-----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, SMigJ1HX/Wlut52X0KH8Fa6HmUWG2oDMgwldLbEu8ea3SjUOeUvppvhMsJB/cwrU R/YO88x5JcoT3V86qf910g== 0000950147-96-000122.txt : 19960402 0000950147-96-000122.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950147-96-000122 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERPROBE CORP CENTRAL INDEX KEY: 0000725259 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 860312814 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11370 FILM NUMBER: 96542902 BUSINESS ADDRESS: STREET 1: 600 S ROCKFORD DR CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6029677885 MAIL ADDRESS: STREET 1: 600 S ROCKFORD DR CITY: TEMPE STATE: AZ ZIP: 85281 10KSB 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission File Number 0-11370 CERPROBE CORPORATION -------------------- (Name of small business issuer in its charter) Delaware 86-0312814 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 South Rockford Drive, Tempe, Arizona 85281 ---------------------------------------------- (Address of principal executive offices)(Zip Code) Issuer telephone number, including area code: --------------------------------------------- (602) 967-7885 Securities registered under Section 12(b) of the Act: ----------------------------------------------------- None ---- (Title of Class) Securities registered under Section 12(g) of the Act: Common Stock, Par Value $.05 Per Share -------------------------------------- (Title of Class) Indicate by check mark whether the issuer (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 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]. The issuer's revenues for the fiscal year ended December 31, 1995 were $26,098,637. As of March 22, 1996, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the Nasdaq National Market, was $40,826,352. Shares of Common Stock held by each officer and director and by each person who owned 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive. As of March 22, 1996, there were 4,281,553 shares of the registrant's Common Stock outstanding. Transitional Small Business Disclosure Format: Yes No X --- --- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Registration Statement on Form 8-A/A (No. 0-11370) and Registration Statement on Form S-8 (No. 33-65200) are incorporated by reference in Part IV hereof. TABLE OF CONTENTS Page Part I Item 1. Description of Business............................................ 1 Item 2. Description of Properties.......................................... 10 Item 3. Legal Proceedings.................................................. 12 Item 4. Submission of Matters to a Vote of Security-Holders................ 12 Part II Item 5. Market for Common Equity and Related Stockholder Matters........... 12 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 13 Item 7. Financial Statements............................................... 17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 17 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............... 17 Item 10. Executive Compensation............................................. 20 Item 11. Security Ownership of Certain Beneficial Owners and Management.................................................. 28 Item 12. Certain Relationships and Related Transactions..................... 30 Part IV Item 13. Exhibits, Lists and Reports on Form 8-K............................ 32 Signatures................................................................... 37 Financial Statements ........................................................F-1 i PART I ITEM 1. DESCRIPTION OF BUSINESS General Cerprobe designs, manufactures, and markets high-performance probing and interface products for use in the testing of integrated and hybrid electronic circuits for the semiconductor industry. Cerprobe believes it is a leading U.S. producer of probe cards. Cerprobe's probing and interface products enable semiconductor manufacturers, such as Intel, Motorola, and IBM, among others, to test the integrity of their integrated circuits during the batch fabrication process used in manufacturing integrated circuits in wafer form. Testing integrated circuits during the batch fabrication stage of the manufacturing process permits semiconductor manufacturers to identify defective products early in the manufacturing process, which improves overall product quality and lowers manufacturing costs. Cerprobe markets its probing and interface products worldwide to semiconductor manufacturers, both those who manufacture integrated circuits for resale and those who manufacture integrated circuits for inclusion in their own products. Industry Background During the past three decades, the demand for integrated circuits has increased dramatically. The semiconductor has enabled the electronics industry to decrease the size, improve the performance, and expand the capabilities of electronic products, such as computers and cellular phones. As the electronics industry has become more sophisticated, it has developed the technology to reduce the size of components and to fabricate a complete electronic circuit on a single substrate referred to in the industry as a "chip." A number of components integrated on a single chip to form a circuit is known as an "integrated circuit." Integrated circuits are widely used in the automotive, computer, telecommunications, and consumer electronics industries. Demand for products incorporating integrated circuits continues to increase as semiconductor manufacturers have decreased the size and improved the performance capabilities of integrated circuits. In addition, as a result of advances in technology, the amount and complexity of the circuitry integrated within a single chip has grown significantly. An interconnection of integrated circuits and discrete electronic components on a substrate is a "hybrid circuit." Hybrid circuits may contain as few as one and as many as 50 chips, potentially costing thousands of dollars. Because one flaw in the substrate could cause the entire assembly to be defective, it is important for hybrid circuit manufacturers to identify defective substrates through testing. Integrated circuits generally are manufactured using a batch fabrication process, pursuant to which integrated circuits are fabricated by repeating a complex series of process steps on a wafer substrate, which is usually made of silicon and measures three to eight inches in diameter. A finished wafer consists of many integrated circuits (each referred to as a "die"), the number depending on the size of the circuits and the size of the wafer. Semiconductor manufacturers use probing equipment during the design and manufacturing processes to verify design specifications, identify defective integrated circuits, ensure conformance with quality standards, and classify integrated circuits according to performance characteristics. Most semiconductor manufacturers test integrated circuits by probing the dies in wafer form to determine whether each individual integrated circuit meets design specifications. Probing involves establishing temporary electrical contact between the device under test ("DUT") and automatic test equipment ("ATE"). The number of dies on any wafer meeting specifications varies depending upon the complexity of the circuit and other manufacturing-related aspects. Semiconductor manufacturers concerned with maintaining profit margins test each integrated circuit two or three times before completion of the fabrication process. Testing is performed during the wafer fabrication process ("in-line testing") and at the completion of the wafer fabrication process ("end-of-line testing") to measure electrical parameters which verify the reliability of the wafer fabrication process, while functional testing is performed after the wafer fabrication ("wafer sort") to identify integrated circuits that do not conform to particular electrical specifications. Semiconductor manufacturers use probe cards and ATE interfaces primarily during the wafer sort, which occurs before the separation and packaging of each individual integrated circuit. After probing, integrated circuits that meet specifications are separated from the batch and bonded onto plastic, ceramic, or other packages with extended leads. Integrated circuits that do not meet specifications are discarded. Consequently, the testing of integrated circuits in wafer form is important to avoid incurring the significant expense of assembling dies that do not meet specifications. Probe cards and ATE interfaces are also used for in-line testing and are used for research and development and quality and process control applications. In-line testing requires special equipment features such as cleanroom compatibility, as tests are carried out during the manufacturing process. This testing is done to verify the manufacturing process while wafers are in an unfinished state where corrective action to the process can be taken. Testing also provides integrated circuit manufacturers with valuable data used to maintain process controls. Testing can alert manufacturers to flaws in the fabrication process or the equipment used by identifying recurring defects. Integrated circuit testing also enables semiconductor manufacturers to generate reliable yield data. Yield is defined as the ratio of the number of integrated circuits on a wafer that meet the specifications at the end of the process compared to the number of integrated circuits on a wafer at the beginning of the fabrication process. Yield data allows manufacturers to measure the efficiency of their production process and adjust production techniques accordingly. Yield data from testing also can enable manufacturers to decrease raw materials and reduce costs if yields are higher than expected. The Wafer Probing Process Semiconductor manufacturers test integrated circuits by means of a probing system, which transmits electrical signals to the integrated circuits and analyzes the signals upon their return. The principal components of a probing system include: (i) a probe card, which consists of a printed circuit board containing numerous probes positioned to "touchdown" on or make electrical contact with a series of metallized pads on the integrated circuits; (ii) a prober, which moves the wafers into position enabling the probe card probes to touchdown on the pads; (iii) automatic test equipment ("ATE"), which transmits the electrical signals to the integrated circuits and evaluates signals upon their return; and (iv) an ATE interface, which transmits the electrical signals between the ATE and the probe card. The probe card utilizes a number of probes designed to separately contact or "probe" a series of electrical contact points (or "pads") on the integrated circuit. Because the type and complexity of the integrated circuit to be tested vary, the number and positioning of the probes and the size of each probe card must be custom designed for the specific integrated circuits being tested to ensure proper alignment. Each ATE interface generally must be custom designed for each probe card. An ATE and a prober can be used to test integrated circuits of various sizes, types, and degrees of complexity and generally are not specific to the integrated circuit being tested. During the probing process, the prober positions each integrated circuit on a wafer so that the pads on the integrated circuit align under and make contact with the probes on the probe card. The ATE transmits electrical signals through the ATE interface to the probe card, then to the metallized pads on the integrated circuit and then evaluates the signals it receives from the probe card to determine whether a particular integrated circuit meets design specifications. The probing process also determines the performance capabilities of each integrated circuit. The testing of integrated circuits can run from milliseconds to over a minute depending on the complexity of the semiconductor device, as some integrated circuits contain more than three million interconnects. Unlike most of the equipment used in the semiconductor manufacturing process, which typically has a long life cycle, probe cards have a short life span. Probe cards for application specific integrated circuits ("ASICs") might be used once and then discarded. The average life of a probe card typically ranges from 200,000 to 500,000 touchdowns. However, damage due to faulty test handling equipment or operator error can render a probe card useless prior to expiration of its normal useful life. Cerprobe estimates that about one-third of its probe cards become obsolete within six months after sale. The Market for Probe Card and ATE Interfaces The Company sells its probe cards and ATE interfaces in the United States, European, and Asian markets. The Japanese market is comprised of semiconductor fabrication facilities located in Japan, which currently are serviced by the Company's Japanese competitors. Recent trends, including rapidly growing demand for semiconductors and advances in semiconductor technology, have driven increased demand for probing devices, such as probe cards and ATE interfaces. As demand for semiconductors increases, semiconductor manufacturers typically require additional probing devices to meet their growing capacity requirements. Conversely, to the extent demand for semiconductors lessens, semiconductor manufacturers are likely to reduce their demand for probing devices. Integrated circuit technology is changing rapidly due to constantly increasing demands for greater functionality and higher speeds. Advances in integrated circuit design and process technologies have enabled manufacturers to produce smaller integrated circuits with even greater circuit densities, levels of integration, and complexity to meet these demands. Advances in semiconductor technology have resulted in higher pin counts, more varied configurations, and increasingly complex semiconductor devices. As a result of the increased complexity of integrated circuits and shorter product lifecycles, demand for sophisticated probing devices has increased. These trends in the integrated circuit market have caused corresponding trends in the probe card and ATE interface markets. Testing more complex integrated circuits requires more sophisticated probe cards and ATE interfaces. The increased sophistication of integrated circuits also has resulted in increased testing time, which lowers integrated circuit production rates. In addition, probe cards and ATE interfaces must have greater performance capabilities in order to test the increasingly complex circuitry and higher pin counts of integrated circuits. Probing device manufacturers also must have the capability to handle increasingly varied integrated circuit configurations. Integrated circuit manufacturers are putting added emphasis on greater accuracy and testing speed and quicker turnaround times for probing devices. Cerprobe Strategy Cerprobe has become a leader in the domestic market for probe cards and ATE interfaces by addressing many of the challenges associated with the testing of complex integrated circuits through a combination of strengths, including advanced technical capabilities, a broad line of high-quality products, and close relationships with leading integrated circuit manufacturers. Cerprobe's strategy is to increase its domestic market share and to continue expanding into international markets. Cerprobe's implementation of this strategy includes the following key elements: o Focus on Technological Innovation. Cerprobe is focusing more heavily on engineering and research and development to produce a variety of high-performance custom-designed probe cards that have the ability to test more complex integrated circuits and to test at higher speeds. Cerprobe supports higher integrated circuit production rates through the use of leading edge materials and proprietary circuit design methods in its probe cards and ATE interfaces. SEMATECH, the U.S. semiconductor industry consortium which defines the standards for future semiconductor products, recently awarded Cerprobe two research and development contracts. Cerprobe currently is developing new integrated circuit testing systems for the semiconductor industry. The latest research and development contract calls for Cerprobe to determine the best solutions for probing the interior contact points of semiconductors. Demand for such testing devices is driven by the continuing shrinkage of semiconductors, which is leading to more complex integrated circuits. Cerprobe intends to continue its emphasis on engineering and research and development in an effort to anticipate and address technological advances in semiconductor processing. o Maintain Strong Customer Relationships. Cerprobe maintains long-standing relationships with many of its customers. Cerprobe's development of products and product enhancements is market driven. Engineering, sales, and management personnel collaborate closely with customer counterparts to determine customers' needs and specifications. Cerprobe's probing devices are custom designed for testing specific semiconductor devices. Cerprobe expects to continue to strengthen its existing customer relationships by continuing to provide quality products and high levels of service and support. o Provide Quality Products and Service. Cerprobe believes it has developed a reputation as a leader in providing high-quality products and services. This high quality level is achieved through rigorous inspection and testing of products, and the application of sound Quality Management policies and practices. ISO 9000, the internationally recognized standard for Quality Management, sets the criterion for Cerprobe's quality system and is being implemented at all manufacturing sites. A cornerstone of the Quality Management system is Cerprobe's advanced metrology tools that ensure precise measurements of all key product parameters. As the size of integrated circuits is driven smaller by advances in integrated circuit technology, the accuracy of measurements becomes increasingly important. Cerprobe's Quality and Engineering departments work together to define measurement needs and identify tools that can achieve the desired results. Cerprobe believes that its size and production methods allow it to provide its customers with high-quality products and quick turnaround times. o Expand to International Markets. Cerprobe intends to continue expansion into international markets including Europe and Asia. Cerprobe has begun to pursue these markets by aggressively mounting a focused sales and marketing effort directed at selected key semiconductor manufacturers abroad. Cerprobe believes that its recent international successes are in part due to its strategy of locating manufacturing plants close to its customer sites. Cerprobe's international expansion includes the location of a full-service manufacturing plant in East Kilbride, Scotland and the opening of facilities in Singapore. o Expand Product Lines and Applications. Cerprobe intends to capitalize on its market position and technical expertise to further broaden existing product lines through internally developed products and from time to time through acquisitions. For example, Cerprobe's acquisition of Fresh Test Technology Corporation enabled Cerprobe to offer an expanded product line, including ATE interfaces and custom-designed printed circuit boards. The acquisition of Fresh Test and the proposed acquisition of CompuRoute, Inc. provides Cerprobe with greater opportunities for product development. This strategy also enables Cerprobe to offer its customers a total system solution. See "Description of Business - Proposed Acquisition." Products Cerprobe's probe cards generally range in price from $500 to $10,000, but may cost more depending upon the complexity and performance specifications of the probe cards. Cerprobe's interface assemblies range in price from $1,000 to $65,000. Most probe cards are delivered within one to three weeks of the receipt of a customer's order and appropriate specifications. Probe Card Products Probe card products continued to constitute the significant majority of Cerprobe's business during 1995. A probe card used in the testing of an integrated or hybrid circuit utilizes a number of probes designed to separately contact or "probe" a series of metallized pads on the integrated or hybrid circuit. Through the number and positioning of the probes, probe cards are individually designed for the specific integrated or hybrid circuits being tested. Probe cards are manufactured according to the customer's specifications, which vary depending upon the type and complexity of the circuit to be tested. The metallized pads on the circuit to be tested generally are located on the periphery of the circuit. As the number of pads increases due to the type and complexity of the circuit being tested, certain customers place pads in the center as well as on the periphery of the circuit being tested. This design is known as an "array." There are four types of probe card technologies currently available. 1. CerCardTM/epoxy ring technology uses probes that connect directly to a printed circuit board. Probe cards using this type of technology are capable of high-speed, high-density probing. Cerprobe introduced the CerCardTM in October 1990. Sales of the CerCardTM generated approximately 68% of Cerprobe's revenues in 1995 as compared to approximately 73% of Cerprobe's revenues in 1994. Cerprobe anticipates that the CerCardTM will continue to account for a substantial portion of Cerprobe's probe card business in the future. 2. Ceramic/metal blade technology uses a ceramic or metal blade attached to a needle designed to make contact with the pads. Probe cards using ceramic blade technology, which was developed and patented by Cerprobe, are capable of low-speed, low-density probing. With optional features, the ceramic blade can be used for high-speed probing. Cerprobe will continue to manufacture ceramic blade probe cards; however, Cerprobe expects that ceramic blade probe cards will account for a decreasing portion of Cerprobe's probe card business in the future. 3. Buckle beam technology uses vertical probes that emerge from a pattern that mirrors the pattern of the pads on the integrated or hybrid circuit being tested. Probe cards using this technology are capable of probing pads in the center of an integrated or hybrid circuit using an "array" design. This technology generally is used for high-density, low-speed applications. 4. Membrane technology uses a thin film flexible circuit with "bumps," rather than probes, designed to make contact with the pads. Probe cards using this technology were introduced in 1988 and are intended for high-speed, high-density applications. All of Cerprobe's probe card products utilize either CerCardTM/epoxy ring or ceramic blade technology. Cerprobe estimates that products utilizing these technologies account for approximately 90% of the world market for integrated and hybrid circuit probe card products, that products utilizing the metal technology account for approximately 10% of the world market, and that products using the buckle beam and membrane technologies constitute less than 1% of the available world market. Cerprobe has invested over 15 years in the design of different types of printed circuit boards, blades, and probes and the manufacturing processes required to assemble these products into a finished probe card. Because the signals carried by the probe card are very sophisticated and vary by customer, Cerprobe manufactures many types of printed circuit boards, blades and probes, each of which may be individually designed to meet the specifications of each customer. ATE Interface Products An interface is used to carry signals from the ATE to the probe card. An interface typically consists of two intricate multi-layer printed circuit boards connected by either a system of cables varying in length from less than one inch up to six feet or spring loaded contact pins. One end of the interface connects to the ATE and the other to a probe card fixture mounted on a prober that holds the probe card in a stationary position. Cerprobe's computer-aided design system is used to design the interfaces, each of which has hundreds of intricate signal lines. In each case, the integrity of the test is highly dependent on maintaining the quality of the signal between the ATE and the integrated or hybrid circuit being tested. Cerprobe's interface product line transmits a "clean" signal from the ATE to the probe card and carries a return signal back to the ATE after the circuit processes the signal. Cerprobe's interface products are designed to optimize the integrity of return signal data through the reduction of channel crosstalk and the matching of delay times and impedance, thereby realizing accurate circuit yields. Yield is the ratio of good circuits to total circuits per processed wafer and is an important cost factor for Cerprobe's customers. Because Cerprobe's interfaces provide reliable yield data by allowing for clear signal transmission, interfaces can also be cost saving devices. Cerprobe's interface products feature ease of mechanical installation in the prober and facilitate access to the wafer during testing. Generally, each combination of ATE and prober ordered by a customer will require a different interface. Interface products range from small single board cable type interfaces for less complex systems to high speed/frequency digital or mixed signal (analog and digital) interfaces used in testing more complex integrated circuits. Prices for interfaces range from $1,000 to $65,000 per system. Cerprobe also produces another interface product known as a planarized "motherboard" ("PMB"), which is a modified probe card fixture sometimes used in the manufacture, repair, and inspection of probe cards. Customers of Cerprobe that maintain and inspect their probe cards will continue to purchase PMBs even though their demand for other interface products may decrease. In addition, motherboards are a necessary part of Cerprobe's manufacturing operations. Cerprobe sales of ATE interfaces have increased as a result of the acquisition of Fresh Test Technology Corporation, a company engaged primarily in the design, manufacture, and sale of interface products. Research and Development Cerprobe recently has expanded its engineering and research and development efforts. Cerprobe has been successful in controlling expenditures for research and development by collaborating with certain customers who pay Cerprobe to develop new product innovations. Cerprobe has been awarded two research and development contracts with SEMATECH, a consortium of leading U.S. semiconductor manufacturers and the U.S. government formed to promote technological innovation in the U.S. semiconductor industry. In the first agreement with SEMATECH, Cerprobe concentrated on the extension of present technology to include tighter pitches (i.e., placing probes closer together) as well as developing higher frequency testing characteristics. Advances in semiconductor technology have resulted in the shrinkage of circuitry patterns (from 200 microns to 90 microns, and smaller pad pitches) and increases in speed from 33 Megahertz to over 100 Megahertz. As semiconductors have become more sophisticated, the need to place the pads in the middle of the integrated circuit as well as on the perimeter has developed. An area array probe card makes it possible to test circuitry pads or bumps no matter where they are located on the integrated circuit. The second agreement with SEMATECH calls for Cerprobe to determine the best solution for probing the interior contact points of semiconductors. Pursuant to this agreement, as Cerprobe matches funds contributed by SEMATECH, Cerprobe retains the rights to any technology developed through these research and development efforts. Cerprobe also believes it gains an added benefit from the SEMATECH relationship by being able to work with its semiconductor manufacturer partners to anticipate and address technological advances in semiconductor processing and testing. Manufacturing The manufacturing process for Cerprobe's products consists of the assembly of the component parts of each of its products, which are manufactured at Cerprobe's Tempe and Chandler, Arizona, San Jose, California, Westborough, Massachusetts, Austin, Texas, and East Kilbride, Scotland facilities. The raw materials used by Cerprobe in its manufacturing process include ceramic, tungsten, and printed circuit boards, all of which are readily available in the marketplace. The components purchased by Cerprobe from other manufacturers are obtained from a variety of suppliers, some of which are custom-designed in accordance with Cerprobe's specifications. In August 1994, Cerprobe established and now operates a manufacturing, repair, and sales facility in East Kilbride, Scotland. Cerprobe's objective in establishing and operating this facility is to serve its existing customers in Europe and to expand its sales efforts throughout Europe. To conduct operations in Europe, Cerprobe has formed Cerprobe Europe, Limited in the United Kingdom as a wholly-owned subsidiary of Cerprobe. In June 1995, Cerprobe established an office in Singapore through a joint venture. Cerprobe currently is working to complete a full service manufacturing, repair, and sales facility in Singapore to serve the Asian market. Cerprobe anticipates that the facility will become operational in the second quarter of 1996. Marketing and Sales Since beginning operations, Cerprobe has developed an extensive North American customer base. These customers represent the major merchant manufacturers of integrated circuits (businesses that manufacture for resale in the market), such as Motorola, Intel, National Semiconductor, and others. In addition, a significant part of Cerprobe's revenues are derived from sales to captive semiconductor operations (businesses that produce semiconductors for their own use), such as IBM and AT&T. In 1995, only one of Cerprobe's customers, Intel, accounted for more than 10% of Cerprobe's sales. These merchant semiconductor manufacturers and captive semiconductor operations provide Cerprobe with a well-balanced base consisting of customers whose products serve communications, computer, automotive, and military/aerospace applications. In addition to serving high-volume established manufacturers, Cerprobe's products also are designed to meet the needs of emerging and leading edge technology firms such as those offering ASICs and GaAs (Gallium Arsenide devices). Cerprobe believes that these companies will become an increasingly important part of the U.S.-based semiconductor industry. Purchasers of probing products generally place a high value on service. Technical features and product quality also are attributes expected by Cerprobe's customers. Although the service needs of customers currently are receiving a great deal of attention by all businesses, the unique needs of purchasers of probing products dictate an unusually high level of responsiveness in this area. The products produced by Cerprobe usually require a great deal of customization in order to meet customer specifications. Response time, product design specifications, and rapid delivery typically are critical factors in customer satisfaction. In addition, the customer's evaluation of the design and performance of completed probing products can be quite subjective. To facilitate satisfaction of its customer's servicing needs, Cerprobe maintains five regional service centers in various regions of the United States and a manufacturing, repair, and sales facility in East Kilbride, Scotland. Cerprobe is also establishing a manufacturing, repair, and sales facility in Singapore to provide service to the Asian market. In addition to its regional service facilities, Cerprobe reaches its domestic customers with its sales personnel and regional representatives. Like its regional service facilities, Cerprobe's sales personnel are strategically located to facilitate rapid response to major market centers and key customers. In September 1993, Cerprobe established a sales office in Dallas, Texas to serve customers in that region. In February 1994, Cerprobe expanded that facility to include repair operations. In July 1994, Cerprobe established a sales office in Beaverton, Oregon, to serve customers in that region. Cerprobe also has sales representatives in Colorado Springs, Colorado and Boca Raton, Florida. In both Europe and the Far East, Cerprobe has utilized a network of independent distributors. Currently, Cerprobe's international business represents approximately 11% of sales. Cerprobe, however, recognizes the potential in these markets and is positioning itself to initiate a more aggressive marketing and sales program in the international market in the future. In particular, Cerprobe intends to expand its sales efforts throughout Europe and has established and currently operates a manufacturing, repair, and sales facility in East Kilbride, Scotland for the purpose of serving customers in Europe. In continuing that effort, in June 1995, Cerprobe established a joint venture in Singapore for the purpose of developing a full service manufacturing, repair, and sales facility reaching markets in Southeast Asia. The Company currently is negotiating Pioneer Status with the Singapore Economic Development Agency, which, if granted, would provide certain tax exemptions with respect to the Company's operations in Singapore. The Company anticipates that the Singapore facility will commence operations in the second quarter of 1996. Cerprobe's strategic marketing plan is aimed primarily at increasing its share of the probe card market through continued expansion of CerCardTM product sales both domestically and internationally. The CerCardTM allows Cerprobe to service both the higher pin count probe card market and customers who currently use epoxy ring probe card technology exclusively. Cerprobe also is working with key customers in the development of products and improvements that will enhance Cerprobe's existing product line. Competition Cerprobe encounters competition from a number of well established domestic competitors in the integrated circuit probe card market, including Wentworth Laboratories, Inc., Probe Technology, and Micro-Probe, Incorporated, as well as numerous smaller competitors. Cerprobe's competitors manufacture and market epoxy ring probe cards, which have been accepted in the marketplace for over 20 years, and metal blade probe cards, which have been accepted in the marketplace for over 15 years. Cerprobe estimates that epoxy ring probe cards comprise approximately 90% of the domestic market and metal blade probe cards comprise approximately 5% of the domestic market. Cerprobe estimates that ceramic blade probe cards represent approximately 5% of the total domestic market. Cerprobe believes that its CerCardTM product, which is a technological improvement of the commonly used epoxy ring type probe card, will continue to capture an increasing portion of the market currently using epoxy ring probe cards. Cerprobe believes that it, and to a limited extent Wentworth Laboratories, Inc. and Accuprobe, Inc., are the only current manufacturers of ceramic blade probe cards. It is expected that competition will increase in the future as integrated circuitry and probing technology become more sophisticated. Manufacturers of integrated circuit probe cards compete primarily on the basis of product performance, service, delivery time and price. Cerprobe believes that it compares favorably with its competitors in these areas. Hand-wired connections have been Cerprobe's principal competition in interface circuitry. Historically, ATE end users have hand-wired the connections between the ATE and the probe card. However, more recently, the market in advanced interface circuitry is developing both domestically and internationally, and increased competition has emerged from other probe card manufacturers, ATE manufacturers, and other companies. Competition in interface circuitry will be on the basis