue and following along the Easterly line of said Raytheon Tract of land, North 3(0)22' 25" West, 507.70 feet to a point from which the Northeasterly corner. thereof bears North 3(degree) 22' 25" West, 306.84 feet; thence, leaving said Easterly line of said Raytheon Tract of land parallel with the Northerly line of said Hollister Avenue and distant 500.00 feet Northerly therefrom measured at right angles thereto, North 76(degree) 38' East, 70.29 feet; thence, continuing parallel with the Northerly line of Hollister Avenue and distant 500.00 feet Northerly therefrom measured at right angles thereto, North 74(degree) 19' East at 532.75 feet the Southwesterly corner of the tract of land described in the deed to Fulton-Ventura Corporation, a Nevada Corporation, recorded July 21, 1958 as Instrument No. 17238 in Book 1541 at Page 61 of Official Records, records of said County, 932.75 feet to the Southeasterly corner of said last mentioned tract of land on the Westerly line of La Patera Road 60 feet in width, as described in the deed to County of Santa Barbara, recorded in Book 39 at Page 385 of Deeds, records of said County; thence along said Westerly line of said La Patera Road, South 10(degree) 51' 30" East, 501.78 feet to the Northerly line of Hollister Avenue; thence along said Northerly line, South 74(degree) 19' West, 900.65 feet to an angle point therein; thence South 76(degree) 38' West, 162.50 feet to the point of beginning. EXCEPTING therefrom that portion thereof described in the deed to the County of Santa Barbara, recorded December 7, 1962 as Instrument No. 51965 in Book 1966 at Page 463 of Official Records. Also excepting therefrom one-half of any and all oil, gas and other hydrocarbon substances within and under the above described property more than 500 feet beneath the surface thereof and/or producible therefrom or therethrough, without, however, any surface rights or right of surface entry with respect thereto, as reserved in deed from James Williams, Jr., as. Executor of the Will of James G. Williams, deceased, recorded January 27, 1961 as Instrument No. 2800 in Book 1820, Page 50 of Official Records. APN#73-050-20 -19- EXHIBIT "B" A Deed of Trust to secured an indebtedness in the original amount shown below: Amount: $7,625,000.00 Dated: November 18, 1999 Trustor: Applied Magnetics Corporation, a Delaware corporation Trustee: Bar K, Inc., a California corporation Beneficiary: Gold Mountain Financial Institution, Inc., a California corporation Recorded: November 24, 1999, as Instrument No. 99-0093081 Original Loan #: Not shown Affects: The herein described land and other land A junior Deed of Trust in favor of the Professional Persons as described in and pursuant to the Order and/or Debtor's Third Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code dated as of September 24, 2001, as modified. Said Deed of Trust shall be recorded subsequent to, and shall at all times remain junior to, Owens Financial Group's Deed of Trust. -20- STATE OF CALIFORNIA COUNTY OF SANTA BARBARA On this 21 day of December in the year of 2001 before me, the undersigned, a Notary Public in and for said State, personally appeared John S. Foster and Peter T. Altavilla personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. `; Signature MARGO L WAGNER NOTARY PUBLIC STATE OF __________________ COUNTY OF________________ On this _____ day of___________ in the year of _, before me, the undersigned, a Notary Public in and for said State, personally appeared personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature __________________________ NOTARY PUBLIC THIS CERTIFICATE IS ATTACHED TO THE DOCUMENT IDENTIFIED AS DEED OF TRUST, SECURITY AGREEMENT & ASSIGNMENT OF LEASES & RENTS Dated December 20, 2001 -----END PRIVACY-ENHANCED MESSAGE-----