of performance specifications, service, and price. Competition in the international market is significant and similar to that faced in the domestic market. Most of the probe cards sold outside the United States use epoxy ring technology, built under license from U.S. manufacturers. Cerprobe's competitive challenges in the international market are expected to be similar to those experienced domestically. Patents Cerprobe received a patent in November 1991 for a new probing technology which offers product features that are useful in testing TAB (Tape Automated Bonding) mounted chips, multi-chip substrates, integrated circuits with gold pads or solder bumps, and devices having multiple rows of test points around or within the periphery of the chip. In addition, in January 1995, Cerprobe received a patent for an enhanced version of Cerprobe's CerCardTM product known as a Transmission Line Probe Assembly, which is capable of testing at higher speeds than Cerprobe's current product line. Cerprobe strives to improve existing technology and will pursue patent protection for any new products it may develop in connection with such efforts. However, there can be no assurance that future patents on new products will be sought or issued or that Cerprobe's present patent position will cover its development of new products. Cerprobe believes that its success will depend primarily on the technological competence and creative skills of its personnel rather than the protection of its existing patent or future patents. Employees Cerprobe has several key employees and the loss of any one of them might have a temporary adverse effect on Cerprobe's business prospects. Cerprobe maintains a key man life insurance policy on C. Zane Close, Cerprobe's Chief Executive Officer, in the amount of $1,000,000. During 1995, a period during which demand for Cerprobe's products increased significantly, Cerprobe's total employment increased from 179 to 299 employees. There are no collective bargaining agreements and Cerprobe considers its relations with its employees to be good. Raw Materials The raw materials and components used by Cerprobe in the manufacturing process are available from a broad supplier base. These raw materials and components are readily available and no shortages occurred during 1995. Raw materials include ceramic, tungsten, single and multiple printed circuit boards with a variety of machined mechanical parts, probe needles, and metallized ceramic blades. Government Regulations Federal, state, and local provisions regulating the discharge of materials into the environment have not had a material effect on Cerprobe's business. Cerprobe has made certain leasehold improvements in order to comply with Environmental Protection Agency and local regulations. Cerprobe believes that it is in full compliance with these regulations. Cerprobe, however, is unable to predict what effect, if any, the adoption of more stringent regulations would have on its future operations. Proposed Acquisition On January 23, 1996, the Company signed a letter of intent to acquire the stock of CompuRoute, Inc. and its affiliates ("CompuRoute"). CompuRoute is engaged in the design, manufacture, and sale of high performance printed circuit boards used by customers in the semiconductor industry. See Note 16 to the Company's Consolidated Financial Statements. If the transactions contemplated by the letter of intent are consummated, CompuRoute will become a wholly owned subsidiary of the Company and CompuRoute's shareholders will receive 920,000 shares of the Company's Common Stock, subject to certain conditions and adjustments. The letter of intent also provides for the Company to appoint Dr. George P. Shrime, the principal shareholder of CompuRoute, to its Board of Directors. The letter of intent also contemplates that the Company will purchase the land and building used by CompuRoute from Dr. Shrime in exchange for 75,000 shares of the Company's Common Stock. There can be no assurance that this transaction will be consummated, or, if consummated, that it will be consummated on the same terms as are currently contained in the letter of intent. ITEM 2. DESCRIPTION OF PROPERTIES The Company's principal executive offices and primary manufacturing facility are located at 600 S. Rockford Drive, Tempe, Arizona. The Company leases approximately 30,000 square feet of office and manufacturing space at that location. The lease is for a term of five years and five months, commencing on August 1, 1991, and ending on December 31, 1996. The lease provides for an initial monthly base rent of $15,600 and incremental increases in monthly rent from $18,600 in December 1993 up to $20,400 during the last year of the lease. In 1995, the Company paid $228,780 in total pursuant to this lease. The Company has the option to extend the lease for one successive period of five years at a monthly rent subject to increase according to market rates for comparable space in the same vicinity, subject to a minimum increase of 3% annually. In connection with the acquisition of Fresh Test Technology Corporation, the Company assumed a lease for approximately 15,581 square feet of office and manufacturing space in Chandler, Arizona. The term of the lease is five years commencing on December 1, 1993 and expiring on November 30, 1998. Monthly rent payments range from $10,362 during the first 12 months of the lease to $10,767 during the last 12 months of the lease. The Company leased an additional 5,470 square feet of office and warehouse space at the site in Chandler, Arizona for a 14 month term commencing November 1, 1995 and ending December 31, 1996. The monthly rental rate for this additional office space is $3,555.50. In 1995, the Company paid $125,523 in total pursuant to these two leases. The Company leases approximately 33,000 square feet of office space in San Jose, California for a manufacturing, repair and sales facility. The lease provides for a term of seven years and one month commencing on August 1, 1995 and expiring on August 30, 2002. The lease provides for monthly rental payments of $25,627. The Company has the option to extend the lease for one additional five year term at a monthly rent subject to an increase according to the market rates for comparable space. In 1995, the Company paid $78,077 pursuant to the terms of this lease. The Company remains subject to a lease for approximately 9,056 square feet of office space in Santa Clara, California formerly used as a repair and assembly center and sales office. The lease provides for a term of seven years commencing August 1993. Monthly rent payments range from $9,493 in the first 12 months of the lease to $11,047 in the last 12 months of the lease. Pursuant to this lease, which was entered into in June 1993, and the terms of a preexisting lease relating to a portion of this office space, the Company paid $133,967 in 1995. The Company subleases approximately 4,000 square feet of this space in exchange for $4,000 a month pursuant to a sublease and approximately 5,056 square feet in exchange for monthly payments of $5,600. On November 4, 1994, the Company entered into a lease for a manufacturing, repair and sales facility in East Kilbride, Scotland. The lease provides for approximately 4,582 square feet of office and manufacturing space in exchange for an annual rent of (pounds)15,750, payable quarterly in February, May, August, and November of each year. The term of the lease is five years commencing on August 28, 1994 and expiring on August 27, 1999. In 1995, the Company paid $24,750 in total pursuant to this lease. Unless either party elects to terminate the lease within six weeks of the scheduled expiration date, the lease will continue from year-to-year until terminated by notice. The Company leases approximately 4,800 square feet of office and production space in Austin, Texas for the operation of a repair and assembly center and sales office. The lease will expire on April 14, 2000. The lease provides for monthly payments of rent increasing each year from $3,400 per month during the first year of the lease to $3,986 per month during the last year of the lease. In 1995, the Company paid $43,433 in total pursuant to this lease and a preexisting lease for a portion of the same office space. The Company leases approximately 2,400 square feet of office space in Richardson, Texas, for the operation of a repair and assembly center and sales office. The term of the lease is three years with a three-year renewal. The lease provides for monthly payments of rent of $1,350. In 1995, the Company paid $16,200 pursuant to this lease. On June 30, 1995, the Company leased approximately 6,144 square feet of office space in Westborough, Massachusetts for the operation of a repair and assembly center and sales office. The lease provides for a term of five years commencing on July 1, 1995. Monthly rent payments range from $7,680 in the first 12 months of the lease to $8,192 in the last 12 months of the lease. In 1995, the Company paid $62,956 in total pursuant to this lease. The Company has the option to extend the lease for one additional term of two years at a monthly rent subject to an increase according to the market rates for comparable space in the same vicinity. The Company leases approximately 886 square feet of manufacturing space in Singapore. The term of the lease is three years commencing on September 3, 1995 and expiring on September 2, 1998. The lease provides for monthly payments of rent of $5,854 (Singapore dollars). In 1995, the Company paid $23,377 (Singapore dollars) pursuant to this lease. The Company has the option to renew the lease for an additional three years at a revised rental rate. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to, nor is any of its property the subject of, any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to a vote of the Company's stockholders during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading in the over-the-counter market on the Nasdaq system on September 29, 1983 and commenced trading on the Nasdaq National Market on August 10, 1995 under the symbol "CRPB." On March 22, 1996, the last sale price for the Company's Common Stock was $14.125. The following table sets forth the high and low last sale prices of the Company's Common Stock for each quarter during the last two fiscal years, as reported on the Nasdaq National Market. High Low ---- --- 1994: First Quarter.......................... 6 1/2 5 Second Quarter......................... 5 1/4 4 1/2 Third Quarter.......................... 5 3/4 5 1/2 Fourth Quarter......................... 4 3/4 4 1/4 1995: First Quarter.......................... 6 5 Second Quarter......................... 8 1/4 5 1/2 Third Quarter(1)....................... 10 1/2 10 Fourth Quarter......................... 17 16 3/4 (1) Prior to August 10, 1995, prices represent high and low bid quotations on Nasdaq. Bid quotations represent interdealer quotations, which exclude retail markups or mark-downs and commissions and may not necessarily represent actual transactions. As of March 22, 1996, there were approximately 1,500 record holders of the Company's Common Stock. On May 23, 1994, the Company paid a one-time dividend on its Common Stock equal to $.03 per share. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Over the past three years, the Company has succeeded in restructuring and strengthening its internal management, stabilizing and expanding its production environment, and positioning its key sales personnel. As a result, significant growth has occurred, with sales increasing from over $14 million in 1994 to $26 million in 1995. In addition, the Company believes it is appropriately positioned for its current expansion strategy. During 1995, the semiconductor equipment market grew by more than 50% worldwide. Management believes the increase in domestic market share resulted from the Company's expanded capacity in its existing facilities which provided increased support to the Company's customers. The Company emphasized customer support and engineering leadership. The Company took steps in 1994 to expand its presence in the international market by opening a full service manufacturing and repair facility in Scotland to serve Europe. The Scotland facility is now fully operational. In 1995, the Company continued this expansion by opening an office in Singapore pursuant to a joint venture agreement. Management believes that the fastest growing region for the semiconductor industry is Southeast Asia and plans to continue expanding into this area during 1996. Besides increasing its market share, the Company also has expanded its product line. Historically, the Company has produced high performance probing and interface products for use in the testing of integrated and hybrid circuits in the semiconductor industry. Through the acquisition of Fresh Test Technology Corporation, the Company expanded its product line to include the design and manufacture of interface assemblies. This acquisition was completed on April 3, 1995 with the issuance of 712,500 shares of the Company's Common Stock to the stockholders of Fresh Test Technology Corporation. The acquisition allowed the combination of product lines and the consolidation of engineering expertise. In order to continue to broaden the Company's product line, the Company has entered into a letter of intent to acquire CompuRoute, Inc. (and certain affiliated companies) ("CompuRoute") located in Richardson, Texas for approximately 920,000 shares of the Company's Common Stock. The letter of intent also provides for the issuance of 75,000 shares of the Company's Common Stock to CompuRoute's largest stockholder in exchange for certain real estate associated with CompuRoute's operations. CompuRoute is a leading designer and fabricator of printed circuit boards and assemblies used in the testing of semiconductors. The acquisition of CompuRoute will expand the Company's current product line both internally and externally and increase the Company's distribution network. This transaction is subject to a number of conditions, however, including approval by the stockholders of both companies, and there can be no assurance that it will be completed. In order to continue to be a leading performer in the semiconductor industry, the Company intends to support an aggressive research and development program. Recently, the Company was awarded two contracts by SEMATECH, the consortium of government and semiconductor partners that oversees the development of new standards for the industry. These contracts position the Company as a technological leader in its industry. The Company anticipates an added benefit from the ability to work with the Company's semiconductor manufacturer partners in anticipating and addressing technology advances in semiconductor processing and testing. In January 1996, the Company completed a private placement of $10 million of Series A Preferred Stock to a group of institutional investors. The holders of the Series A Preferred Stock are entitled to certain liquidation preferences, conversion rights, and other privileges as described in Exhibits 4(c) and 4(d) to the Annual Report on Form 10-KSB. See Note 16 to the Company's Consolidated Financial Statements. This equity financing will allow the Company to execute its strategy of rapid growth through internal expansion and strategic alliances without the constraints of capital limitations. Results of Operations - 1995 versus 1994 Net Sales Net sales in 1995 were $26,098,637, an increase of 83% over net sales of $14,251,485 in 1994. This increase in net sales reflects a continuation of higher order rates for the Company's probe card products, especially CercardTM, and the contribution from the 1995 acquisition of Fresh Test Technology Corporation. Approximately $4,000,000 of 1995 net sales resulted from interface product sales. International net sales in 1995 were $2,965,171 compared to $691,295 in 1994, an increase of 329%. Gross Margin The gross margin in 1995 was $12,392,202, an increase of 105% from the gross margin of $6,037,519 in 1994. Gross margin as a percentage of sales increased from 42% in 1994 to 47% in 1995. The increase in gross margin is primarily a result of fixed manufacturing costs being spread over a larger sales base. Although growth in the semiconductor industry positively impacted sales, price competition in the market place continued to prevent the Company from increasing product prices. The Company believes its ability to continue to increase its manufacturing capacity and inventory levels to meet customer demand and maintain satisfactory delivery schedules will be important competitive factors. As a result of increasing fixed costs and operating expenses related to expanding its manufacturing capacity and increasing inventory levels, the Company's operating results may be adversely affected if net sales do not sufficiently maintain their present level to offset the increased costs. Engineering and Product Development Expenses Engineering and product development expenses increased 69% to $706,680 in 1995 from $417,198 in 1994. Engineering and product development expenses as a percentage of sales were 2.7% in 1995 compared to 2.9% in 1994. This increase represents a controlled expansion of research and development efforts to pursue the development of new integrated circuit testing systems for the future. This effort will support the Company's strategy to maintain its position as an industry leader. Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $7,502,598, or 29% of net sales in 1995, from $3,693,401, or 26% of net sales in 1994. The increase in selling, general and administrative expenses resulted primarily from the increase in fixed general and administrative costs due to the Company's continued facility expansion and the acquisition of Fresh Test Technology Corporation. Other Income (Expense) Total other income (expense) was $31,050 in 1995 compared to ($3,576) in 1994. Other income (expense) primarily results from interest income on cash balances and interest expense on debentures and financed property and equipment. The Company expects a decrease in interest expense in 1996 due to the anticipated conversion of the Company's outstanding Convertible Subordinated Debentures on or prior to March 29, 1996 and December 15, 1996. Income Taxes The Company's effective tax rate was 43% in 1995 versus 37% in 1994. The effective tax rate on United States income is 38%; on a consolidated basis, however, the effective tax rate is 43% due to nondeductible tax losses generated by the Scotland subsidiary. Net Income Net income for 1995 was $2,402,247, an increase of $1,189,424, or 98% over net income of $1,212,823 in 1994. This increase is primarily due to the increase in net sales and gross margin. Results of Operations - 1994 versus 1993 The Company's net sales in 1994 increased 27.1% from 1993, primarily as a result of increased sales of its CerCardTM product line. The significant sales increase in the CerCardTM product line was due primarily to an increase in market share and continued strength in the semiconductor industry. The gross margin increased $1,594,000 from the comparable figure in the prior year. Gross margin as a percentage of sales increased from approximately 40% in 1993 to approximately 42% in 1994. The increase in gross margin resulted primarily from the increase in net sales and the positive effect of fixed costs being spread over a larger revenue base. Although the strength in the semiconductor industry positively impacted sales, price competition in the market place continued to prevent the Company from raising prices for its products. Engineering and product development expenses increased by $81,539, or approximately 24%, from the prior period, reflecting a continued stabilization of these expenses since the significant reduction from 1990 to 1991. This effort to maintain engineering and product development expenses at lower than historical levels reflected the Company's strategy to focus engineering activity on improvements in current technology rather than the development and implementation of new products. During 1994, the Company continued tight controls over research and development spending. Although the Company experienced a substantial increase in net sales and an increase in the gross margin, the Company's net income decreased from $1,502,358 in 1993 to $1,212,823 in 1994. The decrease in net income was primarily due to an increase in income taxes of $620,521 and a loss from start-up operations with respect to its newly established facility in East Kilbride, Scotland, equal to approximately $437,000. Interest expense in 1994 was approximately $115,000, a slight decrease from the $132,000 of interest expense in 1993. Liquidity and Capital Resources Working capital increased to $4,771,459 at December 31, 1995 from $3,571,999 at December 31, 1994. The Company's current ratio decreased from 4.0 at December 31, 1994 to 2.5 at December 31, 1995 primarily as a result of capital expenditures of $1,960,775, and an increase in accounts payable and accrued expenses of $1,101,238. The ratio of total debt to net worth was .40 at December 31, 1995 compared to .42 at December 31, 1994. On June 12, 1995, the Company signed a Loan Agreement with First Interstate Bank of Arizona. The Loan Agreement provides up to $750,000 in revolving credit for accounts receivable financing. At December 31, 1995, no amounts were outstanding under this agreement. See Note 5 to the Company's Consolidated Financial Statements. Net cash provided by operations was $1,645,564 in 1995 versus $1,538,766 in 1994. The increase resulted from increases in net income, depreciation and amortization expense, and inventories offset by an increase in accounts payable and accrued expenses. Net cash used in investing activities was $2,000,411 in 1995 versus $1,354,644 in 1994. The increase of $645,767 primarily resulted from increased capital expenditures. Net cash used in financing activities was $95,099 in 1995 verus net cash provided by financing activities of $32,613 in 1994. Cash and cash equivalents were $263,681 at December 31, 1995 compared to $738,319 at December 31, 1994. In January 1996, the Company completed a private placement of $10 million of Series A Preferred Stock to a group of institutional investors pursuant to Regulation S promulgated under the Securities Act of 1933. See Note 16 to the Company's Consolidated Financial Statements. The Company intends to use the proceeds from the private placement to fund the start-up costs associated with the Company's expansion into the Asia Pacific region. The Company anticipates that its current cash and cash equivalents combined with future cash flows from operating activities and its available sources of credit should be sufficient to support the Company's operations for at least the next year. Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 becomes effective for fiscal years beginning after December 15, 1995. The Company is currently assessing the impact of SFAS No. 121 on its financial statements. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 is effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company is currently assessing the impact of SFAS No. 123 on its financial statements. Inflation and Changing Prices The Company is impacted by inflationary trends and business trends within the semiconductor industry and by the general condition of the national and international semiconductor markets. Market price pressures are exerted on American semiconductor manufacturers by a global marketplace and global competition. Such pressures mandate that semiconductor manufacturers closely scrutinize the prices they pay for goods and services purchased from the Company and other suppliers. Accordingly, the price structure for the Company's products must be competitive. Although continued strength in the semiconductor industry continued to have a positive impact on the Company's sales during 1995, significant competition continued to prevent the Company from raising prices on its products. Changes in the Company's supplier prices did not have a significant impact on revenues or income from operations during 1995 or 1994. As a result of the Company's operation of the manufacturing, repair and sales facility in Scotland, the Company's foreign transactions may be denominated in currencies other than the U.S. dollar. Such transactions may expose the Company to exchange rate fluctuations for the period of time from inception of the transaction until it is settled. There can be no assurance that fluctuations in the currency exchange rate in the future will not have an adverse impact on the Company's foreign operations. In addition, the Company may purchase a substantial portion of its raw materials and equipment from foreign suppliers and will incur labor costs in a foreign currency. The foreign manufacture and sale of products and the purchase of raw materials and equipment from foreign suppliers may be adversely affected by political and economic conditions abroad. Protective trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could adversely affect the Company's ability to manufacture or sell its products in foreign markets and purchase materials or equipment from foreign suppliers. In countries in which the Company conducts business in local currency, currency exchange fluctuations could adversely affect the Company's net sales or costs. ITEM 7. FINANCIAL STATEMENTS The Independent Auditors' Report and Financial Statements of the Company are set forth on pages F-1 to F-19 of this report and are incorporated by reference herein. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors and Executive Officers The following table sets forth certain information regarding the Company's directors and executive officers. Name Age Position(s) with the Company - ---- --- ---------------------------- Ross J. Mangano 50 Chairman of the Board of Directors C. Zane Close 46 President, Chief Executive Officer and Director Kenneth W. Miller 64 Secretary, Treasurer and Director Donald F. Walter 63 Director William A. Fresh 67 Director Michael K. Bonham 57 Vice President-Sales and Marketing Eswar Subramanian 38 Vice President-Engineering Henry Wong 36 Vice President-Production Robert K. Bench(1) 47 Chief Financial Officer Roseann L. Tavarozzi 41 Vice President-Finance - ----------- (1 )Mr. Bench has informed the Company that, following the expiration of his employment agreement with the Company on April 3, 1996, he does not intend to remain with the Company. Ross J. Mangano has served as the Chairman of the Board of Directors of the Company since February 1993, and as a director of the Company since February 1988. Mr. Mangano has been employed by Oliver Estate, Inc., an Indiana-based management company, since 1971 and has served as vice president- investments for Oliver Estate, Inc. since 1980. Mr. Mangano also is an investment analyst for Oliver Estate, Inc. Since December 1993, Mr. Mangano has been a member of the board of directors of Cole Taylor Financial Group, a publicly-held bank holding company based in Wheeling, Illinois. C. Zane Close joined the Company in July 1990 as its President and Chief Executive Officer and has also served as a director of the Company since that time. From February 1985 to September 1989, Mr. Close served as vice president of operations and thereafter, until July 1990, as vice president and general manager of Probe Technology Corporation, a California corporation that develops, manufactures and markets probing devices for use in the testing of integrated and hybrid circuits. Kenneth W. Miller has served as the Treasurer of the Company since June 1994, as the Secretary of the Company since October 1991 and as a director of the Company since 1979. Since January 1993, Mr. Miller has served as a business consultant to various companies involved in the high tech industry. From April 1991 until October 1991, Mr. Miller was the marketing director of Scrantom Engineering, Inc., a manufacturer of hybrid circuits and ceramic circuit boards located in Costa Mesa, California. From September 1988 until April 1991, Mr. Miller served as the marketing director of Advanced Packaging Systems, a manufacturer of high density ceramic and polymer thin film interconnect products. From 1981 to September 1988, Mr. Miller served as the president of Interamics, a San Diego-based company that manufactured ceramic packages for integrated circuits and hybrid substrates. From January 1977 to the time he joined Interamics, Mr. Miller was vice president and general manager of a division of Siltec Corporation, a San Francisco-based manufacturer of silicon wafers and ceramic packages. Donald F. Walter has served as a director of the Company since May 1, 1991. Since 1982, Mr. Walter has been a financial consultant and is the principal of Walter & Keenan Financial Consulting Co., a financial consulting firm located in Niles, Michigan. Since 1982, Mr. Walter has served as a director of National Standard Co., a public company based in Niles, Michigan that manufactures specialty wire products. Since 1988, Mr. Walter has served as a director of Metro BanCorp, a publicly-owned bank based in Indianapolis, Indiana. William A. Fresh has served as a director of the Company since April 7, 1995. Mr. Fresh co-founded Fresh Test Technology Corporation, a company recently acquired by the Company ("Fresh Test"), and Fresh Quest Corporation, a designer and manufacturer of probe and interface test technology for the semi-conductor industry. He served as Chairman of the Board and Chief Executive Officer of Fresh Test from January 1986 through March 1995 and has served as the Chairman of the Board and Chief Executive Officer of Fresh Quest Corporation since January 1992. Mr. Fresh also has served as the Chairman of the Board and Chief Executive Officer of Magellan Technology, a public holding company, Orem Tek Development Corp., a real estate development company, and Satellite Images System Corporation, a medical information processing company, since May 1990, May 1991 and February 1992, respectively, and as Chairman of the Board of EFI Electronics, a publicly-held power conditioning company, and Fresh Technology Company, a PC-based software company, since February 1991 and May 1991, respectively. Michael K. Bonham joined the Company in July 1990 as its Vice President of Sales and Marketing. From October 1988 to June 1990, Mr. Bonham was marketing manager of Tektronix, Incorporated, a manufacturer of electronic test measurement equipment, IC Probe and Curve Tracer Group. From September 1984 to October 1988, Mr. Bonham was major account manager and consulting sales engineer for the Semiconductor Cast Systems division of Tektronix. Eswar Subramanian joined the Company in July 1990 as its Vice President of Engineering. Immediately prior to joining the Company, Mr. Subramanian was director of development at Probe Technology Corporation, where he was responsible for the development and establishment of new probing technology and its production operations. From November 1984 to April 1990, Mr. Subramanian was engineering manager at Probe Technology Corporation and was responsible for the design, development, manufacture and engineering of probing products. Henry Wong joined the Company in July 1990 and has served as Vice President of Production since July 1991. Prior to joining the Company, Mr. Wong was chief technologist of probe card production at Probe Technology Corporation, where he was involved in the manufacture and design of probe cards as well as production operations and research and development. Prior to his affiliation with Probe Technology Corporation in 1983, Mr. Wong worked with Rucker and Kolls, a California manufacturer of probe cards. Robert K. Bench joined the Company in April 1995 as its Chief Financial Officer. From April 1991 through March 1995, Mr. Bench served as Vice President and General Manager of Fresh Technology Group, a private holding company, and as Vice President and Chief Operating Officer of Fresh Test Technology Corporation. From March 1986 to March 1991, he served as Vice President of Finance and Chief Financial Officer of Clyde Digital, a software manufacturing and marketing company. Mr. Bench is a certified public accountant. Roseann L. Tavarozzi has served as Vice President-Finance of the Company since April 1995. From March 1994 through March 1995, Ms. Tavarozzi served as Vice President and Chief Financial Officer. Prior to joining the Company, Ms. Tavarozzi was the corporate controller for Quorum International, Ltd., an international distributor of security products based in Phoenix, Arizona. From May 1989 until April 1992, Ms. Tavarozzi was the controller-mid continent for Core-Mark International, Inc., an international distributor of consumable products. Ms. Tavarozzi is a certified public accountant. Upon the resignation of John W. Tarzwell as a director of the Company on May 1, 1991, the Board of Directors of the Company appointed Donald F. Walter to fill the vacancy. In connection with the issuance of the Company's Convertible Subordinated Debentures (see "Transactions with Management"), the Company agreed with one of the holders of the Convertible Subordinated Debentures to appoint Mr. Walter to the Board and thereafter to nominate Mr. Walter as a director so long as $250,000 in principal amount of the Convertible Subordinated Debentures held by such holder and his affiliates remains outstanding. As of the date of this report, such holder and his affiliates held $485,000 in outstanding principal amount of the Convertible Subordinated Debentures. In addition, the employment agreement between the Company and Mr. Close provides that the Company will cause Mr. Close to be nominated to the Board of Directors so long as Mr. Close is employed by the Company. The stockholders of the Company, however, have no obligation to vote for Mr. Walter or Mr. Close and may withhold or distribute votes in their discretion. The Company knows of no other arrangements or understandings between any director or executive officer and any other person pursuant to which he has been selected as a director or executive officer. Compliance with Section 16 of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed with the SEC. Based solely on the Company's review of the copies of such forms received by it during the fiscal year ended December 31, 1995, and written representations that no other reports were required, the Company believes that, except as described below, each person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company's Common Stock complied with all Section 16(a) filing requirements during such fiscal year or prior fiscal years. A Form 4 required to be filed by Robert K. Bench, Chief Financial Officer, with respect to the sale of 30,000 shares and a grant of employee stock options to acquire 25,000 shares, respectively, in August 1995, was not filed until March 6, 1996. A Form 4 required to be filed by Henry Wong, Vice President-Production, with respect to the sale of 5,823 shares and the grant of employee stock options to acquire 25,000 shares, respectively, in August 1995 was not filed until March 6, 1996. A Form 4 required to be filed by Roseann L. Tavarozzi, Vice President-Finance, with respect to the grant of employee stock options to acquire 15,000 shares in August 1995 was not filed until March 6, 1996. A Form 4 required to be filed by William Fresh, a director, in August 1995 with respect to the transfer of 30,000 shares was not filed until on or about March 28, 1996. ITEM 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION Summary of Cash and Other Compensation The following table sets forth information concerning the compensation for the fiscal years ended December 31, 1995, 1994 and 1993 earned by the Company's Chief Executive Officer and the Company's three most highly compensated executive officers whose aggregate cash compensation exceeded $100,000 for services rendered in all capacities to the Company and its subsidiaries for the last fiscal year (the "Named Officers").
SUMMARY COMPENSATION TABLE Long Term Compensation ----------------------------- Annual Compensation Awards Payouts ---------------------------------------- ------------------- -------- Other Restricted All Name and Annual Stock LTIP Other Principal Compensation Award(s) Options Payouts Compen- Position Year Salary($) Bonus($) ($) (4) $ /SARs(#) ($) sation($) -------- ------- ------- -------- ------- - -------- --- --------- C. Zane Close, 1995(1) 135,000 35,000 - President and 1994(2) 116,252 13,000 - 60,000 Chief Executive 1993(3) 108,567 29,600 - Officer Eswar 1995(1) 108,000 25,000 - Subramanian, Vice 1994(2) 98,067 12,000 - 35,000 President - 1993(3) 90,067 23,700 - Engineering Michael K. 1995(1) 108,000 25,000 - Bonham, Vice 1994(2) 100,033 12,000 - 50,000 President - 1993(3) 90,067 23,700 - Sales and Marketing Henry Wong, Vice 1995(1) 100,000 15,750 - 25,000 President - 1994(2) 87,018 5,000 - 20,000 Production 1993(3) 80,073 5,000 -
- ---------------- (1) Includes $34,346, $44,863, $32,462, and $15,000 in salary and/or bonus earned by Messrs. Close, Subramanian, Bonham and Wong, respectively, in 1995 but deferred to a future year. (2) Includes $26,242, $23,662, $16,223, and $14,567 in salary and/or bonus earned by Messrs. Close, Subramanian, Bonham and Wong, respectively, in 1994 but deferred to a future year. (3) Includes $26,324, $21,840, $21,735 and $19,515 in salary and/or bonus earned by Messrs. Close, Subramanian, Bonham and Wong, respectively, in 1993 but deferred to a future year. (4) Other annual compensation did not exceed the lesser of $50,000 or 10% of the total salary and bonus for any of the Named Officers except as noted. Option Grants The following table provides information on stock options granted to the Company's Named Officers during the fiscal year ended December 31, 1995. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants ---------------------------------------------- Potential Realizable Value at Assumed Number of Annual Rates of Stock Securities % of Total Price Appreciation for Underlying Options Exercise Option Term(2) Options Granted Price Expiration -------------------- Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - ---- ----------- ----------- ------ ---- ------ ------- Henry Wong 25,000(1) 12.14% $10.50 2000 $72,524 $160,259
- ------------------ (1) The option agreement provides that the options vest and become exercisable one-fifth in 1995, one-fifth in 1996, one-fifth in 1997, one-fifth in 1998 and one-fifth in 1999. (2) Calculated from a base price equal to the exercise price of each option, which was the fair market value of the Common Stock on the date of grant. The amounts represent only certain assumed rates of appreciation. Option Exercises and Holdings The following table provides information on options exercised in the last fiscal year by the Company's Named Officers and the value of each such Officer's unexercised options at December 31, 1995. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUE AS OF DECEMBER 31, 1995
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at Fiscal Year-End (#) at Fiscal Year-End ($)(2) Acquired on Value ---------------------------- --------------------------- Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ --------------- ----------- ------------- ----------- ------------- C. Zane Close 60,000 $175,000 40,000 20,000 $470,000 $235,000 Eswar 30,000 $236,250 23,334 11,666 $274,175 $137,076 Subramanian Michael K. 30,000 $236,250 23,334 16,666 $391,675 $195,826 Bonham Henry Wong -0- -0- 18,334 26,666 $191,675 $218,326
- --------------------- (1) Calculated based on the market price at exercise multiplied by the number of options exercised less the total exercise price of the options exercised. (2) Calculated based on $17.50, which was the closing sale price of the Common Stock as quoted on the Nasdaq National Market on December 29, 1995, multiplied by the number of applicable shares in-the-money less the total exercise price. Employment Agreements and Other Arrangements On July 16, 1990, C. Zane Close, President and Chief Executive Officer, Michael K. Bonham, Vice President-Sales and Marketing, Eswar Subramanian, Vice President-Engineering and Henry Wong, then a key employee, entered into two year employment agreements (one year with respect to Mr. Wong) with the Company (each of which is subject to automatic renewal for succeeding terms of one year unless either party gives notice at least 90 days prior to the expiration of any term of its intention not to renew) pursuant to which Messrs. Close, Bonham, Subramanian and Wong were to receive $95,000, $80,000, $80,000 and $57,000, respectively, in annual base salary during the term of their employment. Each of the employment agreements provides for additional increases in the base salary and bonuses as may be determined by the Company's Board of Directors in its sole discretion. Each of the agreements may be terminated with or without cause by the Company upon 90 days written notice to the employee and each employee may terminate his obligations under the agreement by giving the Company at least 90 days notice of his intent to terminate. In addition, the employment agreements provided for relocation expenses in the amount of up to $10,000 and for certain temporary living expenses for each of the above-named individuals. The employment agreements also provided for the grant of options to each of the above-named individuals as follows. Pursuant to his option agreement, Mr. Close was granted the right to purchase 40,000 shares at $.50 per share commencing July 16, 1990, 40,000 shares at $1.00 per share commencing July 15, 1991, 5,000 shares at $1.50 per share commencing July 15, 1991, 35,000 shares at $1.50 per share commencing July 15, 1992, 10,000 shares at $2.00 per share commencing July 15, 1992, and 45,000 shares at $2.00 per share commencing July 15, 1993. Pursuant to their employment agreements, Messrs. Subramanian and Bonham were each granted the right to purchase 30,000 shares at $.50 per share commencing July 16, 1990, 30,000 shares at $1.00 per share commencing July 15, 1991, 30,000 shares at $1.50 per share commencing July 15, 1992, and 30,000 shares at $2.00 per share commencing July 15, 1993. Pursuant to his employment agreement, Mr. Wong was granted the right to purchase 25,000 shares at $.50 per share commencing July 16, 1990. In addition, Mr. Wong was granted an option to purchase 25,000 shares at an exercise price of $.9375 per share, one third of which became exercisable July 12, 1991. All of the options described above granted to Messrs. Close, Bonham, Subramanian, and Wong provided for expiration on July 15, 1995. The Company also has entered into employment agreements with Robert K. Bench, its Chief Financial Officer, Harold D. Higgins and Stephen Fresh. These employment agreements provide for an annual base salary of $100,000, $67,000 and $60,000 for Messrs. Bench, Higgins and Fresh, respectively, for a one year term that commenced April 3, 1995. Each of the employment agreements also contains a covenant not to compete pursuant to which Messrs. Bench, Higgins and Fresh may not, during the term of the respective agreement and for a period of 12 months, 90 days and 12 months, respectively, following termination, engage or cause others to engage in the design, manufacture or sale of probe cards and interface hardware products used by the semi-conductor industry in the United States and all other countries in which the Company conducts business. Each of the employment agreements may be terminated at will and each of the employees may terminate his employment upon 45 days prior written notice. If the Company terminates an agreement for cause, or any of Messrs. Bench, Higgins or Fresh terminates his employment, such employee will not be entitled to receive any compensation relating to any period after the termination. If the Company terminates an employee without cause, such employee will be entitled to his base salary for the remaining term of the agreement. Pursuant to an agreement dated as of May 1, 1991, amended as of March 8, 1993, between the Company and John W. Tarzwell and his wife, Mr. Tarzwell agreed to resign as a director, an officer and an employee of the Company effective May 1, 1991. In connection with Mr. Tarzwell's resignation, the Company agreed to pay Mr. Tarzwell $3,125 per month beginning May 15, 1991 and ending April 15, 1994. In addition, the Company agreed to provide Mr. Tarzwell and his wife medical insurance coverage similar to the coverage provided by the Company to employees of the Company, life insurance or comparable coverage providing death benefits of up to $47,500, the use of a Company-leased automobile until March 30, 1992 and reimbursement for all accrued and unpaid vacation pay due Mr. Tarzwell as of April 30, 1991. Mr. Tarzwell agreed to keep confidential all information with respect to the Company, its businesses and affairs and to refrain from disclosing or using such information for his benefit or the benefit of any other person for a period of four years. Further, Mr. Tarzwell agreed to vote all of the Company's stock owned by Mr. Tarzwell in favor of all issues that receive the recommendation of the Company's Board of Directors. In January 1994, the Company's Board of Directors agreed to extend the agreement with Mr. Tarzwell on a month-to-month basis, subject to a 30-day notice of termination. Director Compensation Each outside director of the Company receives $1,500 each quarter and a fee of $500 for each meeting of the Board of Directors attended. Outside directors also are reimbursed for expenses incurred in attending meetings. Directors do not receive additional compensation for committee participation or special assignments. Employee Benefit Plans In 1983, the Board of Directors and the Company's stockholders adopted an incentive stock option plan in order to provide for the grant of options to employees to purchase shares of Common Stock that qualified as "incentive stock options" under Section 422A of the Internal Revenue Code of 1954, as amended. The incentive stock option plan originally provided for the issuance of options to purchase a total of 100,000 shares of the Company's Common Stock. On January 7, 1984, the Board of Directors approved, and on May 5, 1984, the stockholders ratified, the reservation of an additional 120,000 shares of Common Stock for issuance upon the exercise of options under the incentive stock option plan. On February 2, 1987, the Board of Directors approved, and on May 2, 1987, the stockholders ratified, a Plan of Modification to the incentive stock option plan in order to allow the Company certain tax deductions which were not allowed under the incentive stock option plan. The Plan of Modification converted the incentive stock option plan to a non-qualified stock option plan (the "Non-Qualified Plan") and effected a re-grant of all previously issued options under the incentive stock option plan. The original vesting schedules for previously granted options were not affected by the re-grant. On April 22, 1988, the Board of Directors approved the reservation of an additional 150,000 shares of Common Stock for issuance upon the exercise of options under the Non-Qualified Plan, thereby increasing the total number of shares subject to the Non-Qualified Plan to 370,000. On April 3, 1989, the Board of Directors approved, and on May 6, 1989, the stockholders ratified, the adoption of an incentive stock option plan (the "ISO Plan") to provide for the grant of options to key executive, managerial or supervisory employees or other employees who are deemed by the Board of Directors to have performed extraordinary services to the Company, which options will qualify for the tax benefits accorded "incentive stock options" as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). The Board of Directors also approved an amendment to the Company's Non-Qualified Plan on April 3, 1989 to provide that the Company's directors who are not employees of the Company, and thus not eligible to receive incentive stock options under the ISO Plan ("Unaffiliated Directors"), would be eligible to receive options under the Non-Qualified Plan. In connection with the adoption of the ISO Plan, all existing options under the Non-Qualified Plan granted prior to April 3, 1989 were permitted to be exchanged for incentive stock options under the ISO Plan at the option of the holder. Subsequent to the adoption of the ISO Plan, the number of shares reserved for issuance under the Non-Qualified Plan was reduced from 370,000 to 150,000. In July 1990, however, the number of shares reserved for issuance under the Non-Qualified Plan was increased to 565,000 in order to grant options to Messrs. Close, Subramanian, Bonham and Wong in connection with their employment by the Company and in May 1991, the number of shares reserved for issuance under the Non-Qualified Plan was again increased to 685,000. A maximum of 500,000 shares of the Company's Common Stock was reserved for issuance upon exercise of options granted under the ISO Plan. The Non-Qualified Plan and the ISO Plan together are referred to herein as the "Stock Option Plans." The purpose of the Stock Option Plans is to aid the Company in attracting and retaining directors and employees and to provide such persons with an incentive to purchase a proprietary interest in the Company in order to create an increased personal interest in the Company's continued success and progress, thereby motivating them to exert their best efforts on behalf of the Company. The Stock Option Plans are administered by the Board of Directors, which has the sole authority and discretion to select employees to participate in the Stock Option Plans, to grant options under the Stock Option Plans, to specify the terms and conditions of the options (within the limitations of the Stock Option Plans), and otherwise to interpret and construe the terms and provisions of the Stock Option Plans and any agreements governing options granted under the Stock Option Plans. The Stock Option Plans authorize the Board of Directors to delegate its administrative authority and discretion under the Stock Option Plans to the Compensation Committee of the Board of Directors. The exercise price of any options granted under the ISO Plan may not be less than 100% of the fair market value of shares of the Company's Common Stock at the time the option is granted (or, for incentive stock options granted to a person who, at the time of the grant, is the beneficial owner of more than 10% of the combined voting power of all classes of voting stock then outstanding of the Company or any parent or subsidiary of the Company (a "10% Beneficial Owner"), not less than 110% of the fair market value of the Common Stock at the date of grant). All options granted under the ISO Plan expire ten years from the date of grant (five years in the case of a 10% Beneficial Owner), unless an earlier expiration date is provided in the option agreement. The term of each option granted under the Non-Qualified Plan is fixed by the Board of Directors or the Compensation Committee at the date of grant. Options granted under the Stock Option Plans are non-transferable by the optionholder, otherwise than by will or the laws of descent and distribution, and are exercisable during the optionholder's lifetime only by the optionholder, or in the event of the death of the optionholder, by a person who acquires the right to exercise the option by the laws of descent and distribution. Only key executive, managerial or supervisory employees of the Company, including directors who also are full time employees, and other employees who are deemed by the Board of Directors to have performed extraordinary services to the Company, are eligible to receive options granted under the ISO Plan. Although all employees of the Company are eligible to receive options under the Non-Qualified Plan, the Board of Directors intends to grant options under the Non-Qualified Plan primarily to the Company's Unaffiliated Directors. The Stock Option Plans authorize the Board of Directors to amend the Stock Option Plans without stockholder approval whenever the Board of Directors deems an amendment proper and in the best interests of the Company. However, the Board of Directors may not amend the ISO Plan or otherwise take any action with respect to the ISO Plan which would prevent any option granted under the ISO Plan from qualifying as an "incentive stock option" within the meaning of Section 422A of the Code. Moreover, the Board of Directors may not, without stockholder approval, increase the aggregate number of shares of the Company's Common Stock which are subject to the ISO Plan, reduce the exercise price at which options may be granted under the ISO Plan or at which any outstanding option may be exercised, or extend the term of the ISO Plan. Unless previously terminated by the Board of Directors, the ISO Plan will terminate on April 3, 1999. As a result of the adoption of the ISO Plan on April 3, 1989, all options granted under the Non-Qualified Plan prior to April 3, 1989 (which had not previously been canceled) were permitted to be exchanged for options under the ISO Plan at the option of the holder; provided, however, that no options granted under the ISO Plan in exchange for options previously granted under the Non-Qualified Plan were permitted to be issued at a price that is less than 100% of the fair market value of the Company's Common Stock at the time of the exchange and re-grant (or, for incentive stock options granted to a 10% Beneficial Owner, not less than 110% of the fair market value of the Common Stock at the date of the exchange and re-grant). Such options generally are exercisable over a three year period, with one-third exercisable on the date of grant and an additional one-third to become exercisable on each anniversary of the date of grant. For certain information regarding the exercise of options by Named Officers, see the table entitled "Aggregated Option Exercises In Last Fiscal Year And Option Value As Of December 31, 1995." As of March 22, 1996 there were outstanding options to acquire 379,631 shares of the Company's Common Stock under the Stock Option Plans. 1995 Stock Option Plan On May 9, 1995, the Board of Directors adopted the 1995 Stock Option Plan (the "1995 Plan") and on June 27, 1995, the Company's stockholders approved the 1995 Plan, which is divided into two programs: the Discretionary Grant Program and the Automatic Grant Program. The Discretionary Grant Program provides for the grant of options to acquire Common Stock of the Company ("Options"), the direct grant of Common Stock ("Stock Awards"), the grant of stock appreciation rights ("SARs"), or the grant of other cash awards ("Cash Awards") (Stock Awards, SARs, and Cash Awards are collectively referred to herein as "Awards"). Options and Awards under the 1995 Plan may be issued to key personnel, directors, consultants, and other independent contractors who provide valuable services to the Company and its subsidiaries (collectively, "Eligible Persons"). The Options issued may be incentive stock options or nonqualified stock options. The Company believes that the Discretionary Grant Program represents an important factor in attracting and retaining executive officers and other key employees and constitutes a significant part of its compensation program, providing them with an opportunity to acquire a proprietary interest in the Company and giving them an additional incentive to use their best efforts for the long-term success of the Company. The Automatic Option Program provides for the automatic grant of options to acquire the Common Stock of the Company ("Automatic Options"). Automatic Options are granted to non-employee members of the Company's Board of Directors. The Company believes that the Automatic Option Program promotes the interests of the Company by providing such directors the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company and an increased personal interest in the Company's continued success and progress. Shares Subject to the 1995 Plan A maximum of 500,000 shares of Common Stock of the Company may be issued under the 1995 Plan. If any Option or SAR terminates or expires without having been exercised in full, stock not issued under such Option or SAR will again be available for the purposes of the 1995 Plan. If any change is made in the stock subject to the 1995 Plan, or subject to any Option or SAR granted under the 1995 Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, split-up, combination of shares, exchange of shares, change in corporate structure, or otherwise), the 1995 Plan provides that appropriate adjustments will be made as to the maximum number of shares subject to the 1995 Plan, and the number of shares and exercise price per share of stock subject to outstanding Options. There were outstanding Options to acquire 143,000 shares of the Company's Common Stock under the 1995 Plan as of March 22, 1996. Eligibility and Administration Options and Awards may be granted only to persons ("Eligible Persons") who at the time of grant are either (i) key personnel (including officers and directors) of the Company, or (ii) consultants and independent contractors who provide valuable services to the Company. Options that are incentive stock options may be granted only to key personnel of the Company who are also employees of the Company. The Eligible Persons under the Discretionary Grant Program are divided into two groups, and there is a separate administrator (each a "Plan Administrator") for each group. One group consists of Eligible Persons who are executive officers and directors of the Company and all persons who own 10% or more of the Company's issued and outstanding stock. The power to administer the 1995 Plan with respect to those persons rests exclusively with a committee ("Senior Committee") comprised of two or more disinterested directors who are appointed by the Board of Directors. The power to administer the 1995 Plan with respect to the remaining Eligible Persons is vested with the Board of Directors of the Company or with a committee of two or more directors appointed by the Board of Directors. Each Plan Administrator determines (i) which of the Eligible Persons in its group will be granted Options and Awards; (ii) the amount and timing of the grant of such Options and Awards; and (iii) such other terms and conditions as may be imposed by the Plan Administrator consistent with the 1995 Plan. To the extent that granted Options are incentive stock options, the terms and conditions of those Options must be consistent with the qualification requirements set forth in the Internal Revenue Code. Exercise of Options The expiration date, maximum number of shares purchasable, and the other provisions of the Options are established at the time of grant, provided that no options may be granted for terms of more than 10 years. Options vest and thereby become exercisable in whole or in one or more installments at such time as may be determined by the Plan Administrator upon the grant of the Options. However, a Plan Administrator has the discretion to provide for the automatic acceleration of the vesting of any Options or Awards granted under the Discretionary Grant Program in the event of a "Change in Control." The definition of "Change in Control" includes the following events: (i) the acquisition of beneficial ownership by certain persons, acting alone or in concert with others, of 40% or more of the Company's outstanding Common Stock pursuant to a tender offer which the Board of Directors recommends that the Company's stockholders not accept, or (ii) the change in the composition of the Board of Directors occurs such that those individuals who were elected to the Board of Directors at the last stockholders' meeting at which there was not a contested election for Board membership subsequently ceased to comprise a majority of the Board of Directors by reason of a contested election. The exercise prices of Options will be determined by a Plan Administrator, but if an Option is intended to be an incentive stock option may not be less than 100% (110% if the Option is granted to a stockholder who at the time the Option is granted owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company) of the fair market value of the Common Stock at the time of the grant. To exercise an Option, the optionholder will be required to deliver to the Company full payment of the exercise price for the shares as to which the Option is being exercised. Generally, Options can be exercised by delivery of cash, bank cashier's check, or shares of Common Stock of the Company. Termination of Employment or Services Options granted under the 1995 Plan are nontransferable other than by will or by the laws of descent and distribution upon the death of the optionholder and, during the lifetime of the optionholder, are exercisable only by such optionholder. In the event of the death or termination of the employment or services of the participant (but never later than the expiration of the term of the Option), Options may be exercised within 90 days thereafter. If termination is by reason of permanent disability, however, Options may be exercised by the optionholder or the optionholder's estate or successor by bequest or inheritance during the period ending 180 days after the optionholder's retirement (but not later than the expiration of the term of the Option). Termination of employment at any time for cause immediately terminates all Options held by the terminated employee. Awards A Plan Administrator also may grant Awards to Eligible Persons under the 1995 Plan. Awards may be granted in the form of SARs, Stock Awards, or Cash Awards. Awards granted in the form of SARs entitle the recipient to receive a payment equal to the appreciation in market value of a stated number of shares of Common Stock from the price on the date the SAR was granted or became effective to the market value of the Common Stock on the date first exercised or surrendered. The Plan Administrators may, consistent with the 1995 Plan, determine such terms, conditions, restrictions and/or limitations, if any, on any SARs. Awards granted in the form of Stock Awards entitle the recipient to receive shares of the Company's Common Stock directly. Awards granted in the form of cash entitle the recipient to receive direct payments of cash depending on the market value or the appreciation of the Common Stock or other securities of the Company. The Plan Administrators may determine such other terms, conditions, or limitations, if any, on any Awards. The 1995 Plan states that it is not intended to be the exclusive means by which the Company may issue options or warrants to acquire its Common Stock, stock awards, or any other type of award. To the extent permitted by applicable law, the Company may issue any other options, warrants, or awards other than pursuant to the 1995 Plan without stockholder approval. Terms and Conditions of Automatic Options Each year at the meeting of the Board of Directors held immediately after the annual meeting of stockholders, each non-employee Board member will be granted an Automatic Option to acquire 2,000 shares of Common Stock ("Annual Automatic Option"). Each non-employee Board member serving on the date the 1995 Plan was approved by the Company's stockholders received an automatic grant of options to acquire 2,000 shares of Common Stock on that date (the "Initial Existing Director Grant"). New non-employee members of the Board of Directors will receive an Automatic Option to acquire 20,000 shares of Common Stock ("Initial Automatic Option") on the date of their first appointment or election to the Board. Each Automatic Option shall become exercisable and vest in a series of three equal and successive annual installments, with each annual installment to become exercisable on the day before the Company's annual meeting of stockholders occurring in the applicable year. A non-employee member of the Board is not eligible to receive an Annual Automatic Option if the grant date is within 30 days of such non-employee member receiving an Initial Automatic Option. The exercise price per share of Common Stock subject to each Automatic Option is equal to 100% of the fair market value per share on the date of the grant of the Automatic Option. Each Automatic Option expires on the tenth anniversary of the date on which an Automatic Option grant was made. Non-employee Board members also may be eligible to receive Options or Awards under the Discretionary Grant Program or option grants or direct stock issuances under any other plans of the Company. Cessation of service on the Board terminates any Automatic Options for shares that were not vested at the time of such cessation. Automatic Options are nontransferable other than by will or the laws of descent and distribution on the death of optionholder and, during the lifetime of the optionholder, are exercisable only by such optionholder. Duration and Modification The 1995 Plan will remain in force until May 9, 2005. The Board of Directors of the Company may at any time suspend, amend, or terminate the 1995 Plan, except that without approval by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock of the Company present in person or by proxy at a meeting of stockholders of the Company convened for such purpose, the Board of Directors may not (i) increase, except in the case of certain organic changes to the Company, the maximum number of shares of Common Stock subject to the 1995 Plan, (ii) reduce the exercise price at which Options may be granted or the exercise price for which any outstanding Options may be exercised, (iii) extend the term of the 1995 Plan, (iv) change the class of persons eligible to receive Options or Awards under the 1995 Plan, or (v) materially increase the benefits accruing to participants under the 1995 Plan. Notwithstanding the foregoing, the Board of Directors may amend the 1995 Plan from time to time as it deems necessary in order to meet the requirements of any amendments to Rule 16b-3 under the Securities Exchange Act of 1934 without the consent of the stockholders of the Company. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 22, 1996 by (i) each director and each nominee for director; (ii) each Named Officer set forth in the Summary Compensation Table under the section entitled "Executive Compensation"; (iii) all directors, executive officers, and key employees of the Company as a group; and (iv) each person known by the Company to be the beneficial owner of more than 5% of the Common Stock. The information as to beneficial ownership is based upon statements furnished to the Company by such persons. Name and Address Amount and Nature Percent of of Beneficial Owner(1) of Beneficial Ownership(2) Class(3) - ---------------------- -------------------------- -------- William A. Fresh 344,297(4) 8.0% L. Jack Rothe, et al., Trustees 382,500 8.9% 112 W. Jefferson Blvd. Suite 613 South Bend, IN 46601 Ross J. Mangano 261,634(5) 6.1% Judd C. Leighton 260,000(6) 5.7% 112 W. Jefferson Blvd. Suite 603 South Bend, IN 46601 Mary Morris Leighton 260,000(7) 5.7% 112 W. Jefferson Blvd. Suite 603 South Bend, IN 46601 Kenneth W. Miller 193,070(8) 4.5% C. Zane Close 41,600(9) 1.0% Donald F. Walter 16,334(10) * Michael K. Bonham 90,034(11) 2.1% Eswar Subramanian 89,234(12) 2.1% Henry Wong 65,011(13) 1.5% All executive officers and directors as a group (eight persons) 1,166,303(14) 25.9% - ------------ *Less than 1%. (1) Each director, nominee and officer of the Company may be reached through the Company at 600 South Rockford Drive, Tempe, Arizona 85281. (2) Unless otherwise indicated, and subject to community property laws where applicable, all shares are owned of record by the persons named and the beneficial ownership consists of sole voting power and sole investment power. (3) The percentages shown include the shares of Common Stock actually owned as of March 22, 1996 and the shares of Common Stock that the identified person or group had the right to acquire within 60 days of March 22, 1996 pursuant to the exercise of stock options or conversion of securities. In calculating the percentage of ownership, all shares of Common Stock that the identified person or group had the right to acquire within 60 days of March 22, 1996 upon the exercise of stock options or conversion of securities are deemed to be outstanding for the purpose of computing the percentage of the shares of Common Stock owned by such person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of Common Stock owned by any other person. (4) Includes 162,700 shares held by WAF Investment Company, a company 100% owned by Mr. Fresh and his wife, and 78,477 shares held by Orem Tek Development Corp., a company 100% owned by Mr. Fresh, and reflects 2,000 shares which Mr. Fresh has the right to acquire at an exercise price of $8.25 per share pursuant to the exercise of options granted in June 1995. (5) Includes 20,000 shares in the name of Nat & Co. voted pursuant to a power of attorney, 51,300 shares in the name of Oliver & Company voted pursuant to a power of attorney, 165,000 shares in the name of Millie M. Cunningham voted pursuant to a power of attorney, 10,000 shares which Mr. Mangano has the right to acquire at an exercise price of $1.00 per share pursuant to the exercise of options granted in September 1992, 13,334 shares which Mr. Mangano has the right to acquire at an exercise price of $5.75 per share pursuant to the exercise of options granted in September 1994, and 2,000 shares which Mr. Mangano has the right to acquire at an exercise price of $8.25 per share pursuant to the exercise of options granted in June 1995. (6) Includes 200,000 shares with respect to which Judd C. Leighton has the right to acquire sole voting and investment power pursuant to the conversion of $200,000 in principal amount of the Company's 12 1/2% Convertible Subordinated Debentures due December 15, 1996, which are convertible at any time prior to maturity into shares of Common Stock at the rate of $1.00 per share, and 60,000 shares with respect to which Mr. Leighton has the right to acquire shared voting and investment power pursuant to the conversion of $60,000 in principal amount of the Company's 12 1/2% Convertible Subordinated Debentures due December 15, 1996, held by Leighton-Oare Foundation, Inc., a corporation for which Mr. Leighton and his wife, Mary Morris Leighton, serve as directors. (7) Includes 200,000 shares with respect to which Mary Morris Leighton has the right to acquire sole voting and investment power pursuant to the conversion of $200,000 in principal amount of the Company's 12 1/2% Convertible Subordinated Debentures due December 15, 1996, which are convertible at any time prior to maturity into shares of Common Stock at the rate of $1.00 per share, and 60,000 shares with respect to which Mrs. Leighton has the right to acquire shared voting and investment power pursuant to the conversion of $60,000 in principal amount of the Company's 12 1/2% Convertible Subordinated Debentures due December 15, 1996 held by Leighton-Oare Foundation, Inc., a corporation for which Mrs. Leighton and her husband, Judd C. Leighton, serve as directors. (8) Includes 127,736 shares held by U.S. Trust Company of California, N.A., as trustee for the Kenneth W. Miller Charitable Remainder Unitrust. Mr. Miller may be deemed to have shared voting and investment power with respect to these shares. Also includes 30,000 shares which Mr. Miller has the right to acquire at an exercise price of $.50 per share pursuant to the exercise of options granted in July 1990, 10,000 shares which Mr. Miller has the right to acquire at an exercise price of $1.00 per share pursuant to the exercise of options granted in September 1992, 13,334 shares which Mr. Miller has the right to acquire at an exercise price of $5.75 per share pursuant to the exercise of options granted in September 1994, and 2,000 shares which Mr. Miller has the right to acquire at an exercise price of $8.25 per share pursuant to the exercise of options granted in June 1995. (9) Includes 40,000 shares which Mr. Close has the right to acquire at an exercise price of $5.75 per share pursuant to the exercise of options granted in September 1994. (10) Includes 13,334 shares which Mr. Walter has the right to acquire at an exercise price of $5.75 per share pursuant to the exercise of options granted in September 1994 and 2,000 shares which Mr. Walter has the right to acquire at an exercise price of $8.25 per share pursuant to the exercise of options granted in June 1995. (11) Includes 33,334 shares which Mr. Bonham has the right to acquire at an exercise price of $5.75 pursuant to the exercise of options granted in September 1994. (12) Includes 23,334 shares which Mr. Subramanian has the right to acquire at an exercise price of $5.75 per share pursuant to the exercise of options granted in September 1994. (13) Includes 5,000 shares which Mr. Wong has the right to acquire at an exercise price of $10.50 per share pursuant to the exercise of options granted in August 1995 and 2,000 shares which Mr. Wong's spouse has the right to acquire at an exercise price of $10.50 per share pursuant to the exercise of options granted in August 1995. (14) Includes 223,004 shares of Common Stock that members of the group had the right to acquire as of March 22, 1996 or within 60 days of March 22, 1996 pursuant to the exercise of stock options. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March and April of 1991, the Company issued $1,000,000 in principal amount of Convertible Subordinated Debentures, $600,000 of which was issued with a maturity date of December 15, 1996 bearing interest at 12 1/2% per annum, payable semi-annually on the 15th day of each June and December, and $400,000 of which was issued with a maturity date of March 29, 1996 bearing interest at the rate of 11% per annum, payable quarterly on the first day of each January, April, July and October. All of the Debentures provided for conversion at the option of the holder into shares of Common Stock at the rate of $1.00 per share, subject to certain adjustments. In addition, the holders of the Debentures were granted certain rights of first refusal with respect to the issuance of additional debt, Common Stock or other securities convertible into Common Stock of the Company. The Debentures also provided for certain demand and piggyback registration rights with respect to the shares of Common Stock acquired upon conversion of the Debentures, pursuant to which the Company will incur the cost of registration of the Common Stock acquired by the holders of Debentures upon conversion. Kenneth W. Miller and Donald F. Walter, directors of the Company, Henry Wong, a Vice President of the Company, and James F. Keenan, a member of the group that nominated Mr. Walter, purchased $20,000, $10,000, $80,000 and $10,000, respectively, in principal amount of the 12 1/2% Convertible Subordinated Debentures due December 15, 1996. Troon & Co., a nominee of L. Jack Rothe (formerly Robert O. Kuehl), et al., Trustees, purchased $400,000 of the 11% Convertible Subordinated Debentures due March 29, 1996. As the result of the possible affiliation between Ross J. Mangano, a director of the Company, and L. Jack Rothe, et al., Trustees, the issuance of Debentures to Troon & Co. may have constituted a "business combination" with an "interested stockholder" under Section 203 of the Delaware General Corporation Law. Accordingly, the Debenture issued to Troon & Co. was issued in accordance with the terms of the proposal to permit the Company to issue Debentures to interested stockholders approved by the stockholders of the Company at the 1990 Annual Meeting of Stockholders. To assist the Company in meeting the minimum stockholders' equity requirement for listing on the National Association of Securities Dealers Automated Quotation System ("Nasdaq"), Mr. Miller converted $10,000 in principal amount of the Debentures into 10,000 shares of Common Stock, Mr. Walter converted $5,000 in principal amount of the Debentures into 5,000 shares of Common Stock, Mr. Wong converted $40,000 in principal amount of the Debentures into 40,000 shares of Common Stock, Mr. Keenan converted $5,000 in principal amount of the Debentures into 5,000 shares of Common Stock and Troon & Co. converted $300,000 in principal amount of the Debentures into 300,000 shares of Common Stock. The principal amounts of the Debentures described above were converted into shares of Common Stock at the rate of $1.00 per share. On the date the Debentures were converted, the bid price for the Company's Common Stock was $1 3/8 and the asked price was $1 3/4. To compensate such Debenture holders for the loss of interest on that portion of the Debentures converted into shares of Common Stock, the Company agreed to increase the interest rate payable on the principal amount of the Debentures outstanding after such conversion held by such Debenture holders to 25% per annum. In addition, in September 1993, Mr. Walter converted an additional $5,000 in principal amount of the Debentures into 5,000 shares of Common Stock at the rate of $1.00 per share. On the date these Debentures were converted, the bid price for the Company's Common Stock was $5 3/4 and the asked price was $6 1/4. On September 12, 1994, Mr. Wong converted an additional $40,000 in principal amount of Debentures into 40,000 shares of Common Stock at the rate of $1.00 per share. On that date, the bid price for the Company's Common Stock was $5.75 and the asked price was $6.50. As a result of the conversions described above, $115,000 in principal amount of the Debentures currently bears interest at the rate of 25% per annum. The Company anticipates that the entire outstanding principal amount of the Debentures will be converted into shares of Common Stock on or prior to March 29, 1996 and December 15, 1996, respectively. PART IV ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements The following Financial Statements of the Company are filed with this report: Description Page Independent Auditors' Report ................................ F-1 Consolidated Balance Sheets, December 31, 1995 and 1994...... F-2 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993........................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993..................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993........................... F-5 Notes to Financial Statements................................ F-7 2. Exhibits Exhibit Number Description 2(a) Agreement of Merger and Plan of Reorganization dated February 21, 1995, as amended by that certain Amendment of Agreement of Merger and Plan of Reorganization dated March 31, 1995, by and among Fresh Test Acquisition, Inc., the Company, Fresh Technology Corporation, and William A. Fresh, Robert K. Bench, Harold D. Higgins, WAF Investment Company and Orem Tek Development Corp. filed as Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on or about April 4, 1995 and incorporated herein by reference. 3(a) Certificate of Incorporation of the Company dated March 14, 1987, as filed with the Secretary of State of Delaware and filed as Exhibit 4(a) to the Company's Form 10-Q for the period ended June 30, 1987 and incorporated herein by reference. 3(b) Bylaws of the Company dated March 14, 1987, filed as Exhibit 4(b) to the Company's Form 10-Q for the period ended June 30, 1987 and incorporated herein by reference. 4(a) Specimen Stock Certificate filed as Exhibit 4(c) to the Company's Form S-18 Registration Statement (No. 2-85679) and incorporated herein by reference. 4(b) Specimen Convertible Subordinated Debenture filed as Exhibit 4(b) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 4(c) Specimen Series A Preferred Stock Certificate. 4(d) Certificate of Designations of Series A Preferred Stock dated January 11, 1996, as filed with the Secretary of State of Delaware. 10(a) Non-Qualified Stock Option Plan adopted by the Company's Board of Directors on June 25, 1983, as amended, and Form of Qualified Stock Option Agreement filed as Exhibits 4(a) and 4(c) to the Company's Form S-8 Registration Statement (No. 33-65200) and incorporated herein by reference. 10(b) Incentive Stock Option Plan adopted by the Company's Board of Directors on April 3, 1989, filed as Exhibit 10(k) to the Company's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference and Form of Incentive Stock Option Agreement filed as Exhibit 4(d) to the Company's Form S-8 Registration Statement (No. 33-65200) and incorporated herein by reference. 10(c) Lease Agreement between the Company and Jerome A. Reynolds dated July 4, 1991 filed as Exhibit 10(b) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10(d) Lease Agreement between the Company and Kou-ping Cheng dated June 11, 1993 filed as Exhibit 10(u) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(e) Lease Agreement between the Company and NPF Management, Inc. dated March 15, 1993 filed as Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. 10(f) Lease Modification between the Company and PDJ Corporation dated February 10, 1994 to Lease Agreement between the Company and NPF Management, Inc. dated March 15, 1993 filed as Exhibit 10(v) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(g) Lease Agreement between the Company and John J. Hollowell dated October 30, 1990 filed as Exhibit 10(m) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(h) Office Lease Agreement between the Company and Robert B. Hopgood, Jr. dated November 13, 1990 filed as Exhibit 10(n) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(i) Addendum dated March 1, 1992 between the Company and Robert B. Hopgood, Jr. to Office Lease Agreement between the Company and Robert B. Hopgood, Jr. dated November 13, 1990 filed as Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10(j) Second Addendum dated January 1, 1994 between the Company and Robert B. Hopgood, Jr. to Office Lease Agreement between the Company and Robert B. Hopgood, Jr. dated November 13, 1990 filed as Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10(k) Lease Agreement between the Company and Renner Plaza Properties dated September 8, 1993 filed as Exhibit 10(w) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(l) Lease Agreement between the Company and Aetna Life Insurance Company dated December 30, 1994 filed as Exhibit 10(l) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(m) Lease between Scottish Enterprise and Cerprobe Europe Limited dated November 4, 1994 filed as Exhibit 10(m) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(n) Rental Agreement between the Company and Gentra Capital Corporation dated as of July 6, 1994 filed as Exhibit 10(n) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(o) Agreement dated May 2, 1991 between the Company and John W. Tarzwell and Margaret L. Tarzwell filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10(p) Amendment No. 1 dated March 8, 1993 to Agreement dated May 2, 1991 between the Company and John W. Tarzwell and Margaret L. Tarzwell filed as Exhibit 10(s) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(q) Asset Purchase Agreement dated July 10, 1991 between the Company and Alpha Test Corporation filed as Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10(r) Employment Contract dated July 16, 1990 between the Company and Carl Zane Close filed as Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(s) Employment Contract dated July 17, 1990 between the Company and Michael K. Bonham filed as Exhibit 10(q) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(t) Employment Contract dated July 16, 1990 between the Company and Eswar Subramanian filed as Exhibit 10(r) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(u) Employment Contract dated July 16, 1990 between the Company and Henry Wong filed as Exhibit 10(s) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(v) Manufacturing Licensing Agreement between the Company and Intertrade Scientific, Inc. dated August 30, 1993 filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(w) Manufacturing Licensing Agreement between the Company and ESJ Corporation dated January 21, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(x) Loan Agreement between the Company and First Interstate Bank of Arizona, N.A. dated June 6, 1994 and related Promissory Note filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(y) Master Lease Agreement between the Company and First Interstate Bank of Arizona, N.A. dated as of June 6, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(z) Master Lease Agreement between the Company and PFC, Inc. dated August 9, 1994 filed as Exhibit 10(z) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(aa) Commitment of Norwest Equipment Finance, Inc. to the Company dated December 14, 1994 filed as Exhibit 10(aa) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(bb) Agreement between Cerprobe Europe, Limited and Lanarkshire Development Agency dated August 15, 1994, as amended, filed as Exhibit 10(bb) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(cc) Lease Agreement between the Company and Realtec Properties I, L.P. dated July 17, 1995 filed as Exhibit 1 to the Company's Form 10-QSB for the quarter ended June 30, 1995 and incorporated herein by reference. 10(dd) Lease Agreement between the Company and East Point Realty Trust dated June 30, 1995 filed as Exhibit 2 to the Company's Form 10-QSB for the quarter ended June 30, 1995 and incorporated herein by reference. 10(ee) Amendment to Loan Agreement between the Company and First Interstate Bank of Arizona, N.A. dated April 30, 1995 and related Promissory Note filed as Exhibit 3 to the Company's Form 10-QSB for the quarter ended June 30, 1995 and incorporated herein by reference. 10(ff) Amendment to Master Lease Agreement between the Company and First Interstate Bank of Arizona, N.A. dated April 30, 1995 filed as Exhibit 4 to the Company's Form 10-QSB for the quarter ended June 30, 1995 and incorporated herein by reference. 10(gg) Letter of Intent between the Company and Technology Parks PTE LTD dated June 23, 1995 filed as Exhibit 5 to the Company's Form 10-QSB for the quarter ended June 30, 1995 and incorporated herein by reference. 10(hh) Employment Agreement between the Company and Robert K. Bench dated March 31, 1995. 10(ii) Security Agreement between the Company and Zions Credit Corporation dated December 27, 1995. 10(jj) Assignment of Lease between Fresh Test Technology, Inc. and the Company dated August 31, 1995. 10(kk) Lease Agreement between Fresh Test Technology, Inc. and Mission West Properties dated September 21, 1993. 10(ll) The Company's 1995 Stock Option Plan. 11 Schedule of Computation of Net Income per Share. 21 List of Subsidiaries filed as Exhibit 21 to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 23 Independent Auditors' Consent. 27 Financial Data Schedule. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-KA3 on or about October 1, 1995, which amended the Company's Current Report on Form 8-K filed on April 4, 1995. There were no other Current Reports on Form 8-K filed during the last quarter of 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CERPROBE CORPORATION /s/ C. Zane Close ----------------- C. Zane Close President, Chief Executive Officer and Director Dated: March 27, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/Ross J. Mangano Chairman of the Board of March 27, 1996 - -------------------- Directors and Director Ross J. Mangano /s/C. Zane Close President, Chief Executive March 27, 1996 - -------------------- Officer, and Director C. Zane Close (Principal Executive Officer) /s/Robert K. Bench Chief Financial Officer March 27, 1996 - -------------------- (Principal Financial Robert K. Bench and Accounting Officer) /s/Kenneth W. Miller Director and Treasurer March 27, 1996 - -------------------- Kenneth W. Miller /s/Donald F. Walter Director March 27, 1996 - -------------------- Donald F. Walter /s/William A. Fresh Director March 27, 1996 - -------------------- William A. Fresh CERPROBE CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report............................................... F-1 Consolidated Balance Sheets, December 31, 1995 and 1994.................... F-2 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993.................................................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 ..................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993........................................... F-6 Notes To Consolidated Financial Statements................................. F-7 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Cerprobe Corporation: We have audited the accompanying consolidated balance sheets of Cerprobe Corporation and subsidiary as of December 31, 1995 and 1994 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerprobe Corporation and subsidiary as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Phoenix, Arizona February 2, 1996 CERPROBE CORPORATION Consolidated Balance Sheets December 31, 1995 and 1994
Assets 1995 1994 ------------ ------------ Current assets: Cash and cash equivalents $ 263,681 738,319 Accounts receivable, net of allowance of $173,000 in 1995 and $23,000 in 1994 (note 5) 4,377,041 2,201,712 Inventories (notes 2 and 5) 2,802,081 1,693,198 Prepaid expenses 111,673 52,571 Income taxes receivable 163,464 -- Deferred income taxes (note 7) 270,599 93,974 ------------ ------------ Total current assets 7,988,539 4,779,774 ------------ ------------ Property and equipment, net (notes 3 and 5) 4,667,786 2,146,080 Goodwill, net of amortization of $197,109 1,923,396 -- Patents and technology, net of amortization of $16,826 74,013 -- Other assets 313,716 89,519 ------------ ------------ Total assets $ 14,967,450 7,015,373 ============ ============ Liabilities and Stockholders' Equity 1995 1994 ------------ ------------ Current liabilities: Accounts payable $ 1,499,853 443,559 Accrued expenses (note 4) 788,599 663,904 Convertible subordinated debentures (note 5) 595,000 -- Current portion of note payable (note 5) 123,743 -- Current portion of capital leases (note 10) 209,885 100,312 ------------ ------------ Total current liabilities 3,217,080 1,207,775 Convertible subordinated debentures (note 5) -- 595,000 Note payable, less current portion (note 5) 408,376 -- Capital leases, less current portion (note 10) 572,830 195,716 Deferred income taxes (note 7) 66,123 -- Other liabilities 46,801 93,928 ------------ ------------ Total liabilities 4,311,210 2,092,419 ------------ ------------ Commitments and contingencies (notes 8 and 10) Stockholders' equity (notes 6 and 16): Preferred stock, $.05 par value; authorized 10,000,000 shares; none issued -- -- Common stock, $.05 par value; authorized, 10,000,000 shares; issued and outstanding, 4,095,851 shares in 1995 and 3,223,351 shares in 1994 204,792 161,167 Additional paid-in capital 7,239,410 3,685,432 Retained earnings 3,466,464 1,064,217 Unearned compensation (241,872) -- Foreign currency translation adjustment (12,554) 12,138 ------------ ------------ Total stockholders' equity 10,656,240 4,922,954 ------------ ------------ Total liabilities and stockholders' equity $ 14,967,450 7,015,373 ============ ============
See accompanying notes to consolidated financial statements. CERPROBE CORPORATION Consolidated Statements of Income Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ------------ ------------ ------------ Net sales $ 26,098,637 14,251,485 11,211,511 Costs of goods sold 13,706,435 8,213,966 6,767,505 ------------ ------------ ------------ Gross margin 12,392,202 6,037,519 4,444,006 ------------ ------------ ------------ Expenses: Engineering and product development 706,680 417,198 335,659 Selling, general and administrative 7,502,598 3,693,401 2,398,243 ------------ ------------ ------------ Total expenses 8,209,278 4,110,599 2,733,902 ------------ ------------ ------------ Operating income 4,182,924 1,926,920 1,710,104 ------------ ------------ ------------ Other income (expense): Interest income 44,697 18,882 1,471 Interest expense (153,758) (115,254) (131,887) Other income 140,111 92,796 12,670 ------------ ------------ ------------ Total other income (expense) 31,050 (3,576) (117,746) ------------ ------------ ------------ Income before income taxes 4,213,974 1,923,344 1,592,358 Income taxes (1,811,727) (710,521) (90,000) ------------ ------------ ------------ Net income $ 2,402,247 1,212,823 1,502,358 ============ ============ ============ Income per common and common equivalent share: Primary net income per share $ 0.59 0.36 0.41 ============ ============ ============ Weighted average number of common and common equivalent shares outstanding 4,071,233 3,387,220 3,687,740 ============ ============ ============ Fully diluted net income per share $ 0.49 0.30 0.35 ============ ============ ============ Weighted average number of common and common equivalent shares outstanding 4,862,137 4,006,801 4,348,872 ============ ============ ============
See accompanying notes to consolidated financial statements. CERPROBE CORPORATION Consolidated Statements of Stockholders' Equity Years ended December 31, 1995, 1994 and 1993
Number of Common Foreign Shares Additional Retained Currency Total Issued and Common Paid-in Earnings Unearned Translation Stockholders' Outstanding Stock Capital (Deficit) Compensation Adjustment Equity --------- -------- --------- ----------- --------- -------- ---------- Balance, January 1, 1993 2,619,518 $130,975 2,733,997 (1,561,487) -- -- 1,303,485 Conversion of subordinated debentures, net of $6,143 costs 5,000 250 (1,393 -- -- -- (1,143) Stock options exercised 351,500 17,575 241,041 -- -- -- 258,616 Net income -- -- -- 1,502,358 -- -- 1,502,358 --------- -------- --------- ----------- --------- -------- ----------- Balance, December 31, 1993 2,976,018 148,800 2,973,645 (59,129) -- -- 3,063,316 Conversion of subordinated debentures 40,000 2,000 38,000 -- -- -- 40,000 Stock options exercised 207,333 10,367 191,326 -- -- -- 201,693 Tax benefit of disqualifying dispositions -- -- 482,461 -- -- -- 482,461 Cash dividends paid ($.03 a share) -- -- -- (89,477) -- -- (89,477) Translation adjustment -- -- -- -- -- 12,138 12,138 Net income -- -- -- 1,212,823 -- -- 1,212,823 --------- -------- --------- ----------- --------- -------- ----------- Balance, December 31, 1994 3,223,351 161,167 3,685,432 1,064,217 -- 12,138 4,922,954 Issuance of stock options at less than fair market value -- -- 387,000 -- (387,000) -- -- Compensation expense related to stock options -- -- -- -- 145,128 -- 145,128 Stock options exercised 160,000 8,000 199,464 -- -- -- 207,464 Tax benefit of disqualifying dispositions -- -- 340,170 -- -- -- 340,170 Issuance of common stock for acquisition 712,500 35,625 2,627,344 -- -- -- 2,662,969 Translation adjustment -- -- -- -- -- (24,692) (24,692) Net income -- -- -- 2,402,247 -- -- 2,402,247 --------- -------- --------- ----------- --------- -------- ----------- Balance, December 31, 1995 4,095,851 $204,792 7,239,410 3,466,464 (241,872) (12,554) 10,656,240 ========= ======== ========= =========== ========= ======== ===========
See accompanying notes to consolidated financial statements. CERPROBE CORPORATION Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ----------- ----------- ----------- Operating activities: Net income $ 2,402,247 1,212,823 1,502,358 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,125,584 458,436 306,708 Tax benefit from stock options exercised 340,170 482,461 -- Loss (gain) on sale of equipment 4,787 (50) -- Deferred income taxes (110,502) (93,974) -- Provision for losses on accounts receivable 12,000 24,000 (8,373) Provision for obsolete inventory 80,000 67,200 30,000 Compensation expense 145,128 -- -- Changes in operating assets and liabilities: Accounts receivable (1,444,689) (907,762) (273,552) Inventories (1,038,216) (51,285) (434,984) Prepaid expenses and other assets (389,988) (59,418) (49,828) Income taxes receivable (163,464) -- -- Accounts payable and accrued expenses 1,101,238 (15,786) 78,881 Accrued income taxes (376,442) 331,765 44,677 Other liabilities (42,289) 90,356 (18,456) ----------- ----------- ----------- Net cash provided by operating activities 1,645,564 1,538,766 1,177,431 ----------- ----------- ----------- Investing activities: Capital expenditures (1,960,775) (1,354,694) (500,938) Costs incurred in Fresh Test acquisition (402,865) -- -- Cash acquired in purchase of Fresh Test 321,167 -- -- Proceeds from sale of equipment 42,062 50 -- ----------- ----------- ----------- Net cash used in investing activities (2,000,411) (1,354,644) (500,938) ----------- ----------- ----------- Financing activities: Dividends paid -- (89,477) -- Net payments under line of credit agreement -- -- (155,614) Principal payments on note payable and capital leases (302,563) (79,603) (274,466) Net proceeds from issuance of common stock 207,464 201,693 252,473 ----------- ----------- ----------- Net cash provided by (used in) financing activities (95,099) 32,613 (177,607) ----------- ----------- ----------- Effect of exchange rates on cash (24,692) 12,138 -- Net increase (decrease) in cash and cash equiva-lents (474,638) 228,873 498,886 Cash and cash equivalents, beginning of year 738,319 509,446 10,560 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 263,681 738,319 509,446 =========== =========== ===========
CERPROBE CORPORATION Consolidated Statements of Cash Flows, Continued Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 ---------- ------- ------- Supplemental schedule of noncash investing and financing activities: Conversion of subordinated debentures $ -- 40,000 5,000 ========== ======= ======= Equipment acquired under capital leases and issuance of note payable $1,056,817 195,293 161,072 ========== ======= ======= Supplemental disclosures of cash flow informa tion: Interest paid $ 153,690 115,873 133,539 ========== ======= ======= Income taxes paid (refunded) $1,679,876 (9,731) 65,323 ========== ======= ======= Issuance of stock for purchase of Fresh Test Technology (note 12) 2,662,969 -- -- ========== ======= ======= See accompanying notes to consolidated financial statements. CERPROBE CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies Cerprobe Corporation (the Company) designs, manufactures, and markets high-performance probing and interface products for use in the testing of integrated and hybrid electronic circuits for the semiconductor industry. The Company markets its products worldwide to semiconductor manufacturers. The following are the significant accounting and financial policies used in the preparation of these consolidated financial statements of the Company: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. The Company's subsidiary, Cerprobe Europe, Limited, was established in February 1994 in Scotland. All significant intercompany transactions have been eliminated in consolidation. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks and cash invested in short-term securities with original maturities of three months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are stated at cost and depreciated by the straight-line method over the following estimated useful lives: Manufacturing tools and equipment 3-7 years Office furniture and equipment 3-7 years Computer software 3 years Leasehold improvements Life of lease Goodwill Goodwill represents the amount by which the cost of businesses purchased exceeds the fair value of the net assets acquired. Goodwill is amortized over a period of eight years using the straight-line method. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Patents and Technology Patents and technology are stated at fair market value at the date of acquisition less accumulated amortization and are amortized over a period of five years using the straight-line method. Research and development costs and any costs associated with internally developed patents, formulas or other proprietary technology are expensed in the year incurred. Income Taxes Effective January 1, 1993, the Company adopted the asset and liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation The financial statements of the Company's Scotland subsidiary are translated into United States dollars in accordance with SFAS No. 52, Foreign Currency Translation. Assets and liabilities of the Scotland subsidiary are translated into United States dollars at current exchange rates. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded directly as a separate component of stockholders' equity. Revenue Recognition The Company records revenue when goods are shipped. Net Income Per Share Primary net income per common and common equivalent share is computed using the weighted average number of common shares outstanding during each year and includes shares issuable upon exercise of stock options and warrants when the effect of such issuance is dilutive. The calculation of fully diluted net income per common and common equivalent share assumes that the convertible subordinated debentures were converted into common stock at the beginning of the year, when dilutive. Reclassifications Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the 1995 presentation. (2) Inventories Inventories consist of the following: 1995 1994 ----------- ----------- Raw materials $ 1,655,974 777,199 Work-in-process 1,229,107 967,999 Reserve for obsolete inventories (83,000) (52,000) ----------- ----------- $ 2,802,081 1,693,198 =========== =========== (3) Property and Equipment Property and equipment consist of the following: 1995 1994 ----------- ----------- Manufacturing tools and equipment $ 4,825,724 3,056,849 Office furniture and equipment 1,722,312 839,521 Leasehold improvements 759,843 439,894 Construction in progress 398,838 41,620 Computer software 39,775 39,775 Accumulated depreciation and amortization (3,078,706) (2,271,579) ----------- ----------- $ 4,667,786 2,146,080 =========== =========== (4) Accrued Expenses Accrued expenses consist of the following: 1995 1994 ----------- ----------- Accrued payroll and related taxes $ 482,866 204,297 Accrued income taxes -- 376,442 Other accrued expenses 305,733 83,165 ----------- ----------- $ 788,599 663,904 =========== =========== (5) Convertible Subordinated Debentures and Note Payable On March 29, 1991, the Company issued $600,000 of 12.5% convertible subordinated debentures due December 15, 1996. The debentures are convertible into 600,000 shares of common stock, subject to adjustment. In addition, the Company issued $400,000 of 11% convertible subordinated debentures due March 29, 1996. The 11% debentures are convertible into 400,000 shares of common stock, subject to adjustment. Interest on the debentures is due either semi-annually or quarterly. Of the $1,000,000 debentures sold, $510,000 were acquired by officers and directors of the Company or by investment groups controlled by directors of the Company. The Company reserved 1,000,000 shares of its common stock for possible conversion of the debentures. In connection with the conversion of a portion of the debentures in 1993, the interest rate on $115,000 of the remaining debentures increased to 25%. In September 1994, September 1993 and October 1992, $40,000, $5,000 and $360,000, respectively, in principal amount of the Company's convertible subordinated debentures were converted to common stock. The Company has a bank line of credit available at the lesser of 80% of eligible receivables, as defined, or $750,000 until April 30, 1996. Interest on outstanding balances is at prime plus .75%, and the line of credit is collateralized by accounts receivable, inventory and equipment. The non-use fee under the line of credit is .00375%. At December 31, 1995, no amounts were outstanding under the line of credit and $750,000 was available. The Company has a note payable for the purchase of equipment which accrues interest at 9.4%. Monthly payments of $13,185 including interest are due through December 1999. At December 31, 1995, $532,119 was outstanding under the note. Long-term debt consists of the following: 1995 1994 ---------- ---------- Convertible subordinated debentures $ 595,000 595,000 Note payable 532,119 -- ---------- ---------- 1,127,119 595,000 Less current maturities 718,743 -- ---------- ---------- Long-term debt $ 408,376 595,000 ========== ========== Annual maturities of long-term debt are as follows: 1996 $ 718,743 1997 127,650 1998 140,177 1999 140,549 ---------- $1,127,119 =========== (6) Stockholders' Equity The Company has an incentive stock option plan, a nonqualified stock option plan, and a combination stock option plan. In accordance with the plans, options are to be granted at no less than 100% of the fair market value of the shares at the date of grant. The options become exercisable on a basis as established by the Company's Compensation Advisory Committee and are exercisable for a period of 5 to 10 years. A total of 500,000, 685,000 and 500,000 shares of the Company's common stock are reserved for issuance under the incentive stock option plan, the nonqualified stock option plan, and the combination stock plan, respectively.
Changes in options are summarized as follows: Option Price Available Per Share Outstanding Exercisable for Grant ---------------- --------- ---------- --------- At January 1, 1993 $ 0.500-- 2.060 835,000 607,334 350,000 Granted 6.750 30,500 (30,500) Became exercisable 0.563-- 6.750 -- 165,115 Exercised 0.500 1.000 (351,500) (351,500) Canceled 0.563 (1,000) (1,000) 1,000 ---------------- --------- ---------- --------- At December 31, 1993 0.500-- 6.750 513,000 419,949 320,500 Granted 5.750 260,000 (260,000) Became exercisable 0.938-- 6.750 194,505 Exercised 0.563-- 1.000 (207,333) (207,333) Canceled 0.938 (3,334) (3,334) 3,334 ---------------- --------- ---------- --------- At December 31, 1994 0.500-- 6.750 562,333 403,787 63,834 Combination stock option plan 500,000 Granted 5.500-- 12.875 206,000 (206,000) Became exercisable 5.500-- 12.875 139,103 Exercised 0.500-- 5.500 (160,000) (160,000) Canceled 6.750 (10,000) (10,000) 10,000 ---------------- --------- ---------- --------- At December 31, 1995 $ 0.500-- 12.875 598,333 372,890 367,834 ================ ========= ========== =========
The Company extended the exercise date on 72,000 options issued under the nonqualified stock option plan. As a result, compensation expense of $387,000 will be recognized over the revised period of the options through July 1997. Compensation expense related to these options was $145,128 during the year ended December 31, 1995. (7) Income Taxes The components of the provision for income taxes are as follows: 1995 1994 1993 ----------- ----------- ----------- Federal $ 1,391,499 495,000 43,000 State 420,228 215,521 47,000 ----------- ----------- ----------- $ 1,811,727 710,521 90,000 =========== =========== =========== Current $ 1,922,229 804,495 90,000 Deferred (110,502) (93,974) -- ----------- ----------- ----------- $ 1,811,727 710,521 90,000 =========== =========== =========== A reconciliation of the difference between the provision for income taxes and the income taxes at the statutory United States federal income tax rate is as follows: 1995 1994 1993 ----------- ----------- ----------- Computed expected provision $ 1,433,000 654,000 541,400 Change in beginning of the year valuation allowance (36,000) (258,000) -- State income taxes, net 253,000 142,000 107,000 Foreign losses not benefited 199,000 149,000 -- Benefit of loss carryforward -- -- (566,000) Other (37,273) 23,521 7,600 ----------- ----------- ----------- $ 1,811,727 710,521 90,000 =========== =========== =========== The components of the Company's deferred tax asset and deferred tax liability are as follows: 1995 1994 --------- --------- Deferred tax assets: Foreign loss carryforwards $ 348,000 149,000 Reserves and accruals not currently deductible 270,598 93,974 Deferred compensation 48,785 74,000 --------- --------- Total gross deferred tax assets 667,383 316,974 Less valuation allowance (348,000) (185,000) --------- --------- Net deferred tax asset 319,383 131,974 Deferred tax liabilities: Difference between book and tax basis of property 114,907 38,000 --------- --------- Net deferred tax asset $ 204,476 93,974 ========= ========= The valuation allowance at December 31, 1995 and 1994 is primarily related to foreign losses for which there is no assurance of realizing a tax benefit. A valuation allowance has not been provided for the other deferred tax assets since realization of the deferred tax assets is considered more likely than not. During 1995 and 1994, tax benefits were recorded for the exercise of stock options under the nonqualified stock option plan. The benefits of approximately $340,000 and $482,000 were recorded directly to additional paid-in capital. (8) Research and Development Arrangements The Company has been awarded two research and development contracts by Sematech, the consortium of U.S. semiconductor manufacturers and the government. Pursuant to the contracts, Sematech will reimburse the Company 50% and 20% of the costs incurred under the first and second project, respectively, up to a fixed amount. The remaining costs will be charged to research and development by the Company. The contracts allow the sharing of proprietary technology upon completion. For the year ended December 31, 1995, the Company had incurred costs of $273,249 and was reimbursed by Sematech for $74,196. (9) Related Party Transactions Effective May 1, 1991, the Company entered into an agreement with a former director and officer of the Company, whereby this officer left the employ of the Company and agreed not to compete with the Company for a two-year period. The agreement required the Company to pay $3,125 a month from May 1, 1991 through April 30, 1993 and to provide certain other benefits to this individual. This agreement was extended for an additional year, through April 30, 1994, and is presently on a month-to-month basis. (10) Commitments The Company leases certain equipment under capital leases. These assets have been capitalized at the present value of the future minimum lease payments and are included with manufacturing tools, office furniture and equipment at a cost of $1,043,082 and $485,983 with related accumulated amortization of $266,014 and $177,183 at December 31, 1995 and 1994, respectively. In addition, the Company is obligated under certain noncancelable operating leases for the Company's manufacturing and office space. Certain operating lease agreements provide for annual rent escalations and renewal options. The following is a schedule of the minimum future lease payments for the years ending December 31: Rentals receivable Capital Operating under leases leases subleases ---------- --------- ------- 1996 $ 269,967 1,047,776 116,100 1997 224,954 804,993 115,700 1998 204,691 799,707 75,300 1999 162,406 665,585 78,900 2000 61,160 528,705 47,600 Thereafter -- 542,944 -- ---------- --------- ------- Total minimum future lease payments 923,178 $4,389,710 433,600 ========== ======= Less amounts representing interest (at rates ranging from 7.5% to 10%) 140,463 ---------- Present value of net minimum future lease payments $ 782,715 ========== Amortization expense applicable to assets under capital leases is charged to depreciation and amortization expense. Rental expense for the years ended December 31, 1995, 1994 and 1993 was $723,396, $446,422 and $361,871, respectively. The Company has a bank lease line of credit for $1,000,000 for equipment leasing. The non-use fee under the lease line is .0075%. At December 31, 1995, $497,835 was outstanding under the lease line and $502,165 was available. (11) Business Segment The Company is engaged in one business segment, the development, manufacturing and marketing for industrial use of equipment to test integrated and hybrid circuits. For the years ended December 31, 1995, 1994 and 1993, 11%, 5% and 6%, respectively, of the Company's sales were outside of the United States. At December 31, 1995 and 1994, the Company had approximately $964,000 and $568,000 of assets located in Scotland. Sales to individual customers totaling 10% or more of net sales were $4,899,290 (one customer), $5,318,000 (three customers) and $2,412,000 (two customers) for the years ended December 31, 1995, 1994 and 1993, respectively. (12) Acquisition On April 3, 1995, the Company acquired all of the outstanding stock of Fresh Test Technology Corporation (Fresh Test), a probe card manufacturer, for 712,500 shares of the Company's common stock. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was $2,120,505 and has been recorded as goodwill, which is being amortized on a straight-line basis over eight years. The purchase price of $2,662,969 plus acquisition costs of $402,865 was allocated as follows: Working capital $ 460,515 Property and equipment 462,611 Other assets 43,311 Patents and technology 90,840 Goodwill 2,120,505 Other liabilities 111,948 The operating results of Fresh Test have been included in the consolidated statement of income from the date of acquisition. The following summary, prepared on a pro forma basis, presents the results of operations as if the acquisition had occurred January 1, 1994: Year ended December 31, ------------------------- 1994 1995 ----------- ---------- (unaudited) Net sales $18,712,171 27,601,795 Net income 998,856 2,543,690 Primary net income per share 0.24 0.62 Fully diluted net income per share 0.21 0.52 The pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1994 or a projection of future results. (13) 401(k) Plan On April 1, 1993, the Company established the Cerprobe Corporation 401(k) Plan (the Plan). Employees who have reached 18 years of age and who have completed one year of service for the Company are eligible to participate in the Plan. Participants may elect to defer up to 15% of their salary. Any contribution by the Company is at its discretion. In 1993 and 1995 the Company accrued 25% of the participants' contributions or approximately $28,000 and $90,000, respectively, as contributions to the Plan. No matching Company contribution was made for 1994. The participants are fully vested in their contributions and become fully vested in the Company's contributions after three years of service. (14) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts. The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than three months. The carrying amount of accounts receivables, accounts payable and accrued expenses approximates fair value as they are expected to be collected or paid within 90 days of year-end. The fair value of notes payable, capital lease obligations and other long-term obligations approximate the terms in the marketplace at which they could be replaced. Therefore, the fair value approximates the carrying value of these financial instruments. (15) Supplemental Financial Information A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1995, 1994 and 1993 follows: Balance at Balance at beginning end of of year Additions Deductions year -------- ------- ------- ------- Allowance for doubtful accounts: Year ended December 31, 1995 $ 23,000 151,094 (1,094) 173,000 Year ended December 31, 1994 $ 10,000 24,000 (11,000) 23,000 Year ended December 31, 1993 $ 20,000 (8,373) (1,627) 10,000 Allowance for obsolescence of inventories: Year ended December 31, 1995 $ 52,000 110,600 (79,600) 83,000 Year ended December 31, 1994 $ 48,500 67,200 (63,700) 52,000 Year ended December 31, 1993 $ 67,600 30,000 (49,100) 48,500 (16) Subsequent Events Convertible Preferred Stock On January 18, 1996, the Company issued approximately 800,000 shares of convertible preferred stock for $10,000,000. Net proceeds from the private placement, after deducting expenses, were $9,400,000. The preferred stock has a liquidation preference of 6% which is payable in stock or cash. The preferred stock is convertible into common stock at the option of the holder in increments of 25% of the shares held by the holder beginning March 3, 1996 through June 1, 1996. Automatic conversion occurs at the end of two years. The preferred stock converts at the lesser of 110% of the fixed strike price of $16.55 or 90% of the average five day closing price prior to the conversion date. The Company may call the preferred stock at any time in minimum amounts of $2,000,000 at a price of 125% of par beginning July 18, 1996 or upon a merger, buyout or acquisition. Additionally, the Company issued 52,000 warrants which are exercisable at the fixed strike price of $16.55 and expire in four years. Fully diluted net income per share would have been $0.42 for the year ended December 31, 1995 if the convertible preferred stock and warrants had been issued on January 1, 1995. Acquisition On January 23, 1996, the Company signed a letter of intent to acquire the stock of CompuRoute, Inc., a manufacturer of printed circuit boards, and its affiliates. As consideration for the acquisition, the Company plans to issue 995,000 shares of common stock. The Company anticipates recording the acquisition under the pooling-of-interests method of accounting. (17) Quarterly Data (Unaudited) The following table presents selected unaudited quarterly operating results for the eight quarters ended December 31, 1995. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly the related quarterly results. Quarter Ended ------------------------------------------------- 1995 December 31 September 30 June 30 March 31 ---- ---------- --------- --------- --------- Net sales $8,130,183 6,834,260 6,171,529 4,962,665 ---------- --------- --------- --------- Gross margin 3,814,490 3,282,633 3,023,215 2,271,864 Net income 710,705 512,158 614,649 564,735 Primary net income per share 0.16 0.12 0.15 0.16 Weighted average number of common equivalent shares outstanding 4,365,151 4,405,372 4,194,089 3,446,342 Fully diluted net income per share $ 0.14 0.10 0.13 0.14 Weighted average number of common equivalent shares outstanding 5,004,326 4,992,874 4,858,662 4,041,342 1994 ---- Net sales $4,140,349 3,376,850 3,395,927 3,338,359 Gross margin 2,090,645 1,010,416 1,497,706 1,438,752 Net income 421,032 45,958 373,429 372,404 Primary net income per share 0.12 0.01 0.11 0.11 Weighted average number of common equivalent shares outstanding 3,411,984 3,377,319 3,373,325 3,379,923 Fully diluted net income per share $ 0.11 0.01 0.09 0.09 Weighted average number of common equivalent shares outstanding 4,001,907 4,006,327 3,992,620 4,006,032 EX-4.C 2 CERTIFICATE INCORPORATED UNDER THE LAWS OF DELAWARE Number 001 -5- Shares SEE RESTRICTIVE LEGEND ON REVERSE SIDE CERPROBE CORPORATION The Corporation is authorized to issue 1,000 shares of Series A Preferred Stock, par value $.05 each THIS CERTIFIES THAT WOOD GUNDY (LONDON) LIMITED is the registered holder of ***FIVE*** Shares of the Series A Preferred Stock of CerProbe Corporation transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this 16th day of January, 1996. CERPROBE CORPORATION CORPORATE * SEAL * 1967 DELAWARE SECRETARY PRESIDENT Countersigned by: American Securities Transfer, Inc. THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION OR SAFE HARBOR FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. THE ISSUER WILL FURNISH, WITHOUT CHARGE, TO THE HOLDER OF THIS CERTIFICATE, UPON REQUEST, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF THIS SERIES A PREFERRED STOCK AND EACH OTHER CLASS AND SERIES OF STOCK OF THE CORPORATION, IF ANY, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-.....Custodian.. TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act........................... in common (State) Additional abbreviations may also be used though not in the above list. - -------------------------------------------------------------------------------- For Value Received,_______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ----------------------------- - ----------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------ of the Preferred Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated_______________________ ________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: ________________________ The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-4.D 3 CERTIFICATES OF DESIGNATIONS CERTIFICATE OF DESIGNATIONS OF SERIES A PREFERRED STOCK OF CERPROBE CORPORATION It is hereby certified that: 1. The name of the Corporation (hereinafter called the "Corporation") is CerProbe Corporation, a Delaware corporation. 2. The certificate of incorporation of the Corporation authorizes the issuance of Ten Million (10,000,000) shares of preferred stock of a par value of Five Cents ($.05) per share and expressly vests in the Board of Directors of the Corporation the authority provided therein to issue any or all of said shares in one or more series and by resolution or resolutions to establish the relative rights, preferences and limitations of each series to be issued. 3. The Board of Directors of the Corporation, pursuant to the authority expressly vested in it as aforesaid, has adopted the following resolutions creating a Series A issue of Preferred Stock: RESOLVED, that One Thousand (1,000) of the Ten Million (10,000,000) authorized shares of Preferred Stock of the Corporation shall be designated Series A Preferred Stock, $.05 par value per share, and shall possess the rights and privileges set forth below: Section 1. Designation and Amount. The shares of such Series shall be designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 1,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants, if any, to acquire shares of Series A Preferred Stock or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Rank. The Series A Preferred Stock shall rank: (i) on parity with all of the Corporation's Series A Preferred Stock, (ii) junior to any other class or series of capital stock of the Corporation hereafter created specifically ranking by its terms senior to the Series A Preferred Stock (collectively, the "Senior Securities"); (iii) prior to all of the Corporation's Common Stock, par value $.05 per share ("Common Stock"); (iv) prior to any class or series of capital stock of the Corporation hereafter created specifically ranking by its terms junior to any Series A Preferred Stock of whatever subdivision (collectively, with the Common Stock, "Junior Securities"); (v) on parity with any class or series of capital stock of the Corporation hereafter Page 1 of 12 created specifically ranking by its terms on parity with the Series A Preferred Stock ("Parity Securities"), in each case as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (all such distributions being referred to collectively as "Distributions"). Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and the holders of the Series A Preferred Stock ("Holders") shall not be entitled to receive any dividends on the Series A Preferred Stock. Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the Holders of shares of Series A Preferred Stock shall be entitled to receive, immediately after any distributions to Senior Securities required by the Corporation's Certificate of Incorporation or any certificate of designations of preferences, and prior and in preference to any distribution to Junior Securities but in parity with any distribution of Parity Securities, an amount per share equal to the sum of (i) $10,000 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), and (ii) an amount equal to 6% of the Original Series A Issue Price per annum for the period that has passed since the date of issuance by the Corporation of any Series A Preferred Stock (such amount being referred to herein as the "Premium"). If upon the occurrence of such event, and after payment in full of the preferential amounts with respect to the Senior Securities, the assets and funds thus distributed among the Holders of the Series A Preferred Stock and the Parity Securities shall be insufficient to permit the payment to such Holders of the full preferential amounts due to the Holders of the Series A Preferred Stock and the Parity Securities, respectively, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the Holders of the Series A Preferred Stock and the Parity Securities, pro rata, based on the respective liquidation amounts to which each such series of stock is entitled by the Corporation's Certificate of Incorporation and any certificate of designations of preferences. (b) CerProbe Corporation will give the Holders of the Series A Preferred Stock thirty (30) business days notice of any sale, conveyance or disposition of all or substantially all of the assets of the Corporation and the Holders of the Series A Preferred Stock will have the right during the thirty (30) business day period to convert (notwithstanding the 45 day, 75 day, 105 day and 135 day holding requirements set forth in Section 5(a) hereof), or continue to hold the Series A Preferred Stock; provided, however, that, (i) the Holders may not convert anytime on or before the fortieth (40th) day following the Last Closing Date (as hereinafter defined); and (ii) a consolidation or merger of the Corporation with or into any other corporation or corporations shall not be treated as a liquidation, dissolution or winding up within the meaning of this Section 4, but instead shall be treated pursuant to Section 5 hereof. Section 5. Conversion. The record Holders of Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): Page 2 of 12 (a) Right to Convert. Each record Holder of Series A Preferred Stock shall be entitled (at the times and in the amounts set forth below), and, subject to the Corporation's rights of redemption set forth in Section 6(a), Section 6(b) and Section 6(c) hereof, at the office of the transfer agent for the Series A Preferred Stock (currently American Securities Transfer, Inc. and any successor thereto, the "Transfer Agent"), to convert portions of the Series A Preferred Stock held by such Holder (but only in multiples of $10,000) into that number of fully-paid and non-assessable shares of Common Stock at the Conversion Rate, as defined below. Each record Holder of Series A Preferred Stock shall be entitled to convert up to one-fourth (1/4) of the shares of Series A Preferred Stock held by such Holder beginning 45 days following the Last Closing Date, an additional one-fourth (1/4) of the shares of Series A Preferred Stock held by such Holder beginning 75 days following the Last Closing Date, an additional one-fourth (1/4) of the shares of Series A Preferred Stock held by such Holder beginning 105 days following the Last Closing Date, and may convert any remaining Series A Preferred Stock beginning 135 days following the Last Closing Date, at the office of the Transfer Agent for the Series A Preferred Stock, into that number of fully-paid and non-assessable shares of Common Stock of the Corporation calculated in accordance with the following formula (the "Conversion Rate"): Number of shares of Common Stock issuable upon conversion of one share of Series A Preferred Stock = (.06) (N/365) (10,000) + 10,000 ------------------------------ Conversion Price where, o N = the number of days between (i) the date that, in connection with the consummation of the initial sale of the shares of Series A Preferred Stock from the Corporation, the escrow agent first had in its possession funds representing full payment for the shares of Series A Preferred Stock for which conversion is being elected , and (ii) the applicable Date of Conversion for the shares of Series A Preferred Stock for which conversion is being elected, and o Conversion Price = the lesser of (x) $16.55 (being 110% of the average Closing Price, as that term is defined below, for the five trading days ending on December 22, 1995, which average Closing Price was $15.05) (the "Fixed Conversion Price"), or (y) X times the average Closing Price, as that term is defined below, of the Corporation's Common Stock for the five (5) trading days immediately preceding the Date of Conversion, where X shall equal .90 + (1- (the average Closing Price of the Corporation's Common Stock for the five (5) trading days immediately preceding the Date of Conversion, divided by the average Closing Price of the Corporation's Common Stock for the fifteen (15) trading days immediately preceding the Date of Conversion); provided that, in no event shall X be less than .90 or greater than 1.0. Page 3 of 12 For purposes hereof, the term "Closing Price" shall mean the closing price on the over-the-counter market as reported by NASDAQ, or if then traded on a national securities exchange or the National Market System, the mean of the high and low prices on the principal national securities exchange or the National Market System on which it is so traded. For purposes hereof, the term "Last Closing Date" shall be the date of the last Closing of the sale and purchase of the Series A Preferred Stock. (b) Mechanics of Conversion. In order to convert Series A Preferred Stock into full shares of Common Stock, the Holder shall (i) fax, prior to Midnight, Mountain Standard Time (the "Conversion Notice Deadline") on the Date of Conversion specified on the Notice of Conversion, a copy of the fully executed notice of conversion in the form attached hereto ("Notice of Conversion") to the Transfer Agent with a copy to the Corporation (at its principal executive office), which notice shall specify the number of shares of Series A Preferred Stock to be converted and shall contain a calculation of the Conversion Rate (together with a copy of the first page of each certificate to be converted), and (ii) surrender the original certificate or certificates therefor, duly endorsed, and the original Notice of Conversion, no later than 12 Midnight Mountain Standard Time, the next business day, to a common courier for either overnight or 2-day delivery to the office of the Transfer Agent for the Series A Preferred Stock; provided, however, that neither the Corporation nor the Transfer Agent shall be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless either the certificates evidencing such Series A Preferred Stock are delivered to the Transfer Agent as provided above, or the Holder notifies the Transfer Agent (with a copy of such notice to the Corporation) that such certificates have been lost, stolen or destroyed and executes and delivers to the Corporation an agreement in form and content satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. (i) Lost or Stolen Certificates. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of a certificate or certificates ("Stock Certificates") representing shares of Series A Preferred Stock, and (in the case of loss, theft or destruction) of indemnity or security in form and content satisfactory to the Corporation, and upon surrender and cancellation of the Stock Certificate(s), if mutilated, the Corporation shall execute and deliver new Stock Certificate(s) of like tenor and date. (ii) Issuance of Common Stock. The Corporation shall use its best commercially practicable efforts to issue and deliver, within three (3) business days after receipt by the Transfer Agent of such certificates, or after receipt of such agreement and indemnification, as provided for herein, to such Holder of Series A Preferred Stock at the address of the Holder on the books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled as aforesaid. (iii) No Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of this Series A Preferred Stock. If any conversion of Page 4 of 12 the Series A Preferred Stock would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be rounded to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. (iv) Date of Conversion. The date on which conversion occurs (the "Date of Conversion") shall be deemed to be the date set forth in such Notice of Conversion, provided (i) that the advance copy of the Notice of Conversion is faxed to the Transfer Agent, with a copy to the Corporation, before midnight, Mountain Standard Time, on the Date of Conversion, and (ii) that the original Stock Certificates representing the shares of Series A Preferred Stock to be converted are surrendered by depositing such certificates by either overnight courier or 2-day courier, as provided above, and received by the Transfer Agent within five (5) business days thereafter. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Stock Certificates representing the Series A Preferred Stock to be converted are not received by the Transfer Agent, with a copy to the Corporation, within five (5) business days after the Date of Conversion or if the facsimile of the Notice of Conversion is not received by the Transfer Agent, with a copy to the Corporation, prior to the Conversion Notice Deadline, the Notice of Conversion, without further act or action being required by the Corporation, shall be null and void. (v) Converted Shares No Longer Outstanding. Following conversion of shares of Series A Preferred Stock, such shares of Series A Preferred Stock shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Corporation as Series A Preferred Stock. (c) Reservation of Stock Issuable Upon Conversion. The Corporation shall from time to time reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series A Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (d) Automatic Conversion. Subject to the Corporation's rights of redemption set forth in Section 6(a), Section 6(b) and Section (c) hereof, each share of Series A Preferred Stock outstanding on December 29, 1997 automatically, without the necessity of any action by either the Holder of the Series A Preferred Stock or the Corporation, shall be converted into Common Stock on such date at the Conversion Price then in effect (calculated Page 5 of 12 in accordance with the formula in Section 5(a) above), and December 29, 1997 shall be deemed the Date of Conversion with respect to such conversion. (e) Adjustment to Conversion Rate. (i) If, prior to the conversion of all of the Series A Preferred Stock, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, or other similar event, the Conversion Rate shall be proportionately adjusted, or if the number of outstanding shares of Common Stock is decreased by a combination or reclassification of shares, or other similar event, the Conversion Rate shall be proportionately adjusted. (ii) If, prior to the conversion of all Series A Preferred Stock, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Corporation shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Corporation or another entity, or other property, then the Holders of Series A Preferred Stock shall thereafter have the right to purchase and receive upon conversion of Series A Preferred Stock, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such shares of stock and/or securities or other property as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore purchasable and receivable upon the conversion of Series A Preferred Stock held by such Holders had such merger, consolidation, exchange of share, recapitalization or reorganization not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holders of the Series A Preferred Stock to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Rate and of the number of shares issuable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be practicable in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. So long as shares of the Series A Preferred Stock are issued and outstanding, the Corporation shall not effect any transaction described in this subsection 5(e) unless the resulting successor or acquiring entity (if not the Corporation) assumes by written instrument the obligation to deliver to the Holders of the Series A Preferred Stock such shares of stock and/or securities or other property as, in accordance with the foregoing provisions, the Holders of the Series A Preferred Stock may be entitled to receive upon conversion of the Series A Preferred Stock. (iii) If any adjustment under this Section 5(e) would create a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion shall be rounded to the nearest whole share. Page 6 of 12 Section 6. Cash Redemption by Corporation. (a) Corporation's Right to Redeem Upon Receipt of Notice of Conversion. The Corporation shall have the unconditional right, in its sole discretion, upon receipt of a Notice of Conversion pursuant to Section 5, to redeem in whole or in part any Series A Preferred Stock submitted for conversion, immediately prior to conversion. If the Corporation elects to redeem some, but not all, of the Series A Preferred Stock submitted for conversion, the Corporation shall redeem from among the Series A Preferred Stock submitted by the various Holders thereof for conversion on the applicable date, a pro-rata amount from each Holder so submitting Series A Preferred Stock for conversion. The Corporation shall effect each such redemption by giving notice ("Notice of Redemption Upon Receipt of Notice of Conversion") of its election to redeem, by facsimile by the close of business on the second business day following receipt of a Notice of Conversion from a Holder, with a copy by 2- day courier, to (A) the Holders of Series A Preferred Stock selected for redemption, at the address and facsimile number of such Holder appearing in the Corporation's register for the Series A Preferred Stock and (B) the Transfer Agent. Such Notice of Redemption Upon Receipt of Notice of Conversion shall indicate the number of shares of Holder's Series A Preferred Stock that have been selected for redemption, the Date of Redemption Upon Receipt of Notice of Conversion (as defined below) and the applicable Redemption Price Upon Receipt of Notice of Conversion (as defined below). If the Notice of Redemption Upon Receipt of Notice of Conversion is not received within the times specified above or does not meet the conditions specified above, the Notice of Redemption Upon Receipt of Notice of Conversion shall become null and void (unless otherwise agreed in writing by the Holder). The Corporation shall not be entitled to send any Notice of Redemption Upon Receipt of Notice of Conversion and begin the redemption procedure unless it has (i) the full amount of the Redemption Price Upon Receipt of Notice of Conversion, in cash, available in a demand or other immediately available account in a bank or similar financial institution, or (ii) immediately available credit facilities, in the full amount of the Redemption Price Upon Receipt of Notice of Conversion, with a bank or similar financial institution on the date the Notice of Redemption Upon Receipt of Notice of Conversion is sent to the applicable Holder. The Redemption Price Upon Receipt of Notice of Conversion per share of Series A Preferred Stock shall equal the Closing Price on the Date of Conversion for such shares, multiplied by the number of shares of Common Stock that would otherwise have been issuable had the shares of Series A Preferred Stock redeemed been converted on the Date of Conversion as to such shares. For the purposes of the above, "Closing Price" and "Date of Conversion" shall have the meanings set forth in Section 5. The "Date of Redemption Upon Notice of Conversion" shall be deemed to be the Date of Conversion (as that term is defined in Section 5(b) above). The Redemption Price Upon Receipt of Notice of Conversion shall be paid to the Holder of Series A Preferred Stock redeemed within 10 business days of the delivery of the Notice of Redemption Upon Receipt of Notice of Conversion to such Holder; provided, Page 7 of 12 however, that the Corporation shall not be obligated to deliver any portion of the Redemption Price Upon Receipt of Notice of Conversion unless either the certificates evidencing the Series A Preferred Stock redeemed are delivered to the Transfer Agent as provided in Section 5(b), or the Holder notifies the Transfer Agent that such certificates have been lost, stolen or destroyed and executes an agreement, in form and content, satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Notwithstanding the foregoing, in the event that the certificates evidencing the Series A Preferred Stock redeemed are not delivered to the Transfer Agent as provided in Section 5(b), the redemption of the Series A Preferred Stock pursuant to this Section 6(a) shall still be deemed effective as of the Date of Redemption Upon Receipt of Notice of Conversion. (b) Corporation's Right to Redeem at its Election. Commencing 6 months after the Last Closing Date, the Corporation shall have the unconditional right, in its sole discretion, to redeem, at any time and from time to time, any or all of the Series A Preferred Stock; provided that, the Corporation shall only be entitled to redeem shares of Series A Preferred Stock with an aggregate Stated Value (as defined below) of at least Five Hundred Thousand Dollars ($500,000) on the first such redemption. If the Corporation elects to redeem some, but not all, of the Series A Preferred Stock, the Corporation shall redeem a pro-rata amount from each Holder of Series A Preferred Stock. The Corporation shall effect each such redemption by giving at least 30 days prior written notice ("Notice of Redemption At Corporation's Election") to (A) the Holders of Series A Preferred Stock selected for redemption, at the address and facsimile number of such Holder appearing in the Corporation's register for the Series A Preferred Stock, and (B) the Transfer Agent, which Notice of Redemption At Corporation's Election shall be deemed to have been delivered three (3) business days after the Corporation's mailing (by overnight courier, with a copy by facsimile) of such Notice of Redemption At Corporation's Election. Such Notice of Redemption At Corporation's Election shall indicate the number of shares of Holder's Series A Preferred Stock that have been selected for redemption, the date which such redemption is to become effective ( the "Date of Redemption At Corporation's Election") and the applicable Redemption Price At Corporation's Election, as defined below. The Corporation shall not be entitled to send any Notice of Redemption At Corporation's Election and begin the redemption procedure unless it has (x) the full amount of the Redemption Price At Corporation's Election, in cash, available in a demand or other immediately available account in a bank or similar financial institution, or (y) immediately available credit facilities, in the full amount of the Redemption At Corporation's Election, with a bank or similar financial institution on the date the Notice of Redemption At Corporation's Election is delivered to the applicable Holder. For purposes hereof, "Stated Value" shall mean the Original Series A Issue Price of the shares of Series A Preferred Stock redeemed pursuant to this Section 6(b), as defined in Section 4(a), together with the accrued but unpaid Premium (as defined in Section 4(a)) on such shares of Series A Preferred Stock, as of the Date of Redemption At Corporation's Election. Page 8 of 12 The Redemption Price At Corporation's Election shall be calculated as 125% of Stated Value of the shares of Series A Preferred Stock redeemed pursuant to this Section 6(b). The Redemption Price At Corporation's Election shall be paid to the Holder of Series A Preferred Stock redeemed within 10 business days of the Date of Redemption At Corporation's Election; provided, however, that the Corporation shall not be obligated to deliver any portion of the Redemption Price At Corporation's Election unless either the certificates evidencing the Series A Preferred Stock redeemed are delivered to the Transfer Agent prior to the 10th business day following the Date of Redemption At Corporation's Election, or the Holder notifies the Transfer Agent that such certificates have been lost, stolen or destroyed and executes an agreement, in form and content, satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Notwithstanding the foregoing, in the event that the certificates evidencing the Series A Preferred Stock redeemed are not delivered to the Transfer Agent prior to the 10th business day following the Date of Redemption At Corporation's Election, the redemption of the Series A Preferred Stock pursuant to this Section 6(b) shall still be deemed effective as of the Date of Redemption At Corporation's Election and the Redemption Price At Corporation's Election shall be paid to the Holder of Series A Preferred Stock redeemed within 5 business days of the date the certificates evidencing the Series A Preferred Stock redeemed are actually delivered to the Transfer Agent. (c) Corporation's Intention to Redeem. Notwithstanding anything contained in this Certificate of Designations to the contrary, the Corporation intends to exercise its discretion to redeem shares of Series A Preferred Stock pursuant to Section 6(a) above in the event that the exercise of conversion rights by the Holders of the Preferred Stock pursuant to Section 5(a) above or in the event of automatic conversion pursuant to Section 5(d) above would result in the issuance of greater than 800,000 shares of Common Stock in the aggregate pursuant to this Certificate of Designations, unless the Corporation has received an opinion from counsel that the issuance of such greater number of shares is in compliance with applicable Nasdaq requirements. Section 7. Advance Notice of Intent to Redeem Upon Conversion (a) Holder's Right to Elect to Receive Notice of Cash Redemption by Corporation. Holders of Series A Preferred Stock shall have the right to require Corporation to provide advance notice stating whether Corporation will elect to redeem Holder's shares in cash, pursuant to Corporation's redemption rights discussed in Section 6(a). (b) Mechanics of Holder's Election Notice. Holders of Series A Preferred Stock shall send notice ("Election Notice") to Corporation and such other person(s) as the Corporation may designate, by facsimile, stating Holder's intention to require Corporation to disclose that if Holder were to exercise his, her or its right of conversion (pursuant to Section 5) whether Corporation would elect to redeem Holder's Series A Preferred Stock for cash in lieu of issuing Common Stock. Corporation is required to disclose to Holder Page 9 of 12 what action Corporation would take over the subsequent 10 day period, including the date Corporation receives such Election Notice. (c) Corporation's Response. Corporation must respond by the close of business on the second business day following receipt of Holder's Election Notice (1) via facsimile, and (2) via overnight courier. If Corporation does not respond to Holder within two (2) business days via facsimile and overnight courier, Corporation shall be required to issue to Holder Common Stock upon Holder's conversion of Holder's Series A Preferred Stock within the subsequent 10 day period. Section 8. Voting Rights. Except as otherwise required by the General Corporation Law of the State of Delaware ("Delaware Law"), the Holders of the Series A Preferred Stock shall have no voting power whatsoever, and no holder of Series A Preferred Stock shall vote or otherwise participate in any proceeding in which actions shall be taken by the Corporation or the stockholders thereof or be entitled to notification as to any meeting of the stockholders. To the extent that under Delaware Law the vote of the Holders of the Series A Preferred Stock, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the Holders of at least a majority of the shares of the Series A Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of Series A Preferred Stock (except as otherwise may be required under Delaware Law) shall constitute the approval of such action by the class. To the extent that under Delaware Law the Holders of the Series A Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series A Preferred Stock shall be entitled to one vote. Holders of the Series A Preferred Stock shall be entitled to notice of all stockholder meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's by-laws and applicable statutes. Section 9. Protective Provision. So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided by Delaware Law) of the Holders of at least 66 2/3% of the then issued and outstanding shares of Series A Preferred Stock, alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the Series A Preferred Stock. In the event Holders of 66 2/3% of the then outstanding shares of Series A Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the Series A Preferred Stock, then the Corporation will deliver notice of such approved change to the Holders of the Series A Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of 30 days to convert pursuant to the terms of this Certificate of Designations prior to such alteration or change (notwithstanding the 45 day, 75 day, 105 day and 135 day holding requirements set forth in Section 5(a) hereof), or continue to hold their shares of Series A Preferred Stock; provided, however, that the Holders may not convert anytime on or before the fortieth (40th) day following the Last Closing Date. Page 10 of 12 Section 10. Status of Redeemed or Converted Stock. In the event any shares of Series A Preferred Stock shall be redeemed or converted pursuant to Section 5 or Section 6 hereof, the shares so converted or redeemed shall be canceled, shall return to the status of authorized but unissued Preferred Stock of no designated series, and shall not be issuable by the Corporation as Series A Preferred Stock. Section 11. Preference Rights. Nothing contained herein shall be construed to prevent the Board of Directors of the Corporation from issuing one or more series of Preferred Stock with dividend and/or liquidation preferences senior to, equal to or junior to the dividend and liquidation preferences of the Series A Preferred Stock. FURTHER RESOLVED, that the statements contained in the foregoing resolutions creating and designating the said Series A Preferred Stock and fixing the relative rights, preferences and limitations thereof shall, upon the effective date of said Series, be deemed to be included in and be a part of the Certificate of Incorporation of the Corporation pursuant to the provisions of the Delaware Law. IN WITNESS WHEREOF, CerProbe Corporation has caused this Certificate of Designations, Preferences and Rights of Series A Preferred Stock to be duly executed by its President this 11 day of January, 1996. CERPROBE CORPORATION By:______________________________________ C. Zane Close, President Page 11 of 12 NOTICE OF CONVERSION* (To be Executed by the Registered Holder of Series A Preferred Stock of CerProbe Corporation in order to Convert the Series A Preferred Stock) The undersigned hereby irrevocably elects to convert ___________ shares of Series A Preferred Stock of CerProbe Corporation (the "Corporation"), represented by stock certificate No(s). ______________________________________ (the "Preferred Stock Certificates") into shares of common stock ("Common Stock") of the Corporation according to the conditions of the Certificate of Designations of Series A Preferred Stock, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged by the Corporation to the Holder for any conversion, except for transfer taxes, if any. The undersigned represents and warrants that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Series A Preferred Stock shall be made in compliance with Regulation S, pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Act") or pursuant to an exemption from registration under the Act. Date of Conversion: __________________________ Applicable Conversion Price: _________________ Signature: ___________________________________ Name: ________________________________________ Address: _____________________________________ Fax Number: __________________________________ * No shares of Common Stock will be issued until the original Series A Preferred Stock Certificate(s) to be converted and the Notice of Conversion are received by the Transfer Agent pursuant to the provisions of the Certificates of Designations of Series A Preferred Stock. Page 12 of 12 EX-10.HH 4 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement is made and entered into as of the 31st day of March, 1995, by and between CERPROBE CORPORATION, a Delaware corporation ("Employer"), and ROBERT K. BENCH ("Employee"). RECITALS A. Employer is in the business of the design, manufacture, and sale of probe cards for use in the semiconductor industry and for semiconductor testing and the design, manufacture and sale of test and interface hardware products, including, without limitation, performance boards, prober and handler interfaces, including complete interface systems (digital, mixed signal and analog), used by the semiconductor industry (the "Business"). B. Employer desires to employ Employee, and Employee desires to accept such employment, on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants set forth in this Agreement, the parties hereto hereby agree as follows: 1. Employment. Employer hereby employs Employee and Employee hereby accepts such employment, to perform such duties and services for and on behalf of Employer as may, from time to time, be determined by the President of Employer. Employee shall devote Employee's full and undivided business time, attention and efforts to Employer's business and to the performance of Employee's duties under this Agreement, and shall fully and faithfully perform all duties assigned to Employee under this Agreement, consistent with Employee's position hereunder, to the best of Employee's abilities. Employee agrees to serve in such capacity as Employee and Employer may mutually agree. 2. Compensation. Employee shall be entitled to receive a per annum salary of One Hundred Thousand Dollars ($100,000) ("Base Salary") as full compensation for all the services rendered by Employee during the term of Employee's employment hereunder. Employee shall be entitled to receive the Base Salary in fifty-two (52) equal payments; payments to be made every week commencing on April 13, 1995, or pursuant to such other payment schedule consistent with Employer's compensation policy as from time to time in effect (less all applicable deductions for all taxes, including federal, state, and FICA; insurance; pension plans; etc.). 3. Other Benefits. In addition to Employee's Base Salary, during the term of Employee's employment hereunder, Employee shall be entitled to the following: (a) Pension Plans. Participation in such pension, profit sharing and deferred compensation plans and programs, if any, as may be provided from time to time by Employer to such other comparable level employees of Employer. (b) Medical and Dental Benefits. Participation in such group medical, accident and dental plans, if any, as may be provided from time to time by Employer to such other comparable level employees of Employer. (c) Vacation. Receive not less than three (3) weeks paid vacation during the term of this Agreement. Vacation shall be taken at such times as determined by Employee and approved by Employer. Vacation benefits will be consistent with Employer's vacation policy as from time to time in effect. (d) Reimbursement. Reimbursement within thirty (30) days of the submittal of an approved expense report, for all ordinary and necessary out-of-pocket business expenses incurred by Employee in connection with the business of Employer and Employee's duties under this Agreement. The term "business expenses" shall include any item of expense that is reasonable, ordinary or necessary in relation to Employee's duties hereunder. To obtain reimbursement, Employee shall submit to Employer receipts, bills or sales slips for the expenses incurred. (e) Other Benefits. Such other fringe benefits, such as life and disability insurance, as Employer may make generally available on a nondiscriminatory basis to all other employees of Employer. 4. Term of Employment. (a) Employment Term. The term of Employee's employment hereunder shall commence on April 3, 1995, and shall terminate twelve (12) months thereafter, unless earlier terminated in accordance with the terms of this Agreement. (b) Termination. Notwithstanding anything contained in this Agreement to the contrary, Employee's employment hereunder is entirely at will, and may be terminated by Employer with or without cause, subject only to the payment obligations of Employer as hereafter set forth. In the event Employer terminates Employee's employment hereunder for Cause (as hereafter defined), Employee's employment hereunder shall immediately terminate on the effective date of such termination as established by Employer, and Employee shall only receive Base Salary and any other benefits under this Agreement prorated through the effective date of Employee's termination. For purposes of this Agreement, "Cause" means: (i) "Total and Permanent Incapacity" (as hereinafter defined) of Employee; (ii) the failure or inability (not as a consequence of any illness, accident or other disability, as confirmed by competent medical evidence) of Employee to perform Employee's duties hereunder for a period of thirty (30) days in a manner reasonably satisfactory to Employer's Board of Directors, provided the decision of the Board of Directors is not arbitrary or capricious, and is not made in bad faith and further that the failure or inability is not as a consequence of any illness, accident or other disability as confirmed by competent medical evidence; or (iii) "Serious Misconduct" (as hereinafter defined) of Employee. "Total and Permanent Incapacity" means such physical or mental condition of Employee, including alcoholism, which renders Employee incapable of performing Employee's duties hereunder for a period in excess of sixty (60) days. In the event Employee is a Qualified Individual with a Disability, 2 as defined in the American with Disabilities Act, Employer shall not terminate Employee's employment hereunder if Employee is able to perform the essential functions of the Employee's job with or without reasonable accommodation from Employer. "Serious Misconduct" means embezzlement or misappropriation of corporate funds; other acts of Dishonesty (as hereinafter defined); activities harmful to the reputation of Employer (other than as a consequence of good faith decisions made by Employee in the normal performance of Employee's duties hereunder); the conviction of or the plea by Employee to any criminal felony offense or any criminal offense regarding dishonesty or moral turpitude; the refusal to perform the duties assigned to Employee pursuant to this Agreement (unless such duties shall be unlawful); or the breach of any of the terms or conditions contained in this Agreement or any other Agreement between Employee and Employer. "Dishonesty" shall include, but shall not be limited to, the furnishing of any information, reports, documents or certificates by Employee to Employer which Employee knew, believed or should have known to be false or misleading or omitted to state a material fact necessary to be stated therein in order to make any of the statements, or information therein not misleading. In the event Employer terminates Employee's employment hereunder, for reasons other than for Cause, Employee's employment hereunder shall immediately terminate on the effective date of such termination as established by Employer, and Employee shall only receive (i) Base Salary for the remaining period of the term of this Agreement, payable on the dates such Base Salary shall otherwise have been payable hereunder, and (ii) any other fringe benefits under this Agreement prorated through the effective date of Employee's termination. Notwithstanding anything contained in this Agreement to the contrary, Employee may resign and terminate Employee's employment hereunder, with or without cause, subject to the requirement that Employee shall provide Employer with not less than forty-five (45) days' prior written notice. In such event, Employee shall not receive any Base Salary or any other benefits under this Agreement after the effective date of Employee's resignation. (c) Death. In the event of the death of Employee during the term of this Agreement, this Agreement and Employee's employment hereunder shall terminate as of the date of the death of Employee, and Employee's estate or personal representative shall be entitled to receive Base Salary and other fringe benefits prorated for the period of Employee's employment to the date of death, payable within sixty (60) days after the date of death. (d) Suspension. Employer shall have the right to suspend Employee with full pay for any period of time the Board of Directors of Employer deems, in its sole discretion, necessary or appropriate to investigate Employee's conduct in connection with Section 4(b) hereof. 5. Noncompetition. During the period of Employee's employment hereunder, and for a period of twelve (12) months from and after the date of termination of Employee's employment hereunder (or such lesser period to the maximum extent permitted by applicable law), neither Employee nor any person or entity controlled (directly or indirectly) by Employee, whether as employer, employee, proprietor, partner, stockholder (other than the holder of less than five percent (5%) of the stock of a corporation the securities of which are traded on a national securities exchange or in the over-the-counter market), director, officer, consultant, agent or otherwise, shall within, into or from the Restricted Territory (as defined below) engage or cause others to engage in the Business unless first authorized in writing by Employer, which authorization may be withheld 3 in the sole and absolute discretion of Employer. For purposes of this Agreement, the term "Restricted Territory" shall mean the United States of America, and all other countries in which the Employer conducts the Business on the date hereof. If Employee violates Employee's obligations contained in this Section 5, then the time periods hereunder shall be extended by the period of time equal to that period beginning when the activities constituting such violation commenced and ending when the activities constituting such violation terminated. 6. Nonsolicitation. During the period of Employee's employment hereunder, and for a period of twelve (12) months from and after the date of termination of Employee's employment hereunder (or such lesser period to the maximum extent permitted by applicable law), neither Employee nor any person or entity controlled (directly or indirectly) by Employee whether as employer, employee, proprietor, partner, stockholder (other than the holder of less than five percent (5%) of the stock of a corporation the securities of which are traded on a national securities exchange or in the over-the-counter market), director, officer, consultant, agent or otherwise, shall solicit (a) in respect of the Business, any person or other entity that is, or was within the previous twelve (12) month period immediately prior to the date of termination of Employee's employment hereunder, a customer or supplier of Employer, or (b) any person who, on such date, is an employee of Employer, for employment, or as an independent contractor with any person or entity, unless first authorized in writing by Employer, which authorization may be withheld in Employer's sole and absolute discretion. If Employee violates Employee's obligations contained in this Section 6, then the time periods hereunder shall be extended by a period of time equal to that period beginning when the activities constituting such violation commenced and ending when the activities constituting such violation terminated. 7. Trade Secrets and Other Confidential Information. From and after the date hereof, Employee shall not communicate or divulge to, or use for the benefit of, any person, firm or corporation other than Employer and/or Employer's subsidiary, Fresh Test Technology Corporation ("Fresh Test"), and its or their agents and representatives, any of the trade secrets, methods, formulas, business and/or marketing plans, processes or any other proprietary or confidential information with respect to Employer, Fresh Test, its or their business, financial condition, business operations or methods, or business prospects. The preceding sentence shall not apply to information which (a) is, was or becomes generally known or available to the public or the industry other than as a result of a disclosure by Employee in violation of this Agreement, or (b) is required to be disclosed by law. Employee shall advise Employer, in writing, of any request, including a subpoena or similar legal inquiry, to disclose any such confidential information, such that Employer and/or Fresh Test can seek appropriate legal relief. 8. Return of Employer Property. Immediately upon the expiration of this Agreement or the termination of Employee's employment with Employer, whichever shall later occur, Employee shall return to Employer any and all property of Employer, including, but not limited to, all documents, agreements, schedules, statements, customer lists, supplier lists, plans, designs, parts and equipment, that is in the possession or control (direct or indirect) of Employee. Notwithstanding the foregoing, Employee shall immediately return to Employer all such property described in this Section 8 upon termination of this Agreement at any time for Cause. 9. Survival/Remedies/Severability. Employee specifically acknowledges that (a) Employer currently has operating facilities located in the Restricted Territory; (b) Employer receives 4 much of its business from and throughout the Restricted Territory; (c) Employer has plans to expand its operations throughout the Restricted Territory; and (d) the geographic restrictions contained in Section 5 hereof, and the length of time restrictions in Sections 5, 6 and 7 hereof are each necessary and reasonable and were negotiated with Employer. The restrictions and obligations set forth in Sections 5, 6, 7 and 8 hereof shall survive the expiration or termination of this Agreement. The parties hereto hereby acknowledge and agree that the restrictions and obligations set forth in Sections 5, 6, 7 and 8 hereof are reasonable and necessary, and that any violation thereof would result in substantial and irreparable injury to Employer, and that Employer may not have an adequate remedy at law with respect to any such violation. Accordingly, Employee agrees that, in the event of any actual or threatened violation thereof, Employer shall have the right and privilege to obtain, in addition to any other remedies that may be available, equitable relief, including temporary and permanent injunctive relief, to cease or prevent any actual or threatened violation of any provision hereof. Each and every provision set forth in Sections 5, 6, 7 and 8 hereof is independent and severable from the others, and no restriction will be rendered unenforceable by virtue of the fact that, for any reason, any other or others of them may be unenforceable in whole or in part. If any provision in Sections 5, 6, 7 or 8 hereof is unenforceable for any reason whatsoever, that provision will be appropriately limited and reformed to the maximum extent provided by applicable law. If the scope of any restriction contained herein is too broad to permit enforcement to its full extent, then such restriction shall be enforced to the maximum extent permitted by law so as to be judged reasonable and enforceable, and the parties agree that such scope may be modified by an arbitrator or judge in any proceeding to enforce this Agreement. This includes, without limitation, altering or enforcing only portions of the limits on activity restrictions, the geographic scope, and the duration of the restrictions unless to do so would be contrary to law or public policy. 10. Miscellaneous. (a) Third-Party Beneficiary. Fresh Test shall at all times be and remain a third-party beneficiary under this Agreement and all documents, instruments and agreements made and entered into pursuant hereto. (b) Notices. All notices required or permitted to be given hereunder shall be in writing and shall be deemed given when delivered in person, or three (3) business days after being placed in the hands of a courier service (e.g., DHL or Federal Express) prepaid or faxed provided that a confirming copy is delivered forthwith as herein provided, addressed as follows: If to Employer: CerProbe Corporation 600 S. Rockford Drive Tempe, Arizona 85281 Attention: C. Zane Close FAX: 602-967-4636 5 If to Employee: Robert K. Bench 2632 E. El Moro Avenue Mesa, Arizona 85204 and/or to such other respective addresses and/or addressees as may be designated by notice given in accordance with the provisions of this Section. (c) Entire Agreement. This Agreement constitutes the entire agreement between the parties and shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. Except as set forth herein, the provisions of this Agreement supersede any and all other agreements or understandings, whether oral or written, between Employer and Employee, with respect to Employee's employment by Employer. Any amendments, or alternative or supplementary provisions to this Agreement must be made in writing and duly executed by an authorized representative or agent of each of the parties hereto. (d) Non-Waiver. The failure in any one or more instances of a party to insist upon performance of any of the terms, covenants or conditions of this Agreement, to exercise any right or privilege in this Agreement conferred, or the waiver by said party of any breach of any of the terms, covenants or conditions of this Agreement, shall not be construed as a subsequent waiver of any such terms, covenants, conditions, rights or privileges, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party. A breach of any representation, warranty or covenant shall not be affected by the fact that a more general or more specific representation, warranty or covenant was not also breached. (e) Counterparts. This Agreement may be executed in multiple count- erparts, each of which shall be deemed to be an original, and all such counterparts shall constitute but one instrument. (f) APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONTROLLED AS TO VALIDITY, ENFORCEMENT, INTERPRETATION, CONSTRUCTION, EFFECT AND IN ALL OTHER RESPECTS BY THE INTERNAL LAWS OF THE STATE OF ARIZONA APPLICABLE TO CONTRACTS MADE IN THAT STATE. (g) Construction. The parties hereto acknowledge and agree that each party has participated in the drafting of this Agreement and that this document has been reviewed by the respective legal counsel for the parties hereto and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be applied to the interpretation of this Agreement. No inference in favor of, or against, any party shall be drawn from the fact that one party has drafted any portion hereof. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. EMPLOYER: EMPLOYEE: CerProbe Corporation By: _____________________ __________________________________ Robert K. Bench Its:_____________________ 7 EX-10.II 5 SECURITY AGREEMENT AND PROMISSORY NOTE Note No: 7092 Date: December 27, 1995 Schedule No: 1 Schedule Date: December 27, 1995 SECURITY AGREEMENT AND PROMISSORY NOTE This Security Agreement and Promissory Note (the "Agreement") is entered into this 27th day of December, 1995 between Cerprobe Corporation (hereinafter referred to as "Borrower") and Zions Credit Corporation (hereinafter referred to as "Lender"). 1. PROMISE TO PAY, TERMS AND PLACE OF PAYMENT. Borrower promises to pay to the order of Lender the sum of $13,185.32 per month commencing December 28, 1995, and on the 28th day of each consecutive month thereafter for a period of 48 months. The first months payment(s) in the total amount of $13,185.32 are payable at the time of execution of this Agreement. In addition, Borrower shall make a payment of $-0- on the date the final installment described above is due. All payments shall be made to P. O. Box 26536, Salt Lake City, Utah 84126-0536 or at such other locations Lender may designate. Total amount financed hereunder is $533,823.05. 2. GRANT OF SECURITY INTEREST; DESCRIPTION OF COLLATERAL. Borrower grants to Lender a security interest in the property described below, together with all presently owned and hereafter acquired attachments, accessories, and additions thereto and replacements and proceeds thereof, including any amounts payable under any insurance policy or eminent domain proceedings (all hereinafter collectively referred to as the "Collateral"). 3. OBLIGATIONS SECURED. Each item of collateral shall secure not only the specific obligation referred to in section one above, but also all other present and future obligations of Borrower to Lender of every kind and nature whatsoever. 4. USE AND LOCATION OF COLLATERAL. Borrower warrants and agrees with Lender that the Collateral will be used primarily for business, commercial or agricultural purposes. [X] if this line is checked, the Collateral is being acquired by Borrower with the proceeds of the obligation described in Section one and therefore is a purchase money security interest as defined in the uniform commercial code as adopted by the State of Utah. Collateral description and location: SEE ATTACHED SCHEDULE "A" FOR EQUIPMENT DESCRIPTION & LOCATION 5. LATE CHARGES. Any installment not paid when due shall bear a late charge equal to 5% of the amount of the installment. 6. LOCATION OF COLLATERAL. Borrower and Lender agree that the Collateral shall remain personal property of the Borrower and shall not become part of or attached to any real estate. Borrower agrees to keep the Collateral at the location set forth in Paragraph 4, and will notify Lender promptly in writing of any change in the location of the Collateral within such State, but will not remove the Collateral from such State without the prior written consent of Lender. 7. BORROWER'S WARRANTIES AND REPRESENTATIONS. Borrower warrants and represents; (a) The Borrower is justly indebted to Lender for the full amount of the foregoing indebtedness; (b) That except for the security interest granted hereby, the Collateral is free from and will be kept free from all liens, claims, security interests and encumbrances; (c) That no financing statement covering the Collateral or any proceeds thereof is on file in favor of anyone other than Lender. (d) That all information supplied and statements made by Borrower in any financial, credit or accounting statement or application for credit submitted by or on behalf of Borrower prior to, contemporaneously with or subsequent to the execution of this agreement with respect to this transaction are and shall be true, correct, valid and genuine; and (e) That Borrower has full authority to enter into this agreement and in so doing it is not violating its charter or by-laws, any law or regulation or agreement with third parties, and it has taken all such action as may be necessary or appropriate to make this Agreement binding upon it. 8. BORROWER'S AGREEMENTS. Borrower agrees: (a) To defend at Borrower's own cost and expense, including attorneys' fees any action, proceeding, or claim affecting the Collateral; (b) To pay reasonable attorneys' fees and other expenses incurred by Lender in enforcing its rights under this Agreement; (c) To pay promptly all taxes, assessments, license fees and other public or private charges when levied or assessed against the Collateral or this Agreement, and this obligation shall survive the termination of this Agreement; (d) That if a certificate of title be required or permitted by law, Borrower shall obtain such certificate with respect to the Collateral showing the security interest of Lender thereon and in any event do everything necessary or expedient to preserve or perfect the security interest of Lender; (e) That Borrower will not misuse, fail to keep in good repair, or without the prior written consent of Lender, and notwithstanding Lender's claim to proceeds, sell, rent, lend, encumber or transfer any of the Collateral; Page 1 of 4 (f) That Lender may enter upon Borrower's premises or wherever the Collateral may be located at any reasonable time to inspect the Collateral and Borrower's books and records pertaining to the Collateral and Borrower shall assist Lender in making such inspection; (g) That the security interest granted by Borrower to Lender shall continue effective irrespective of the payment of the amount in Paragraph one, so long as there are any obligations of any kind, including obligations under guaranties or assignments, owed by Borrower to Lender, provided, however, upon any assignment of this Security Agreement and Promissory Note the Assignee shall thereafter be deemed, for the purpose of this Paragraph, the Lender under this Security Agreement; and (h) At request of Lender, to execute any documents or do any other act necessary to effectuate the purposes and provisions of this Agreement. 9. INSURANCE AND RISK OF LOSS. All risk of loss of, damage to or destruction of the Collateral (including theft thereof) shall at all times be on Borrower. Borrower will procure forthwith and maintain public liability insurance, fire insurance, property damage, and physical damage insurance with extended or combined additional coverage on the Collateral for the full insurable value thereof for the life of this Agreement plus such other insurance as Lender may specify, and promptly deliver each policy or certificates evidencing the existence of such insurance to Lender with a standard long form endorsement attached showing loss payable to Lender or assigns as respective interests may appear. Lender's acceptance of policies in lesser amounts or risks shall not be a waiver of Borrower's foregoing obligation if any item of Collateral is damaged, but not beyond repair, Borrower at its own cost and expense shall repair such Collateral so that it will be in the same or better condition as it was before the damage occurred. In the event any item of Collateral is replaced for any reason it must be with the prior written consent of Lender. All such items replacing any original item of Collateral shall become immediately subject to the lien of this Security Agreement as if Borrower owned the items at the time of executing this Agreement. Borrower agrees to execute any documents or UCC financing statements which Lender may require in order to perfect the security interest in the replacement Collateral. Borrower hereby irrevocably authorizes Lender to make, settle and adjust claims under any insurance policies and to endorse Borrower's name on any check or other items of payment for the proceeds thereof. 10. EVENTS OF DEFAULT; ACCELERATION. The following are events of default under this Agreement. (a) Any of Borrower's obligations to Lender under this Agreement or any other agreement with Lender are not paid promptly when due; (b) Borrower breaches any warranty or provision hereof, or of any note or of any other instrument or agreement delivered by Borrower to Lender in connection with this or any other transaction; (c) Borrower dies, becomes insolvent or ceases to do business as a going concern; (d) Borrower shall make any representation herein or in any other documents or material delivered to Lender which shall prove to be incorrect in any material respect at the time made; (e) Any of the Collateral is lost or destroyed; (f) A petition in bankruptcy or for arrangement or reorganization be filed by or against Borrower or Borrower admits its inability to pay its debts as they mature; (g) Any property of Borrower is attached or a receiver is appointed for Borrower, or a judgment is obtained against Borrower the execution of which is not effectively stayed within thirty (30) days; (h) Lender in good faith believes the prospect of payment or performance is impaired or in good faith believes the Collateral is insecure; and (i) Any guarantor, surety, or endorser for Borrower defaults in any obligation or liability to Lender or any guaranty obtained in connection with this transaction is terminated or breached or any guarantor commits an Event of Default pursuant to (a), (b), (c), (f), or (g) above. Upon the occurrence of an Event of Default, the indebtedness herein described and all other debts then owing by Borrower to Lender under this or any other present or future agreement shall at the election of Lender, become immediately due and payable. After an event of default as defined above, interest shall accrue at a rate per annum equal to 21%. 11. PREPAYMENT. Borrower may prepay in full, but not in part, the unpaid principal balance together with all accrued unpaid interest and any and all other sums due hereunder. The payoff amount will be calculated by Lender using the Rule of 78's including a penalty of 2% of the total amount financed hereunder. 12. LENDER'S REMEDIES AFTER DEFAULT; CONSENT TO ENTER PREMISES. Upon the occurrence of an Event of Default and at any time thereafter, LENDER SHALL HAVE ALL THE RIGHTS AND REMEDIES OF A LENDER UNDER THE UNIFORM COMMERCIAL CODE AND ANY OTHER APPLICABLE LAWS. INCLUDING THE RIGHT TO ANY DEFICIENCY remaining after disposition of the Collateral for which Borrower shall remain fully liable. LENDER, BY ITSELF OR ITS AGENT, MAY WITHOUT NOTICE TO BORROWER AND WITHOUT JUDICIAL PROCESS OF ANY KIND, ENTER INTO ANY PREMISES OR UPON ANY LAND where the Collateral may be located and disassemble, render unusable and/or repossess all or any item of the Collateral, disconnecting and separating all Collateral from any other property. Borrower expressly waives all further rights to possession of the Collateral after an Event of Default and all claims for injuries suffered through loss caused by such entering and/or repossession. Lender may require Borrower to assemble the Collateral and return it to Lender at a place to be designated by Lender which is reasonably convenient to both parties. Lender will give Borrower reasonable notice of the time and place of a public sale of the Collateral or of the time after which any private sale or any other intended disposition of the Collateral is to be made. Unless otherwise provided by law, the requirement of reasonable notice shall be met if such notice is mailed, postage prepaid, to the address of Borrower shown herein at least five days before the time of the sale or disposition. Expenses of retaking, holding, preparing for sale, selling and other costs of disposition including reasonable attorney's fees and other Page 2 of 4 legal fees shall be the responsibility of Borrower and shall be included as part of the obligation of Borrower under this Agreement. The rights and remedies provided Lender are cumulative and may be exercised in such order or combination as Lender may elect. 13. WAIVER OF DEFAULTS; AGREEMENT INCLUSIVE. Lender may in its sole discretion waive any Event of Default. Any such waiver in a particular instance or any particular default shall not be a waiver of other defaults or the same kind of default at another time. No modification or change in this Agreement or any related note, instrument or agreement shall bind Lender unless such waiver or modification is in writing and signed by Lender. 14. FINANCING STATEMENTS. If permitted by law, Borrower authorizes Lender to file such financing statements with respect to the Collateral which Lender may determine are necessary to perfect Lender's interest in the Collateral. Borrower hereby appoints Lender as Borrower's attorney-in-fact to execute on Borrower's behalf any such financing statements. 15. ASSIGNMENT. Lender may assign this Agreement and any indebtedness secured hereby and upon such assignment or transfer the assignee or holder shall be entitled to all rights, powers, privileges and remedies of Lender to the extent assigned or transferred. The obligations of Borrower shall not be subject as against any such assignee or transferee, to any defense, set-off or counterclaim available to the Borrower against Lender and any such defense, set-off or counterclaim may be asserted only against Lender. Any assignee from Lender shall have the same right of off-set as is available to Lender. 16. ARBITRATION DISCLOSURES. (i) Arbitration is usually final and binding on the parties and subject to only very limited review by a court. (ii) The parties are waiving their right to litigate in court, including their right to a jury trial. (iii) Pre-arbitration discovery is generally more limited and different from court proceedings. (iv) Arbitrators' awards are not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by arbitrators is strictly limited. (v) A panel of arbitrators might include an arbitrator who is or was affiliated with the banking industry. ARBITRATION PROCEDURES: (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith, AND including but not limited to a claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration proceedings shall be conducted in Salt Lake City, Utah. The arbitrator(s) shall have the qualifications set forth in subparagraph (c) hereto. All statutes of limitations which would otherwise be applicable in a judicial action brought by a party shall apply to any arbitration or reference proceeding hereunder. (b) In any judicial action or proceeding arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith, including but not limited to a claim based on or arising from an alleged tort, if the controversy or claim is not submitted to arbitration as provided and limited in subparagraph (a) hereto, all decisions of fact and law shall be determined by a reference in accordance with Rule 53 of the Federal Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil Procedure or other comparable, applicable reference procedure. The parties shall designate to the court the referee(s) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored arbitration proceedings. The referee(s) shall have the qualifications set forth in subparagraph (c) hereto. (c) The arbitrator(s) or referee(s) shall be selected in accordance with the rules of the American Arbitration Association from panels maintained by the Association. A single arbitrator or referee shall be knowledgeable in the subject matter of the dispute. Where three arbitrators or referees conduct an arbitration or reference proceeding, the claim shall be decided by a majority vote of the three arbitrators or referees, at least one of whom must be knowledgeable in the subject matter of the dispute and at least one of whom must be a practicing attorney. The arbitrator(s) or referee(s) shall award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees, and court costs). The arbitrator(s) or referee(s) also may grant provisional or ancillary remedies such as, for example, injunctive relief, attachment, or the appointment of a receiver, either during the pendency of the arbitration or reference proceeding or as part of the arbitration or reference award. (d) Judgment upon an arbitration or reference award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration or reference award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that limit, either party may commence legal action for a court trial de novo: Such legal action must be filed within thirty (30) days following the date of the arbitration or reference award; if such legal action is not filed within that time period, the amount of the arbitration or reference award shall be binding. The computation of the total amount of an arbitration or reference award shall include amounts awarded for arbitration fees, attorneys' fees, and all other related costs. (e) At the Bank's option, foreclosure under a deed of trust or mortgagee may be accomplished either by exercise of a power of sale under the deed of trust or mortgage or by judicial foreclosure. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (f) Notwithstanding the applicability of other law to any other provision of this Agreement, the Federal Arbitration Act, 9 U.S.C. s 1 et seg., shall apply to the construction and interpretation of this arbitration paragraph. 17. STATEMENTS. Borrower shall furnish Lender within ninety (90) days after the end of each fiscal year of Borrower, a balance sheet and profit and loss statement as of the end of such fiscal year and a balance sheet and profit and loss statement as of the end of each quarter, all prepared in accordance with generally accepted accounting principles and such other information respecting the financial condition and operations of Borrower as Lender may from time to time reasonably request. 18. ADDITIONAL FEES. Borrower agrees to pay Lender's reasonable fees, costs and expenses for the preparation of all documents, filing, and recording fees and an origination fee which fees shall be disclosed to Borrower prior to the execution of this agreement. Page 3 of 4 Borrower further agrees to pay all costs incurred by Lender in enforcing or protecting Lender's rights under this Agreement including but not limited to all reasonable attorneys' fees and court costs and the costs of storing any of the Collateral. All such additional fees shall be additional indebtedness secured hereby. 19. MISCELLANEOUS. Lender may fill in any blanks including but not limited to serial numbers and the date of the first payment. Any provisions hereof contrary to, prohibited by or invalid under applicable laws or regulations shall be inapplicable and deemed omitted herefrom, but shall not invalidate the remaining provisions hereof. BORROWER ACKNOWLEDGES RECEIPT OF A TRUE COPY OF THIS AGREEMENT. If Borrower is a corporation, this Security Agreement is executed pursuant to authority of its Board of Directors. "Borrower" and "Lender" as used in this Agreement include the heirs, executors or administrations, successors or assigns to those parties. If more than one Borrower executes this Agreement, their obligations under this Agreement shall be joint and several. Borrower waives all rights to trial by jury in any litigations arising herefrom or in relations hereto. This Agreement may not be altered, modified or terminated in any manner except by a writing duly signed by the parties hereto. This Agreement shall be governed by and constituted in accordance with the laws of the state of Utah except as modified by Section 18. 20. ADDITIONAL TERMS. None Dated December 27, 1995. By execution hereof, the signer hereby certifies that he has read this Agreement, including the reverse side of all pages, and that he is duly authorized to execute this Agreement on behalf of the Borrower. Cerprobe Corporation -------------------- Borrower - --------------------------- By /s/ Pauline Hostetler ------------------------------ Witness Title: Controller ------------------------------ Print Name: Pauline Hostetler ------------------------------ State of Arizona ) )ss County of Maricopa ) Subscribed and sworn to before me this 27 day of December, 1995. /s/ Laura M. Back ------------------------------ Notary Public My Commission Expires July 14, 1997 ------------------------------ Residing at ZIONS CREDIT CORPORATION ------------------------ Lender By /s/ Norman Weldon - ----------------------- Norman Weldon Title: Vice President - ------------------------ If Borrower is a partnership, enter: Partner's names Home Address - --------------- ------------ Rev: 04/19/93 Page 4 of 4 SCHEDULE "A" Page 1 of 2 This schedule is attached to and forms a part of the Security Agreement and Promissory Note No. 7092 Schedule No. 1 dated December 27, 1995 between Cerprobe Corporation, as Borrower and Zions Credit Corporation, as Lender. DESCRIPTION OF EQUIPMENT Equipment Location: 600 South Rockford Drive, Tempe, AZ 85281 Infinisys - --------- 1- S1000e/1205A/163A/771A System s/n #S526S03UT 1- 128MB ECC Ram Expansion 1- Intelligent SCSI Controler s/n #082295 1- Solaris 2.3 software 1- Answerbook system admin. 1- Matrix 3000VA 1- Powerchute plus unix. 1- 14" white ASCII/ANSI/PC Terminal s/n #082295 1- 520 EPC 101 Keyboard ESI Technologies - ---------------- 1- EMISMFG EMIS Manufacturing software package 40 user license 1- EMISSFDC EMIS Shop floor data collection 8 user license Tri Star Computer - ----------------- 6- 740-ECT 1SA Combo Enet ISA Combo Twisted Pair & Coax s/n #SO10250, S010255, S010264, S010276, S010292 6- Ewsunic 21" #2182 Monitor s/n #M01188, M011888, M011890, M011891, M011892 6- Tri-Cad 133 MHZ mini tower area 590aTPB P54C Triton M/B s/n #MB13012, MB13015, MB13079, MB13082, MB13084 1- Intel P54C 133 Mhz CPU 1- Wakefield #628-65ABT1 1- Fan, CPU, 40mmX10MM, w. M&P CON 1- Chenbro A6601 Mini Tower Case 1- SI-Asonic 200 Watt P/S 6- PCI Option Package 2- SIMM, 72 Pin,k 16 meg, 60ns serial #'s RM17356, RM17357, RM17358, RM17359, RM17360, RM17361, RM17362, RM17363, RM17364 1- DFI Sha-1500 P PCI SCSI Cntrl. s/n #'s CC10825, CC10826, CC10829, CC10830 1- 1.08g SCSI Quantum QM31080FBS s/n #'s HD10849, HD12031, HD12037, HD12038 1- No removable ND brackets 1- TFAC 2.5" 1.44 MB 1-D s/n # FD12768, FD12769, FD12774, FD12775, FD12786 1- Floppy cable 1- SCSI Hard Drive cable s/n #'s 396251-1 396251-2, 396251-4, 396251-5, 396261-6 Tri Star Computer cont. - ----------------------- 1- Tri-Cad 312OP-2Meg Pci Dram s/n #'s CG12523, CG12524, CG12526, CG12539, CG12546 1- 104 KYBO, Win95 compatible s/n #'s KB11693, KB11714, KB12191, KB12192, KB12193 1- Logi Tech Mouseman 3 bin s/n #MS12183, MS12896, MS12965, MS12968, MS13125 1- Microsoft DOS 6.22 3'5" Disk s/n #SW17365, SW17366, SW17368, SW17393, SW17394 1- Microsoft wind for Wkgrps 3.11 s/n #'S SW16969, SW16970, SW16998, SW16999, SW17013 6- Accel Graphics AG300 PCI 7.5MB PCI 7.5MB for pro/e systems s/n #'s CG12630K CG12631, CG12635, CG12637, CG12638 6- Tri-Star mouse pad 6- Windows NT v3.51 on CD workstation version, s/n #'s SW17281, SW17282, SW17285, S217286, SW17287, SW17268 6- Toshiba 3601 4X SCST CD-Rom quad SCSI 600KR/s 150MS Access mfg. part no. 3601 s/n #'s 10209, CD11893, CD11894, CD11895, CD11896, CD11897 6- Tri-Star Pro/E PC Osage Computer Group - -------------------- 1- 64 MB ECC memory expansion 1- Two 1.05G drives for SS1000 1- SBUS Fast SCSI-2/BFFRD ETH CRD s/n #122283 Parametic Technology Corporation - -------------------------------- 1- Advanced Designer Package - Floating 1- Basic Library 1- Pro/Libraryaccess - Floating 1- Pro PDM Server Leica, Inc. - ----------- 1- LEICA MZ6 optics carrier 1- Binocular Tube 10-50 DEG 1- Binocular Tube 45DEG 4- WF25X/9.5M HP Eyepiece 1- 0.8X Achromain OBJ, FWD-112MM 1- Wild Discussion Tube 1- KL 1500 120V 1- Continuous Ringlight 58MM 1- U-STD CS&Fine Drive 1- Continuous Ringlight 58MM SCHEDULE "A" Page 2 of 2 Leica, Inc. cont. - ----------------- 20- KTVG-73 (stereo4. KT-STD, 10X EP, E-ARM) 20- Coupler 5- SVB-73(Stereo4, S-STD, 10X EP, E-Arm) 1- Leica MZ6 Optics Carrier 1- 10-50 Deg ERGO Bino 1- Binocular Tube 450EG. 4- WF 25x/9.5M HP Eyepiece 1- 0.8X Achro main OBJ. FWD-112MM 1- Wild Discussion Tube 1- KL 1500 120V 1- Continuous Ringlight 58MM 1- U-STD. CS & Fine Drive Tovar Industries, Inc. - ---------------------- 60- A1-E1-076 (chairs) 60- T100A 30"x30/36 x 72, TSR 14 x 15 x 72 UL7408- 15, TLS 12 x 72 Rucker & Kolls, Inc. - -------------------- 4- Model 260A Build Station 4- Microscope Support Assy, X-Y Positioner 5- Reflector, F/C DYNA - ---- 1- Dynamite Workstation 31/2 1- Coolant Pump DM2400 1- Coolant Tank DM2400 1- Coolant Collection Hood 1- Touch Probe, DM2400/2800 1- Collect 1/8" 1- Collect 3/16" 1- Collect 1/4" 1- Collect 3/8" Together with all present and future accessories, attachments, or improvements thereto and replacements or substitutions therefor and proceeds thereof. Cerprobe Corporation - -------------------- Borrower By: /s/ Pauline Hostetler - -------------------------- Title: Controller - -------------------------- EX-10.JJ 6 ASSIGNMENT OF LEASE ASSIGNMENT OF LEASE THIS ASSIGNMENT OF LEASE, dated as of this 31st day of August, 1995 ("the Assignment"), between FRESH TEST TECHNOLOGY, INC. a Utah corporation ("Assignor") and CERPROBE CORPORATION, an Arizona corporation ("Assignee") is made with reference to the following facts: 1. Assignor is the Lessee under that certain lease dated September 21, 1993, and amended by Amendments to Lease dated September 21, 1993, and November 23, 1993 ("the Lease"), between Fresh Test Technology, Inc., as Lessee, and Mission West Properties, a California corporation, as Lessor. NOW, THEREFORE, ASSIGNOR AND ASSIGNEE AGREE AS FOLLOWS: 1. Assignment. Assignor hereby assigns to Assignee all of Assignor's rights and interests as Lessee under the Lease. 2. Acceptance of Assignment. Assignee hereby accepts the foregoing assignment and assumes and agrees to be bound by all the terms, conditions, and provisions of the Lease. 3. Indemnification by Assignee. Assignee will defend, indemnify, and hold harmless Assignor from and against any and all loss, liability, claims, demands, damages, costs, or other expenses (including, without limitation, reasonable attorneys' fees) arising from or relating to any breach or default or obligation of the Lessee under the Lease occurring (or relating to events occurring) on or after the effective date of this Assignment. 4. Indemnity of Assignor. Assignor will defend, indemnify, and hold harmless Assignee from and against all loss, liability, claims, demands, damages, costs, or other expenses (including, without limitation, reasonable attorneys' fees) arising from or relating to any breach or default or obligation of the Lessee under the Lease occurring (or relating to events occurring) before the effective date of this Assignment. 5. Effective Date. The Assignment will become effective as of August 30, 1995. This Assignment of Lease has been executed as of the date first above set forth in Phoenix, Arizona. ASSIGNOR: ASSIGNEE: Fresh Test Technology, Inc., Cerprobe Corporation, an Arizona a Utah corporation corporation By: _____________________ By: _____________________ By: _____________________ By: _____________________ ACCEPTED BY: LESSOR: Mission West Properties, a California corporation By: ____________________ By: ____________________ ADDENDUM TO STANDARD INDUSTRIAL LEASE MULTI-TENANT THIS AMENDMENT TO LEASE dated as of September 1, 1995 is entered into by and between Mission West Properties, a California corporation ("Lessor"), and Cerprobe Corporation, an Arizona corporation, successor in interest to Fresh Test Technology, Inc., a Utah corporation ("Lessee"), with reference to the following facts: A. Lessor and Lessee entered into a standard industrial lease dated September 21, 1993, and modified by Amendments to Lease dated September 21, 1993 and November 23, 1995 ("the Lease"), which affects certain leasable space designated as 15,581 square feet of office and warehouse space located at 531 E. Elliot Road, Suite 120, Chandler, Arizona 85225. The Lease also affects certain leasable space designated as 5,470 square feet of office and warehouse space located at 561 E. Elliot Road, Suite 195, Chandler, Arizona, hereinafter referred to as the "Expansion Space". B. The Lease is in full force and effect, and neither Lessor nor Lessee have actual knowledge of any default or breach by the other under the Lease. C. Lessor and Lessee desire to amend the Lease as provided in this Amendment. ARTICLE 1 - Amendments 1.1 The lease term for the expansion space shall be extended for an additional fourteen (14) months beginning November 1, 1995 and ending December 31, 1996 ("extended term"). 1.2 The monthly base rent payable for the expansion space during the extended term shall be $3,555.50 (equivalent to $.65 per square foot). Lessee shall also pay monthly estimated common area maintenance expenses, applicable sales taxes, and any other sums which may be due under the terms of the Lease. ARTICLE 2 - General Provisions 2.1 The effective date of this Amendment shall be September 1, 1995. 2.2 The Lease, as amended by this Amendment, is hereby confirmed. All other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment has been executed as of the date first above set forth. LESSEE: LESSOR: Cerprobe Corporation, an Arizona Mission West Properties, a corporation California corporation By: _____________________________ By: _____________________________ By: _____________________________ By: _____________________________ EX-10.KK 7 LEASE AGREEMENT STANDARD INDUSTRIAL LEASE - MULTI-TENANT American Industrial Real Estate Association 1. Parties. This Lease, dated, for reference purposes only, September 21, 1993, is made by and between Mission West Properties, a California corporation (herein called "Lessor") and Fresh Test Technology, Inc., a Utah corporation (herein called "Lessee"). 2. Premises, Parking and Common Areas. 2.1 Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the condition set forth herein, real property situated in the County of Maricopa, State of Arizona commonly known as 531 E. Elliot Road, Suite 120, Chandler, AZ 85225 and described as 15,581 square feet of office and manufacturing space, located in Building "A" of Arizona Corporate Center, herein referred to as the "Premises", as may be outlined on an Exhibit attached hereto, including rights to the Common Areas as hereinafter specified but not including any rights to the roof of the Premises or to any Building in the Industrial Center. The Premises are a portion of a building, herein referred to as the "Building." The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." 2.2 Vehicle Parking. Lessee shall be entitled to 47 vehicle parking spaces, unreserved and unassigned, on those portions of the Common Areas designated by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." See Addendum for Paragraph 2.2 (continued). 2.2.1 Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 2.2.2 If Lessee permits or allows any of the prohibited activities described in paragraph 2.2 of this Lease, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designated by the Lessor from time to time for the general non- exclusive use of Lessor, Lessee and of other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.4 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee for the benefit of Lessee and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.5 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations with respect thereto. Lessee agrees to abide by and conform to all such rules and regulations, and to cause its employees, suppliers, shippers, customers and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.6 Common Areas - Changes. Lessor shall have the right in Lessor's sole discretion from time to time: (a) To make changes to the Common Areas including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways, (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available, (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas, (d) To add additional buildings and improvements to the Common Areas, (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof, (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 2.6.1 Lessor shall at all times provide the parking facilities required by applicable law and in no event shall the number of parking spaces that Lessee is entitled to under paragraph 2.2 be reduced unless agreed to by both parties. 3. Term. 3.1 Term. The terms of this Lease shall be for sixty (60) months commencing on December 1, 1993 and ending on November 30, 1998 unless sooner terminated pursuant to any provision hereof. See Addendum for 3.1 (continued) 3.2 Delay in Possession. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder, provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.3 Early Possession. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. Initials _______ ------- 4. Rent. 4.1(a) Base Rent. Lessee shall pay to Lessor, as Base Rent for the Premises, without any offset or deduction, except as may be otherwise expressly provided in this Lease, on the first day of each month of the term hereof, monthly payments in advance of $11,954.07 (Rent - $10,362.37, Rental Tax - $569.93, C.A.M. - $1,012.77). Lessee shall pay Lessor upon execution hereof $11,945.07 as sums due for December 1 through 31, 1993. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the Base Rent. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. See Addendum for Paragraph 4.1(b). 4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as 23.74 percent. (b) "Operating Expenses" is defined, for purposes of this Lease, as all costs incurred by Lessor, if any, for (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities and fences and gates. (bb) Trash disposal services. (cc) Tenant directories. (dd) Fire detection systems including sprinkler system maintenance and repair. (ee) Security services. (ff) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense." (ii) The cost of water, gas and electricity to service the Common Areas. (c) The inclusion of the improvements, facilities and services set forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each twelve month period of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to Lessee, within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. See Addendum for Paragraph 4.2(b)(iii) and 4.2(e). 5. Security Deposit. Lessee shall deposit with lessor upon execution hereof $ _______, a security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 4. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for general office use and the manufacturing, research and development, and assembly of electronic equipment or any other use which is reasonably comparable and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2(a) shall be of no force or effect if, prior to the date of this Lease, Lessee was an owner or occupant of the Premises and, in such event, Lessee shall correct any such violation at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premisses and the occupation and use by Lessee of the Premises and of the Common Areas. Lessee shall not use nor permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Industrial Center. POO0FD55 Initials _______ ------- 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on the Lease commencement date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, heating, and loading doors in the Premises shall be in good operating condition on the Lease commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within thirty (30) days after the Lease commencement date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force or effect if prior to the date of this Lease, Lessee was an owner or occupant of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premisses, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Subject to the provision of paragraphs 4.2 (Operating Expenses). 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or Destruction) and except for damage caused by any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or invitees, in which event Lessee shall repair the damage, Lessor as an Operating Expense, subject to reimbursement pursuant to paragraph 4.2 shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs and utility installations of the Common Areas and all parts thereof, as well as providing the services for which there is already an Operating Expense pursuant to paragraph 4.2. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls, nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises. Lessor shall have no obligation to make repairs under this paragraph 7.1 until a reasonable time after receipt of written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of lessor's failure to keep he Premises in good order, condition and repair. Lessor shall not be liable for damages or loss of any kind or nature by reason of Lessor's failure to furnish any Common Area Services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Lessor. 7.2 Lessee's Obligations. (a) Subject to the provisions of paragraph 6 (Use). 7.1 (Lessor's Obligations), and 9 (Damage or Destruction). Lessee, at Lessee's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonably or readily accessable to Lessee) including, without limiting the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems (Lessee shall procure and maintain, at Lessee's expense, a ventilating and air conditioning system maintenance contract), electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surfaces of exterior walls, ceilings, windows, doors, plate glass, and skylights located within the Premises. Lessor reserves the right to procure and maintain the ventilating and air conditioning system maintenance contract and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (b) If Lessee fails to perform Lessee's obligations under this paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of emergency, in which no notice shall be required), perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall be due and payable as additional rent to Lessor together with Lessee's next Base Rent installment. (c) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease. Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions or Utility Installations in, on or about the Premises, or the Industrial Center except for nonstructural alterations to the Premises not exceeding $2,500 in cumulative costs during the term of this Lease. In any event, whether or not in excess of $2,500 in cumulative cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the Building nor the Industrial Center without Lessor's prior written consent. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises and the Industrial Center to their prior condition Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor. Lessor may, at any time during the term of this Lease, require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Industrial Center that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, or the Industrial Center, or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises of the Industrial Center, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises and the Industrial Center free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's interest to do so. (d) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall be the property of Lessor and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d), Lessee's machinery and equipment, other than that which is affixed to the Premises, so that it cannot be removed without material damage to the Premises, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. 7.4 Utility Additions. Lessor reserves the right to install new or additional utility facilities throughout the Building and the Common Areas for the benefit of Lessor or Lessee, or any other lessee of the Industrial Center, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1(a) Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Industrial Center. Such insurance shall be in an amount not less than $1 Million per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of this paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. See Addendum for paragraph 8.1(b) 8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against any liability arising out of the ownership, use, occupancy or maintenance of the Industrial Center in an amount not less than $1 Million per occurrence. 8.3 Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Industrial Center improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event same is required by a lender having a lien on the Premises) special extended perils ("all risk", as such term is used in the insurance industry), plate glass insurance and such other insurance as Lessor deems advisable. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall cover all Operating Expenses of said period. 8.4 Payment of Premium Increase. (a) After the term of this Lease has commenced, Lessee shall not be responsible for paying Lessee's Share of any increase in the property insurance premium for the Industrial Center specified by Lessor's insurance carrier as being caused by the use, acts or omissions of any other lessee of the Industrial Center, or by the nature of such other lessee's occupancy which create an extraordinary or unusual risk. (b) Lessee, however, shall pay the entirety of any increase in the property insurance premium for the Industrial Center over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. (c) Lessee shall pay to Lessor, during the term hereof, in addition to the rent, Lessee's Share (as defined in paragraph 4.2[a]) of the amount of any increase in premiums for the insurance required under Paragraphs 8.2 and 8.3 above such premiums paid during the Base Period, as hereinafter defined, whether such premium increase shall be the result of the nature of Lessee's occupancy, any act or omission of Lessee, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, or general rate increases. In the event that the Premises have been occupied previously, the words "Base Period" shall mean the last twelve months of the prior occupancy. In the event that the Premises have never been occupied previously, the premiums during the "Base Period" shall be deemed to be the lowest premiums reasonably obtainable for said insurance assuming the most nominal use of the Premises. Provided, however, in lieu of the Base Period, the parties may insert a dollar amount at the end of this sentence which figure shall be considered as the insurance premium for the Base Period. $6,351,000. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1 Million procured under paragraph 8.2. (d) Lessee shall pay any such premium increases to Lessor within 30 days after receipt by Lessee of a copy of the premium statement or other satisfactory evidence of the amount due. If the insurance policies maintained hereunder cover other improvements in addition to the Premises, Lessor shall also deliver to Lessee a statement of the amount of such increase attributable to the Premises and showing in reasonable detail, the manner in which such amount was computed. If the term of this Lease shall not expire concurrently with the expiration of the period covered by such insurance, Lessee's liability for premium increases shall be prorated on an annual basis. 8.5 Insurance Policies. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least 13 plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the commencement date of this Lease. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders' thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entitlement of recovery against the other for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. Initials _______ ------- 8.7 Indemnify. Lessee shall indemnify and hold harmless, Lessor from and against any and all claims arising from Lessee's use of the Industrial Center, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon, and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Industrial Center arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Industrial Center, nor shall Lessor be liable for injury to the person of Lessee. Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Industrial Center, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Industrial Center, nor from the failure of Lessor to enforce the provisions of any other lease of the Industrial Center, or the Rules and Regulations of the Industrial Center. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent of the then replacement cost of the Premises. (b) "Premises Total Destruction" shall mean the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Premises. (c) "Premises Building Partial Damage shall mean the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent of the then replacement cost of the Building. (d) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent or more of the then replacement cost of the Building. (e) "Industrial Center Buildings" shall mean all of the buildings on the Industrial Center site. (f) "Industrial Center Buildings Total Destruction" shall mean if the Industrial Center Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent or more of the then replacement cost of the Industrial Center Buildings. (g) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (h) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring excluding all improvements made by lessees. 9.2 Premises Partial Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Partial Damage and Premises Building Partial Damage, then Lessor shall, at Lessor's expense, repair such damage to the Premises, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4(a) and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10-day period this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.3 Premises Total Destruction; Premises Building Total Destruction; Industrial Center Buildings Total Destruction. (a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, and which falls into the classifications of either (i) Premises Total Destruction, or (ii) Premises Building Total Destruction, or (iii) Industrial Center Buildings Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last six months of the term of this Lease there is substantial damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage during the last six months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continued in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores Premises pursuant to the provisions of this paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue. Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to dos so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.6 Termination - Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes. 10.1 Payment of Tax Increase. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Industrial Center, provided, however, that Lessee shall pay, in addition to rent, Lessee's Share (as defined in paragraph 4.2[a]) of the amount, if any, by which real property taxes applicable to the Premises increase over the fiscal real estate tax year 1993. Such payment shall be made by Lessee within thirty (30) days after receipt of Lessor's written statement setting forth the amount of such increase and the computation thereof. If the term of this Lease shall not expire concurrently with the expiration of the tax fiscal year, Lessee's liability for increased taxes for the last partial lease year shall be prorated on an annual basis. 10.2 Additional Improvements. Lessee shall not be responsible for paying Lessee's Share of any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income estate taxes) imposed on the Industrial Center or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Industrial Center or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Industrial Center. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Industrial Center or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers thereof. 10.4 Joint Assessment. If the Industrial Center is not separately assessed, Lessee's Share of the real property tax liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available, Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon if any such services are not separately metered to the Premises. Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building or the Industrial Center. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a breach of this Lease without the need for notice to Lessee under paragraph 13.1. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting form the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate," provided that before such assignment shall be effective said assignee shall assume, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions of Assignment. Regardless of Lessor's consent, no assignment shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the Base Rent and Lessee's Share of Operating Expenses and to perform all other obligations to be performed by Lessee hereunder. Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of rent shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 of this Lease. Consent to one assignment shall not be deemed consent to any subsequent assignment. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee, or any successor of Lessee, and without obtaining its or their consent thereto and such actions shall not relieve Lessee of liability under this Lease. 12.4 Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessor of all or any part of the Premises and shall be included in subleases: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease, provided, however, that subject to paragraph 12.4(1) until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligations or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary, Lessee shall have no right or claim against such sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublessee shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) If Lessee's obligations under this Lease have been guaranteed by third parties, then as sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (d) The consent by Lessor to any subletting shall not release Lessee from its obligations or alter the primary liability of Lessee to pay the rent and perform and comply with all of the obligations of Lessee to be performed under this Lease. (e) The consent by Lessor to any subletting shall not constitute a consent to any subsequent subletting by Lessee or to any assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease, provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (h) Each and every consent required of Lessee under a sublease shall also require the consent of Lessor. (i) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (j) Lessor's written consent to any subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (k) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within ten (10) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by sublessee. See Addendum for Paragraph 12.4(l) 12.5 Attorneys Fees. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection therewith, such attorneys fees not to exceed $350.00 for each such request. 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) Except as otherwise provided in this Lease, the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee, provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (d) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors, (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event, Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid, the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided, that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installment of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing specifying wherein Lessor has failed to perform such obligation, provided however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Industrial Center. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee. Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overpayment amount, nor prevent Lessor from exercising any of the other rights granted hereunder. In the event that a late charge is payable hereunder, whether or not collected for three (3) consecutive installments of any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4.1 or any other provision of this Lease to the contrary. 14. Condemnation. If the Premises or any portion thereof the Industrial Center are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent of the floor area of the Premises, or more than twenty-five percent of that portion of the Common Areas designated as parking for the Industrial Center is taken by condemnation, Lessee may at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate the Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing this Lease shall remain in full force and effect as to the portion of the premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages, provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) Upon execution of this Lease by both parties, Lessor shall pay to Lee and Associates, licensed real estate broker(s) a fee as set forth in a separate agreement between Lessor and said broker(s). (b) Lessor further agrees that if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, then as to any of said transactions. Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interests in this Lease whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15 said broker shall be third party beneficiary of the provisions of this paragraph 15. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises or of the business of requesting party. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect without modification except as may be represented by the requesting party (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Industrial Center, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title or a lessee's interest in a ground lease of the Industrial Center, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time is of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expenses and insurance and tax expenses payable shall be deemed to be rent. 22. Incorporation of Prior Agreements, Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Industrial Center and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease except as otherwise specifically stated in this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. Initials _______ ------- 24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee or any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short term" memorandum of this Lease for recording purposes. See Addendum for Paragraph 25 (continued). 26. Holding Over. If Lessee, with Lessor's consent remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee but all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Industrial Center is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Industrial Center is located. 30. Subordination. (a) This Lease, and any Option granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Industrial Center and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease or any Option granted herein prior to the lien or any mortgage, deed of trust or ground lease, as the case may be. Lessor's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorney's Fees. If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Industrial Center as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the Premises or the Industrial Center without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Industrial Center. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraph 33 hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Industrial Center. 39. Options. 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor, (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Industrial Center or other property of Lessor or the right of first offer to lease other space within the Industrial Center or other property of Lessor, (3) the right or option to purchase the Premises or the Industrial Center, or the right of first refusal to purchase the Premises or the Industrial Center, or the right of first offer to purchase the Premises or the Industrial Center, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily by or to any person or entity other than Lessee provided however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner either by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease, a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the date after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid or (iii) at any time after an event of default described in paragraphs 13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of said default to Lessee), or (iv) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(b) or paragraph 13.1(c) whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease (i) Lessee fails to pay to Lessor any obligations of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(c) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee) or (iv) Lessor gives to Lessee three notices of such default under paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured. 40. Security Measures. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Industrial Center. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Industrial Center or any part thereof in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 41. Easements. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements rights dedications, Maps, and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment under protest and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If Lessee is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by Lessor and Lessee. Initials _______ ------- 46. Addendum. Attached hereto is an addendum or addenda containing paragraphs 2.2 (continued) 3.1 (continued) 4.1(b) 4.2(b)(iii) 4.2(e) 8.1(b) 12.4(1) 25 (continued) 50 51 51.1 51.2 51.3 51.4 52 53 53.1 53.2 54 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO. THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Mission West Properties, Fresh Test Technology, Inc., a California corporation a Utah corporation By: ________________________________ By: ___________________________________ Harve Filuk, Vice President Robert K. Bench, President/C.O.O. By:_________________________________ By: ___________________________________ Executed on ________________________ Executed on ___________________________ (Corporate Seal) (Corporate Seal) ADDRESS FOR NOTICES AND RENT ADDRESS 6815 Flanders Drive, Suite 250 _______________________________________ San Diego, CA 92121-2905 _______________________________________ American Industrial Real Estate Association, Los Angeles, CA (213)687-8777 Initials _______ ------- ADDENDUM TO STANDARD INDUSTRIAL LEASE - MULTI-TENANT 2.2(continued). Of the 47 parking spaces Lessee is entitled, six(6) shall be covered parking spaces with specific locations to be determined by Lessor. 3.1(continued). Definition of Commencement Date. The Commencement Date is defined as the earlier of the dates (i) Lessee initially occupies the Premises, or (ii) the general contractor supervising the tenant improvements in its sole discretion determines that the tenant improvements have been substantially completed for the Premise, and Lessor notifies Lessee of same in writing. 4.1(b). The monthly rent payable during the term of this lease shall be as follows: Months 1 through 12: $10,362.37 Months 2 through 24: $10,362.37 Months 25 through 36: $11,064.52 Months 37 through 48: $10,064.82 Months 49 through 60: $10,766.97 Lessee shall also pay monthly estimated common area maintenance expenses of $.065 per square foot and applicable sales tax. 4.2(b)(iii). The costs of any capital improvements made to the Buildings or the parking facilities appurtenant thereto which are incurred by Lessor to (i) reduce Operating Expenses or (ii) to comply with governmental rules and regulations made applicable to the Buildings after the date on which this Lease is entered into, provided that with respect to all said costs incurred by Lessor, the proportionate share thereof to be paid by Lessee each month under this article shall not in any event exceed the same proportionate share of the reduction in the operating expenses each month which results from making such capital improvements. 4.2(e). Lessee's share of controllable operating expenses shall not in any year exceed ten percent (10%) above the prior year's controllable operating expenses. Controllable expenses shall mean all expenses identified in the lease as an operating expense but shall not include real estate taxes, insurance, common area utilities, or any other fees and costs imposed on the Industrial Center as a result of any governmental action. 8.1(b). Not more frequently than each three (3) years, if, in the opinion of Lessor's lender or of an insurance broker retained by Lessor, the amount of public liability insurance coverage at that time is not adequate, Lessee shall increase the insurance coverage as required by either Lessor's lender or Lessor's insurance broker within ten (10) days after receipt of Lessor's written request that Lessee do so. 12.4(1). With respect to any sublease entered into by Lessee with Lessor's consent as herein provided, if the rent paid by the subtenant to Lessee for each square foot leased by such subtenant exceeds the rent being paid by Lessee to Lessor for each square foot, then Lessor shall be entitled to 50% of such excess (i.e., the amount of which the rent under such sublease exceeds the rent under this Lease for each square foot leased by such subtenant); and Lessee shall pay Lessor's said percentage share of such excess with respect to rent payable under the sublease to Lessor within ten (10) days after accept by Lessee of the same. 25(continued). Upon expiration or earlier termination of this Lease, Lessee, without necessity of any demand, shall execute and deliver to Lessor, a quitclaim deed in recordable form and acceptable to Lessor, declaring that its purpose is to extinguish all right, title, and interest of Lessee under this Lease. 50. Lessee shall be responsible for all costs incurred, and any delay in occupancy which may occur as a result of processing any applications or complying with requirements relating to Lessee's use of hazardous materials on the Premises. Lessor shall reasonably cooperate with Lessee to avoid or minimize such costs or delay in occupancy, provided such cooperation can be given without Lessor incurring any cost or obligation. 51. Lessee shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations, including, but not limited to, the Federal Water Pollution Control Act (33 U.S.C. ss.1251, et seq.), Resource Conservation & Recovery Act (42 U.S.C. ss.6901, et seq.), Safe Drinking Water Act (42 U.S.C. ss.3000f, et seq.), Toxic Substances Control Act (15 U.S.C. ss.2601, et seq.), the Clean Air Act (42 U.S.C. ss.7401 et seq.), Comprehensive Environmental Response of Compensation and Liability Act (42 U.S.C. ss.9601, et seq.), and other comparable state laws ("Hazardous Materials Laws"), relating to industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, disposal or transportation of any oil, flammable explosives, asbestos, urea formaldehyde, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including, without limitation, any "hazardous substances," "hazardous wastes," "hazardous materials" or "toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials"). 51.1 Lessee shall, at its own expense, procure, maintain in effect and comply with all conditions of any and all permits, licenses, and other governmental and regulatory approvals required for Lessee's use of the Premises, including, without limitation, discharge of (approximately treated) materials or wastes into or through any sanitary sewer serving the Premises. Except as discharged into the sanitary sewer in strict accordance and conformity with all applicable Hazardous Materials Laws, Lessee shall cause any and all Hazardous Materials removed from the Premises to be removed and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such materials and wastes. Lessee shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Premises in total conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding management of such Hazardous Materials. Upon expiration or earlier termination of the lease term, Lessee shall cause all Hazardous Materials to be removed from the Premises and transported for use, storage or disposal in accordance with and compliance with all applicable Hazardous Materials Laws. Lessee shall not take any remedial action in response to the presence of any Hazardous Materials in or about the Premises or any building, nor enter into any settlement agreement, consent decree or other compromise in respect to any claims relating to any Hazardous Materials in any way connected with the Premises or any building, without first notifying Lessor of Lessee's intention to do so and affording Lessor ample opportunity to appear, intervene or otherwise appropriately assert and protect Lessor's interest with respect thereto. 51.2 Lessee shall immediately notify Lessor in writing of: (i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (ii) any claim made or threatened by any person against Lessee, the Premises or any building relating to damage, contribution, cost recovery compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (iii) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in or removed from the Premises or any building, including any complaints, notices, warnings or asserted violations in connection therewith. Lessee shall also supply to Lessor as promptly as possible, and in any event within five (5) business days after Lessee first receives or sends the same with copies of all claims, reports, complaints, notices, warnings or asserted violations, relating in any way to the Premises, any building or Lessee's use thereof. Lessee shall promptly deliver to Lessor copies of hazardous waste manifests reflecting the legal and proper disposal of all Hazardous Materials removed from the Premises. Initials _______ ------- 51.3 Lessee shall indemnify, defend (by counsel reasonably acceptable to Lessor), protect, and hold Lessor and each of Lessor's partners, employees, agents, attorneys, successors and assigns, free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including attorneys' fees), or death of or injury to any person or damage to any property whatsoever, arising from or caused in whole or in part, directly or indirectly, by (i) the presence in, on, under or about the Premises or any building, or discharge in or from the Premises or any building, of any Hazardous Materials; (ii) Lessee's use, analysis, storage, transportation, disposal, release, threatened release, discharge or generation of Hazardous Materials to, in, on, under, about or from the Premises or any building; (iii) Lessee's failure to comply with any Hazardous Materials Law. Lessee's obligations hereunder shall include without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repair, cleanup or detoxification or decontamination of the Premises or any building, or the preparation and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration or earlier termination of the lease term. For purposes of the release and indemnity provisions hereof, any acts or omissions of Lessee, or by employees, agents, subtenants, assignees, contractors or subcontractors of Lessee or others acting for or on behalf of Lessee (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Lessee. 51.4 If at any time it reasonably appears to Lessor that Lessee is not maintaining sufficient insurance or other means of financial capacity to enable Lessee to fulfill its obligations to Lessor hereunder, whether or not then accrued, liquidated, conditional or contingent, Lessee shall procure and thereafter maintain in full force and effect such insurance or other form of financial assurance, with or from companies or persons and in forms reasonably acceptable to Lessor, as Lessor may from time to time reasonably request. 52. Rent Calculations. TOTAL EXISTING SHELL ----- -------- ----- 15,580 SF 7,891 SF 7,690 SF Years 1 - 2 $.67 $.66 Year 3 $.72 $.70 Year 4 $.72 $.57 Year 5 $.77 $.61 53. Tenant Improvement Allowance. Lessor shall construct tenant improvements in accordance with the plans and specifications by Miller/Rausch dated August 25, 1993 and revised September 9, 1993. Lessor shall enter into a contract with Willmeng Construction in the amount of $223,590.80 to construct the aforementioned improvements. Lessor and Lessee acknowledge that the contract amount of $223,590.80 is exclusive of City of Chandler development fees and permits and also acknowledge that the contract amount may be increased or decreased as a result of change orders to the contract, such change orders to be approved by Lessor and Lessee. Lessor's maximum contribution towards the tenant improvement costs and all fees and expenses related thereto shall be $120,000.00. Lessee shall contribute the balance of the tenant improvement costs and all related fees and expenses, currently in the approximate amount of $103,590.80. Lessee's tenant improvement contribution shall be paid to Lessor upon execution of the lease agreement. 53.1 Tenant Improvement Cost Savings or Cost Increases. If tenant improvement costs are less than the estimated total of $223,590.80, the amount of the savings shall be credited equally to Lessor and Lessee. Lessee shall pay all tenant improvement costs, fees and permits related thereto in excess of Lessor's $120,000.00 contribution. All change orders shall be approved by Lessor and Lessee. Should the change orders result in a net increase to the original contract estimate of $223,590.80, Lessee shall upon execution of the change order, fund to Lessor the contracted amount of the change order. 53.2 Reduction of Tenant Improvement Costs and Reduction of Rent (Shell Space). For each $1.00 per square foot of reduction of Lessor's portion of tenant improvement costs up to a maximum of $3.55 per square foot ($27,318.00), Lessor shall reduce the monthly rent as outlined in Paragraph 52 on the shell space at the rate of $.036 per square foot, per month. For example, if a $15,380.00 total reduction is achieved, Lessee's contribution shall be reduced by $7,690.00 and Lessor's contribution shall be reduced by $7,690.00 and the rental rate on the shell space shall be reduced by $.036 per square foot, per month. 54. Right of First Refusal. Lessor shall grant to Lessee a right of first refusal on the contiguous premises, Suite 145, consisting of 10,350 square feet of office and warehouse space currently occupied by Data-Cal Corporation. This option shall be contingent upon Data-Cal Corporation relinquishing at the end of their lease term all rights and options to extend their occupancy of Suite 145. Should Suite 145 be available, the rent payable shall be fair market rent and all other terms and conditions under this lease shall apply. Initials _______ ------- EX-10.LL 8 STOCK OPTION PLAN CERPROBE CORPORATION 1995 STOCK OPTION PLAN ARTICLE I General 1.1 Purpose of Plan; Term (a) Adoption. On May 9, 1995, the Board of Directors (the "Board") of Cerprobe Corporation, a Delaware corporation (the "Company"), adopted this stock option plan to be known as the 1995 Stock Option Plan (the "Plan"). (b) Defined Terms. All initially capitalized terms used hereby shall have the meaning set forth in Article V hereto. (c) General Purpose. The Plan shall be divided into two programs: the Discretionary Grant Program and the Automatic Grant Program. (i) Discretionary Grant Plan. The purpose of the Discretionary Grant Program is to further the interests of the Company and its stockholders by encouraging key persons associated with the Company (or Parent or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby acquiring a proprietary interest in its business and an increased personal interest in its continued success and progress. Such purpose shall be accomplished by providing for the discretionary granting of options to acquire the Company's Stock ("Discretionary Options"), the direct granting of the Company's Stock ("Stock Awards"), the granting of stock appreciation rights ("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards, SARs and Cash Awards shall be collectively referred to herein as "Awards"). (ii) Automatic Grant Program. The purpose of the Automatic Grant Program is to promote the interests of the Company by providing non-employee members of the Company's Board of Directors (the "Board") the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company and to thereby have an increased personal interest in its continued success and progress. Such purpose shall be accomplished by providing for the automatic grant of options to acquire the Company's Stock ("Automatic Options"). (d) Character of Options. Discretionary Options granted under this Plan to employees of the Company (or Parent or Subsidiary Corporations) that are intended to qualify as an "incentive stock option" as defined in Code ss. 422 ("Incentive Stock Option") will be specified in the applicable stock option agreement. All other Options granted under this Plan will be nonqualified options. (e) Rule 16b-3 Plan. With respect to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended ("1934 Act"), to the extent that the Board delegates it administration rights under the Discretionary Grant Program to the Senior Committee, as described in Section 1.3(a) hereof, the Plan is thereafter intended to comply with all applicable conditions of Rule 16b-3 (and all subsequent revisions thereof) promulgated under the 1934 Act. In such instance, to the extent any provision of the Plan or action by a Plan Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by such Plan Administrator. In addition, the A-1 Board may amend the Plan from time to time as it deems necessary in order to meet the requirements of any amendments to Rule 16b-3 without the consent of the shareholders of the Company. (f) Duration of Plan. The term of the Plan is 10 years commencing on the date of adoption of the Plan by the Board as specified in Section 1.1(a) hereof. No Option or Award shall be granted under the Plan unless granted within 10 years of the adoption of the Plan by the Board, but Options or Awards outstanding on that date shall not be terminated or otherwise affected by virtue of the Plan's expiration. 1.2 Stock and Maximum Number of Shares Subject to Plan. (a) Description of Stock and Maximum Shares Allocated. The stock subject to the provisions of the Plan and issuable upon the grant of Stock Awards or upon the exercise of SARs or Options granted under the Plan is shares of the Company's common stock, $.05 par value per share (the "Stock"), which may be either unissued or treasury shares, as the Board may from time to time determine. Subject to adjustment as provided in Section 4.1 hereof, the aggregate number of shares of Stock covered by the Plan and issuable thereunder shall be 500,000 shares of Stock. (b) Calculation of Available Shares. For purposes of calculating the maximum number of shares of Stock which may be issued under the Plan: (i) the shares issued (including the shares, if any, withheld for tax withholding requirements) upon exercise of an Option shall be counted and (ii) the shares issued (including the shares, if any, withheld for tax withholding requirements) as a result of a grant of a Stock Award or an exercise of an SAR shall be counted. (c) Restoration of Unpurchased Shares. If an Option or SAR expires or terminates for any reason prior to its exercise in full and before the term of the Plan expires, the shares of Stock subject to, but not issued under, such Option or SAR shall, without further action or by or on behalf of the Company, again be available under the Plan. 1.3 Approval; Amendments. (a) Approval by Stockholders. The Plan shall be submitted to the stockholders of the Company for their approval at a regular or special meeting to be held within 12 months after the adoption of the Plan by the Board. Stockholder approval shall be evidenced by the affirmative vote of the holders of a majority of the shares of the Company's Common Stock present in person or by proxy and voting at the meeting. The Automatic Grant Program shall not commence until the date such stockholder approval has been obtained ("Effective Date"). The Discretionary Grant Program may commence immediately, but if the Plan is submitted to stockholders for their approval and they decline to approve the Plan or if the Plan is not approved by the stockholders within 12 months after its adoption by the Board, the Plan and all Discretionary Options and Awards made under the Discretionary Grant Program shall automatically terminate to the same extent and with the same effect as though the Plan had never been adopted. If the Plan is approved by shareholders, all Discretionary Options or Awards granted under the Discretionary Grant Program to Eligible Persons who are Affiliates shall be deemed made on the Effective Date. (b) Amendments to Plan. The Board may, without action on the part of the Company's stockholders, make such amendments to, changes in and additions to the Plan as it may, from time to time, deem necessary or appropriate and in the best interests of the Company; provided, the Board A-2 may not, without the consent of the applicable Optionholder, take any action which disqualifies any Discretionary Option previously granted under the Plan for treatment as an Incentive Stock Option or which adversely affects or impairs the rights of the Optionholder of any Discretionary Option outstanding under the Plan, and further provided that, except as provided in Article IV hereof, the Board may not, without the approval of the Company's stockholders, (i) increase the aggregate number of shares of Stock subject to the Plan, (ii) reduce the exercise price at which Discretionary Options may be granted or the exercise price at which any outstanding Discretionary Option may be exercised, (iii) extend the term of the Plan, (iv) change the class of persons eligible to receive Discretionary Options or Awards under the Plan, or (v) materially increase the benefits accruing to participants under the Plan. Notwithstanding the foregoing, Discretionary Options or Awards may be granted under this Plan to purchase shares of Stock in excess of the number of shares then available for issuance under the Plan if (A) an amendment to increase the maximum number of shares issuable under the Plan is adopted by the Board prior to the initial grant of any such Option or Award and within one year thereafter such amendment is approved by the Company's stockholders and (B) each such Discretionary Option or Award granted is not to become exercisable or vested, in whole or in part, at any time prior to the obtaining of such stockholder approval. ARTICLE II Discretionary Grant Program 2.1 Participants; Administration. (a) Eligibility and Participation. Discretionary Options and Awards may be granted only to persons ("Eligible Persons") who at the time of grant are (i) key personnel (including officers and directors) of the Company or parent or subsidiaries of the Company, or (ii) consultants or independent contractors who provide valuable services to the Company or parent or subsidiaries of the Company; provided that (1) if a Senior Committee is formed pursuant to Section 2.1(b) hereof, the members of that Senior Committee shall be ineligible, during their tenure on the Senior Committee, to be granted Discretionary Options or Awards under the Plan or to be granted or awarded equity securities of the Company pursuant to any other plan of the Company or its affiliates except pursuant to the Automatic Grant Program or as otherwise allowed by Rule 16b-3(c)(2)(i) promulgated under the 1934 Act, and (2) Incentive Stock Options may only be granted to key personnel of the Company (and its Parent or Subsidiary) who are also employees of the Company (or its Parent Corporation or Subsidiary Corporation). A Plan Administrator shall have full authority to determine which Eligible Persons in its administered group are to receive Discretionary Option grants under the Plan, the number of shares to be covered by each such grant, whether or not the granted Discretionary Option is to be an Incentive Stock Option, the time or times at which each such Discretionary Option is to become exercisable, and the maximum term for which the Discretionary Option is to be outstanding. A Plan Administrator shall also have full authority to determine which Eligible Persons in such group are to receive Awards under the Discretionary Grant Program and the conditions relating to such Award. (b) General Administration. The Eligible Persons under the Discretionary Grant Program shall be divided into two groups and there shall be a separate administrator for each group. One group will be comprised of Eligible Persons that are Affiliates. For purposes of this Plan, the term "Affiliates" shall mean all "executive officers" (as that term is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the Company and all persons who own ten percent or more of the Company's issued and outstanding Stock. Initially, the power to administer the Discretionary Grant Program with respect to Eligible Persons that are Affiliates shall be vested with the Board. At any time, however, the Board may vest the power to administer the Discretionary Grant Program with respect to A-3 Persons that are Affiliates exclusively with a committee (the "Senior Committee") comprised of two or more Disinterested Directors which are appointed by the Board. The administration of all Eligible Persons that are not Affiliates ("Non-Affiliates") shall be vested exclusively with the Board. The Board, however, may at any time appoint a committee (the "Employee Committee") of two or more persons who are members of the Board and delegate to such Employee Committee the power to administer the Discretionary Grant Program with respect to the Non-Affiliates. Members of the Senior Committee and Employee Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may at any time terminate all or a portion of the functions of the Senior Committee and/or the Employee Committee and reassume all or a portion of powers and authority previously delegated to such Committee. (c) Plan Administrators. The Board, the Employee Committee, and/or the Senior Committee, whichever is applicable, shall be each referred to herein as a "Plan Administrator." Each Plan Administrator shall have the authority and discretion, with respect to its administered group, to select which Eligible Persons shall participate in the Discretionary Grant Program, to grant Discretionary Options or Awards under the Discretionary Grant Program, to establish such rules and regulations as they may deem appropriate with respect to the proper administration of the Discretionary Grant Program and to make such determinations under, and issue such interpretations of, the Discretionary Grant Program and any outstanding Discretionary Option or Award as they may deem necessary or advisable. Unless otherwise required by law, decisions among the members of a Plan Administrator shall be by majority vote. Decisions of a Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Grant Program or any outstanding Discretionary Option or Award. (d) Guidelines for Participation. In designating and selecting Eligible Persons for participation in the Discretionary Grant Program, a Plan Administrator shall consult with and give consideration to the recommendations and criticisms submitted by appropriate managerial and executive officers of the Company. A Plan Administrator also shall take into account the duties and responsibilities of the Eligible Persons, their past, present and potential contributions to the success of the Company and such other factors as a Plan Administrator shall deem relevant in connection with accomplishing the purpose of the Plan. 2.2 Terms and Conditions of Options (a) Allotment of Shares. A Plan Administrator shall determine the number of shares of Stock to be optioned from time to time and the number of shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant of a Discretionary Option to a person shall neither entitle such person to, nor disqualify such person from, participation in any other grant of Options or Stock Awards under this Plan or any other stock option plan of the Company. (b) Exercise Price. Upon the grant of any Discretionary Option, a Plan Administrator shall specify the option price per share. In no event may the option price per share specified by a Plan Administrator be less than 85 percent of the fair market value per share of the Stock on the date the Discretionary Option is granted; provided, however, that if the Discretionary Option is intended to qualify as an Incentive Stock Option under the Code, the option price per share may not be less than 100 percent of the fair market value per share of the stock on the date the Discretionary Option is granted (110 percent if the Discretionary Option is granted to a shareholder who at the time the Discretionary Option is granted owns or is deemed to own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation). The determination of the fair market value of the Stock shall be made in accordance with the valuation provisions of Section 4.5 hereof. A-4 (c) Individual Stock Option Agreements. Discretionary Options granted under the Plan shall be evidenced by option agreements in such form and content as a Plan Administrator from time to time approves, which agreements shall substantially comply with and be subject to the terms of the Plan, including the terms and conditions of this Section 2.2. As determined by a Plan Administrator, each option agreement shall state (i) the total number of shares to which it pertains, (ii) the exercise price for the shares covered by the Option, (iii) the time at which the Options vest and become exercisable and (iv) the Option's scheduled expiration date. The option agreements may contain such other provisions or conditions as a Plan Administrator deems necessary or appropriate to effectuate the sense and purpose of the Plan, including covenants by the Optionholder not to compete and remedies for the Company in the event of the breach of any such covenant. (d) Option Period. No Discretionary Option granted under the Plan that is intended to be an Incentive Stock Option shall be exercisable for a period in excess of 10 years from the date of its grant (five years if the Discretionary Option is granted to a shareholder who at the time the Discretionary Option is granted owns or is deemed to own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its parent or any subsidiary corporation), subject to earlier termination in the event of termination of employment, retirement or death of the Optionholder. A Discretionary Option may be exercised in full or in part at any time or from time to time during the term of the Discretionary Option or provide for its exercise in stated installments at stated times during the Option's term. (e) Vesting; Limitations. The time at which the Optioned Shares vest with respect to an Optionholder shall be in the discretion of that Optionholder's Plan Administrator; provided, however, that no Affiliate may exercise a Discretionary Option within six months of the date of grant. Notwithstanding the foregoing, to the extent a Discretionary Option is intended to qualify as an Incentive Stock Option, the aggregate fair market value (determined as of the respective date or dates of grant) of the Stock for which one or more Options granted to any person under this Plan (or any other option plan of the Company or its parent or subsidiary corporations) may for the first time become exercisable as Incentive Stock Options during any one calendar year shall not exceed the sum of $100,000 (referred to herein as the "$100,000 Limitation"). To the extent that any person holds two or more Options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability as an Incentive Stock Option shall be applied on the basis of the order in which such Options are granted. (f) No Fractional Shares. Options shall be exercisable only for whole shares; no fractional shares will be issuable upon exercise of any Discretionary Option granted under the Plan. (g) Method of Exercise. In order to exercise a Discretionary Option with respect to any vested Optioned Shares, an Optionholder (or in the case of an exercise after an Optionholder's death, such Optionholder's executor, administrator, heir or legatee, as the case may be) must take the following action: (i) execute and deliver to the Company a written notice of exercise signed in writing by the person exercising the Discretionary Option specifying the number of shares of Stock with respect to which the Discretionary Option is being exercised; A-5 (ii) pay the aggregate Option Price in one of the alternate forms as set forth in Section 2.2(h) below; and (iii) furnish appropriate documentation that the person or persons exercising the Discretionary Option (if other than the Optionholder) has the right to exercise such Option. As soon after the Exercise Date as practical, the Company shall mail or deliver to or on behalf of the Optionholder (or any other person or persons exercising this Discretionary Option in accordance herewith) a certificate or certificates representing the Stock for which the Discretionary Option has been exercised in accordance with the provisions of this Plan. In no event may any Discretionary Option be exercised for any fractional shares. (h) Payment Price. The aggregate Option Price shall be payable in one of the alternative forms specified below: (i) Full payment in cash or check made payable to the Company's order; or (ii) Full payment in shares of Stock held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at fair market value on the Exercise Date (as determined in accordance with Section 4.5 hereof); or (iii) If a cashless exercise program has been implemented by the Board, full payment through a sale and remittance procedure pursuant to which the Optionholder (A) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the Optioned Shares to be purchased and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the Optioned Shares to be purchased and (B) shall concurrently provide written directives to the Company to deliver the certificates for the Optioned Shares to be purchased directly to such brokerage firm in order to complete the sale transaction. (i) Rights of a Stockholder. An Optionholder shall have no rights as a stockholder with respect to shares covered by his Discretionary Option until the date a stock certificate is issued to him. No adjustment will be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. (j) Repurchase Right. The Plan Administrator may, in its sole discretion, set forth other terms and conditions upon which the Company (or its assigns) shall have the right to repurchase shares of Stock acquired by an Optionholder pursuant to a Discretionary Option. Any repurchase right of the Company shall be exercisable by the Company (or its assignees) upon such terms and conditions as the Plan Administrator may specify in the Stock Repurchase Agreement evidencing such right. The Plan Administrator may also in its discretion establish as a term and condition of one or more Discretionary Options granted under the Plan that the Company shall have a right of first refusal with respect to any proposed sale or other disposition by the Optionholder of any shares of Stock issued upon the exercise of such Discretionary Options. Any such right of first refusal shall be exercisable by the Company (or its assigns) in accordance with the terms and conditions set forth in the Stock Repurchase Agreement. A-6 (k) Termination of Service. If any Optionholder ceases to be in Service to the Company for a reason other than death, such Optionholder (or such Optionholder's successors in the case of the Optionholder's death) may, within 30 days after the date of termination of such Service, but in no event after the Discretionary Option's stated expiration date, exercise some or all of the Discretionary Options that the Optionholder was entitled to exercise on the date the Optionholder's Service terminated; provided, that (i) if the Optionholder's Service is terminated by the Company in its good faith judgment, for (A) commission of a crime by the Optionholder or for reasons involving moral turpitude; (B) an act by the Optionholder which tends to bring the Company into disrepute; or (C) negligent, fraudulent or willful misconduct by the Optionholder, or (ii) if after the Service of the Optionholder is terminated, the Optionholder commits acts detrimental to the Company's interests, then the Discretionary Option shall thereafter be void for all purposes. Notwithstanding the foregoing, if any Optionholder ceases to be in Service to the Company by reason of permanent disability within the meaning of section 22(e)(3) of the Code (as determined by the applicable Plan Administrator), the Optionholder shall have 180 days after the date of termination of Service, but in no event after the stated expiration date of the Optionholder's Discretionary Options, to exercise Discretionary Options that the Optionholder was entitled to exercise on the date the Optionholder's Service terminated as a result of disability. (l) Nonassignability. No Discretionary Option granted under the Plan or any of the rights and privileges conferred thereby shall be assignable or transferable by an Optionholder other than by will or the laws of descent and distribution, and such Discretionary Option shall be exercisable during the Optionholder's lifetime only by the Optionholder. (m) Death of Optionholder. If an Optionholder dies while in the Company's Service, the Optionholder's vested Discretionary Options on the date of death shall be exercisable within 90 days of such death or until the stated expiration date of the Optionholder's Option, whichever occurs first, by the person or persons ("successors") to whom the Optionholder's rights pass under a will or by the laws of descent and distribution. A Discretionary Option may be exercised and payment of the option price made in full by the successors only after written notice to the Company specifying the number of shares to be purchased. Such notice shall state that the Option Price is being paid in full in the manner specified in Section 2.2(g) hereof. As soon as practicable after receipt by the Company of such notice and of payment in full of the Option Price, a certificate or certificates representing the Optioned Shares shall be registered in the name or names specified by the successors in the written notice of exercise and shall be delivered to the successors. (n) Other Plan Provisions Still Applicable. If a Discretionary Option is exercised upon the termination of Service or death of an Optionholder under this Section 2.2, the other provisions of the Plan shall still be applicable to such exercise, including the requirement that the Optionholder or its successor may be required to enter into a Stock Repurchase Agreement. (o) Definition of "Service". For purposes of this Plan, unless it is evidenced otherwise in the option agreement with the Optionholder, the Optionholder shall be deemed to be in "Service" to the Company so long as such individual renders continuous services on a periodic basis to the Company (or to any Parent or Subsidiary Corporation) in the capacity of an employee, director, or an independent consultant or advisor. In the discretion of a Plan Administrator, an Optionholder shall be considered to be rendering continuous services to the Company even if the type of services change, e.g., from employee to independent consultant. The Optionholder shall be considered to be an employee for so long as such individual remains in the employ of the Company or one or more of its Parent or Subsidiary Corporations. A-7 2.3 Terms and Conditions of Stock Awards (a) Eligibility. All Eligible Persons shall be eligible to receive Stock Awards. The Plan Administrator of each administered group shall determine the number of shares of Stock to be awarded from time to time to any Eligible Person in such group. The grant of a Stock Award to a person shall neither entitle such person to, nor disqualify such person from participation in, any other grant of options or awards by the Company, whether under this Plan or under any other stock option or award plan of the Company. (b) Award for Services Rendered. Stock Awards shall be granted in recognition of an Eligible Person's past services to the Company the value of which services must exceed the value of any compensation previously received by such Eligible Person for such past services as may be determined by the applicable Plan Administrator. The grantee of any such Stock Award shall not be required to pay any consideration to the Company upon receipt of such Stock Award, except as may be required to satisfy applicable employment taxes and income tax withholding requirements. (c) Conditions to Award. All Stock Awards shall be subject to such terms, conditions, restrictions, or limitations as the applicable Plan Administrator deems appropriate, including, by way of illustration but not by way of limitation, restrictions on transferability, requirements of continued employment, individual performance or the financial performance of the Company, or payment by the recipient of any applicable employment or withholding taxes. Such Plan Administrator may modify or accelerate the termination of the restrictions applicable to any Stock Award under the circumstances as it deems appropriate. Notwithstanding the foregoing, any Stock received by an affiliate pursuant to a Stock Award must be held for a period of six months after the grant of such Stock Award. (d) Award Agreements. A Plan Administrator may require as a condition to a Stock Award that the recipient of such Stock Award enter into an award agreement in such form and content as that Plan Administrator from time to time approves. 2.4 Terms and Conditions of SARs (a) Eligibility. All Eligible persons shall be eligible to receive SARs. The Plan Administrator of each administered group shall determine the SARs to be awarded from time to time to any Eligible Person in such group. The grant of an SAR to a person shall neither entitle such person to, nor disqualify such person from participation in, any other grant of options or awards by the Company, whether under this Plan or under any other stock option or award plan of the Company. (b) Award of SARs. Concurrently with or subsequent to the grant of any Discretionary Option to purchase one or more shares of Stock, a Plan Administrator may award to the Optionholder with respect to each share of Stock, a related SAR permitting the Optionholder to be paid the appreciation on the Stock underlying the Discretionary Option in lieu of exercising the Option. In addition, a Plan Administrator may award to any Eligible Person an SAR permitting the Eligible Person to be paid the appreciation on a designated number of shares of the Stock, whether or not such Shares are actually issued. (c) Conditions to SAR. All SARs shall be subject to such terms, conditions, restrictions or limitations as the applicable Plan Administrator deems appropriate, including, by way of illustration but not by way of limitation, restrictions of transferability, requirements of continued A-8 employment, individual performance, financial performance of the Company, or payment by the recipient of any applicable employment or withholding taxes. Such Plan Administrator may modify or accelerate the termination of the restrictions applicable to any SAR under the circumstances as it deems appropriate. (d) SAR Agreements. A Plan Administrator may require as a condition to the grant of an SAR that the recipient of such SAR enter into an SAR agreement in such form and content as that Plan Administrator from time to time approves. (e) Exercise. An Eligible Person who has been granted a SAR may exercise such SAR subject to the conditions specified in the SAR agreement by the Plan Administrator. (f) Amount of Payment. The amount of payment to which the grantee of an SAR shall be entitled upon the exercise of each SAR shall be equal to the amount, if any, by which the fair market value of the specified shares of Stock on the exercise date exceeds the fair market value of the specified shares of Stock on the date the Discretionary Option related to the SAR was granted or became effective, or, if the SAR is not related to any Option, on the date the SAR was granted or became effective. (g) Form of Payment. The SAR may be paid in either cash or Stock, as determined in the discretion of the applicable Plan Administrator and set forth in the SAR agreement. If the payment is in Stock, the number of shares to be paid to the participant shall be determined by dividing the amount of the payment determined pursuant to Section 2.4(f) by the fair market value of a share of Stock on the exercise date of such SAR. As soon as practical after exercise, the Company shall deliver to the SAR grantee a certificate or certificates for such shares of Stock. (h) Termination of Employment; Death. Sections 2.2(k) and (m), applicable to Options, shall apply equally to SARs. (i) Nonassignability. No SAR granted under the Plan or any of the rights and privileges conferred thereby shall be assignable or transferable by a grantee other than by will or the laws of descent and distribution, and such SAR shall be exercisable during the grantee's lifetime only by the grantee. 2.5 Other Cash Awards (a) In General. The Plan Administrator of each administered group shall have the discretion to make other awards of cash to Eligible Persons in such group ("Cash Awards"). Such Cash Awards may relate to existing Options or to the appreciation in the value of the Stock or other Company securities. (b) Conditions to Award. All Cash Awards shall be subject to such terms, conditions, restrictions or limitations as the applicable Plan Administrator deems appropriate, and such Plan Administrator may require as a condition to such Cash Award that the recipient of such Cash Award enter into an award agreement in such form and content as the Plan Administrator from time to time approves. A-9 ARTICLE III Automatic Grant Program 3.1 Eligible Persons under the Automatic Grant Program. The persons eligible to participate in the Automatic Grant Program shall be limited to non-employee Board members ("Eligible Persons"). Persons who are eligible under the Automatic Grant Program may also be eligible to receive Discretionary Options or Awards under the Discretionary Grant Program or option grants or direct stock issuances under other plans of the Company. 3.2 Terms and Conditions of Automatic Option Grants. (a) Amount and Date of Grant. During the term of this Plan, Automatic Grants shall be made to each Eligible Person ("Optionholder") as follows: (i) Annual Grants. Each year on the Annual Grant Date an Automatic Option to acquire 2,000 shares of Stock shall be granted to each Eligible Person for so long as there are shares of Stock available under Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's annual stockholders meeting commencing as of the next annual meeting occurring after the annual meeting held on the Effective Date. Any Person that was granted an Automatic Option under Section 3.2(a)(ii) hereof within 30 days of an Annual Grant Date shall be ineligible to receive an Automatic Option grant pursuant to this Section 3.2(a)(i) on such Annual Grant Date. (ii) Initial New Director Grants. On the Initial Grant Date, every new member of the Board who is an Eligible Person and has not previously received an Automatic Option grant under this Section 3.2(a)(ii) shall be granted an Automatic Option to acquire 20,000 shares of Stock ("Optioned Shares") as long as there are shares of Stock available under Section 1.2 hereof. The "Initial Grant Date" shall be the date that an Eligible Person is first appointed or elected to the Board. Any Eligible Person that was granted an Automatic Option on the Effective Date pursuant to Section 3.2(a)(iii) shall be ineligible to receive an Automatic Option grant pursuant to this Section 3.2(a)(ii). (iii) Initial Existing Director Grants. On the Effective Date, each Eligible Person shall be granted an Automatic Option to acquire 2,000 shares of Stock. (b) Exercise Price. The exercise price per share of Stock subject to each Automatic Option Grant shall be equal to 100 percent of the fair market value per share of the Stock on the date the Automatic Option was granted as determined in accordance with the valuation provisions of Section 4.5 hereof (the "Option Price"). (c) Vesting. Each Automatic Option Grant shall become exercisable and vest in a series of three equal and successive yearly installments, with each annual installment to become exercisable on the day before the Company's annual stockholders' meeting occurring in the applicable year. Each installment of an Automatic Option shall only vest and become exercisable if the Optionholder has not ceased serving as a Board member as of such installment date. (d) Method of Exercise. In order to exercise an Automatic Option with respect to any vested Optioned Shares, an Optionholder (or in the case of an exercise after an Optionholder's death, such Optionholder's executor, administrator, heir or legatee, as the case may be) must take the following action: A-10 (i) execute and deliver to the Company a written notice of exercise signed in writing by the person exercising the Automatic Option specifying the number of shares of Stock with respect to which the Automatic Option is being exercised; (ii) pay the aggregate Option Price in one of the alternate forms as set forth in Section 3.2(e) below; and (iii) furnish appropriate documentation that the person or persons exercising the Automatic Option (if other than the Optionholder) has the right to exercise such Option. As soon after the Exercise Date, as practical, the Company shall mail or deliver to or on behalf of the Optionholder (or any other person or persons exercising this Automatic Option in accordance herewith) a certificate or certificates representing the Stock for which the Automatic Option has been exercised in accordance with the provisions of this Plan. In no event may any Automatic Option be exercised for any fractional shares. (e) Payment Price. The aggregate Option Price shall be payable in one of the alternative forms specified below: (i) full payment in cash or check made payable to the Company's order; or (ii) full payment in shares of Stock held for the requisite period necessary to avoid a charge to the Company's reported earnings and valued at fair market value on the Exercise Date (as determined in accordance with Section 4.5 hereof); or (iii) if a cashless exercise program has been implemented by the Board, full payment through a sale and remittance procedure pursuant to which the Optionholder (A) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the Optioned Shares to be purchased and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the Optioned Shares to be purchased and (B) shall concurrently provide written directives to the Company to deliver the certificates for the Optioned Shares to be purchased directly to such brokerage firm in order to complete the sale transaction. (f) Term of Option. Each Automatic Option shall expire on the tenth anniversary of the date on which an Automatic Option Grant was made ("Expiration Date"). Except as provided in Section 4.4 hereof, should an Optionholder's service as a Board member cease prior to the Expiration Date for any reason while an Automatic Option remains outstanding and unexercised, then the Automatic Option term shall immediately terminate and the Automatic Option shall cease to be outstanding in accordance with the following provisions: (i) The Automatic Option shall immediately terminate and cease to be outstanding for any shares of Stock which were not vested at the time of Optionholder's cessation of Board service. (ii) Should an Optionholder cease, for any reason other than death, to serve as a member of the Board, then the Optionholder shall have 30 days measured from the date of such cessation of Board service in which to exercise the Options which vested prior to the time of such cessation of Board service. In no event, however, may any Automatic Option be exercised after the Expiration Date of such Option. A-11 (iii) Should an Optionholder die while serving as a Board member or within 30 days after cessation of Board service, then the personal representative of the Optionholder's estate (or the person or persons to whom the Automatic Option is transferred pursuant to the Optionholder's will or in accordance with the laws of descent and distribution) shall have a 90 day period measured from the date of the Optionholder's cessation of Board service in which to exercise the Options which vested prior to the time of such cessation of Board service. In no event, however, may any Automatic Option be exercised after the Expiration Date of such Option. (g) Rights of a Stockholder. An Optionholder shall have no rights as a stockholder with respect to shares covered by his Automatic Option until the date a stock certificate is issued to him. No adjustment will be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. (h) Limited Transferability. Each Automatic Option shall be exercisable only by Optionholder during Optionholder's lifetime and shall be neither transferable nor assignable, other than by will or by the laws of descent and distribution following Optionholder's death. ARTICLE IV Miscellaneous 4.1 Capital Adjustments. The aggregate number of shares of Stock subject to the Plan (and the number of shares covered by outstanding Options and Awards and the price per share stated in such Options and Awards) shall be proportionately adjusted for any increase or decrease in the number of outstanding shares of Stock of the Company resulting from a subdivision or consolidation of shares or any other capital adjustment or the payment of a stock dividend or any other increase or decrease in the number of such shares effected without the Company's receipt of consideration therefor in money, services or property. 4.2 Mergers, Etc. If the Company is the surviving corporation in any merger or consolidation, any Option or Award granted under the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option or Award would have been entitled prior to the merger or consolidation. A dissolution or liquidation of the Company shall cause every Option or Award outstanding hereunder to terminate. 4.3 Corporate Transaction. In the event of stockholder approval of a Corporate Transaction, (a) all unvested Automatic Options shall automatically accelerate and immediately vest so that each outstanding Option shall, one week prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the Optioned Shares and (b) the Plan Administrator shall have the discretion and authority, exercisable at any time, to provide for the automatic acceleration of one or more of the outstanding Discretionary Options or Awards granted by it under the Plan. Upon the consummation of the Corporate Transaction, all Options shall, to the extent not previously exercised, terminate and cease to be outstanding. A-12 4.4 Change in Control. (a) Automatic Grant Program. In the event of a Change in Control, all unvested Automatic Options shall automatically accelerate and immediately vest so that each outstanding Automatic Option shall, immediately prior to the effective date of such Change in Control, become fully exercisable for all of the Optioned Shares. Thereafter, each Automatic Option shall remain exercisable until the Expiration Date of such Option. (b) Discretionary Grant Program. In the event of a Change in Control, a Plan Administrator shall have the discretion and authority, exercisable at any time, whether before or after the Change in Control, to provide for the automatic acceleration of one or more outstanding Discretionary Options or Awards granted by it under the Plan upon the occurrence of such Change in Control. A Plan Administrator may also impose limitations upon the automatic acceleration of such Options or Awards to the extent it deems appropriate. Any Options or Awards accelerated upon a Change in Control will remain fully exercisable until the expiration or sooner termination of the Option term. (c) Incentive Stock Option Limits. The exercisability of any Discretionary Options which are intended to qualify as Incentive Stock Options and which are accelerated by the Plan Administrator in connection with a pending Corporation Transaction or Change in Control shall, except as otherwise provided in the discretion of the Plan Administrator and the Optionholder, remain subject to the $100,000 Limitation and vest as quickly as possible without violating the $100,000 Limitation. 4.5 Calculation of Fair Market Value of Stock. The fair market value of a share of Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the fair market value shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) per share of Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its NASDAQ system or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Stock on the date in question, then the mean between the highest bid price and lowest asked price (or the closing selling price) on the last preceding date for which such quotations exist shall be determinative of fair market value. (ii) If the Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Stock on the date in question on the stock exchange determined by the Board to be the primary market for the Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, then the fair market value shall be determined by the Board after taking into account such factors as the Board shall deem appropriate, including one or more independent professional appraisals. 4.6 Use of Proceeds. The proceeds received by the Company from the sale of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall be used for general corporate purposes. A-13 4.7 Cancellation of Options. Each Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionholders, the cancellation of any or all outstanding Discretionary Options granted under the Plan by that Plan Administrator and to grant in substitution therefore new Discretionary Options under the Plan covering the same or different numbers of shares of Stock as long as such new Discretionary Options have an exercise price per share of Stock no less than the minimum exercise price as set forth in Section 2.2(b) hereof on the new grant date. 4.8 Regulatory Approvals. The implementation of the Plan, the granting of any Option or Award hereunder, and the issuance of Stock upon the exercise of any such Option or Award shall be subject to the procurement by the Company of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the Options or Awards granted under it and the Stock issued pursuant to it. 4.9 Indemnification. In addition to such other rights of indemnification as they may have, the members of a Plan Administrator shall be indemnified and held harmless by the Company, to the extent permitted under applicable law, for, from and against all costs and expenses reasonably incurred by them in connection with any action, legal proceeding to which any member thereof may be a party by reason of any action taken, failure to act under or in connection with the Plan or any rights granted thereunder and against all amounts paid by them in settlement thereof or paid by them in satisfaction of a judgment of any such action, suit or proceeding, except a judgment based upon a finding of bad faith. 4.10 Plan Not Exclusive. This Plan is not intended to be the exclusive means by which the Company may issue options or warrants to acquire its Stock, stock awards or any other type of award. To the extent permitted by applicable law, any such other option, warrants or awards may be issued by the Company other than pursuant to this Plan without shareholder approval. 4.11 Company Rights. The grants of Options shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 4.12 Privilege of Stock Ownership. An Optionholder shall not have any of the rights of a stockholder with respect to Optioned Shares until such individual shall have exercised the Option and paid the Option Price for the Optioned Shares. 4.13 Assignment. The right to acquire Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionholder except as specifically provided herein. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Company and its successors or assigns, and the Optionholders, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 4.14 Securities Restrictions (a) Legend on Certificates. All certificates representing shares of Stock issued upon exercise of Options or Awards granted under the Plan shall be endorsed with a legend reading as follows: The shares of Common Stock evidenced by this certificate have been issued to the registered owner in reliance upon written representations that these shares have been purchased solely for A-14 investment. These shares may not be sold, transferred or assigned unless in the opinion of the Company and its legal counsel such sale, transfer or assignment will not be in violation of the Securities Act of 1933, as amended, and the rules and regulations thereunder. (b) Private Offering for Investment Only. The Options and Awards are and shall be made available only to a limited number of present and future key executives and key employees who have knowledge of the Company's financial condition, management and its affairs. The Plan is not intended to provide additional capital for the Company, but to encourage ownership of Stock among the Company's key personnel. By the act of accepting an Option or Award, each grantee agrees (i) that, any shares of Stock acquired will be solely for investment not with any intention to resell or redistribute those shares and (ii) such intention will be confirmed by an appropriate certificate at the time the Stock is acquired. The neglect or failure to execute such a certificate, however, shall not limit or negate the foregoing agreement. (c) Registration Statement. If a Registration Statement covering the shares of Stock issuable upon exercise of options granted under the Plan as filed under the Securities Exchange Act of 1933, as amended, and as declared effective by the Securities Exchange Commission, the provisions of Sections 4.1(a) and (b) shall terminate during the period of time that such Registration Statement, as periodically amended, remains effective. 4.15 Tax Withholding. (a) General. The Company's obligation to deliver Stock upon the exercise of Options under the Plan shall be subject to the satisfaction of all applicable federal, state and local income tax withholding requirements. (b) Shares to Pay for Withholding. The Board may, in its discretion and in accordance with the provisions of this Section 4.15(b) and such supplemental rules as it may from time to time adopt (including the applicable safe-harbor provisions of SEC Rule 16b-3), provide any or all Optionholders with the right to use shares of Stock in satisfaction of all or part of the federal, state and local income tax liabilities incurred by such Optionholders in connection with the exercise of their Options ("Taxes"). Such right may be provided to any such Optionholder in either or both of the following formats: (i) Stock Withholding. The Optionholder of an Option may be provided with the election to have the Company withhold, from the Stock otherwise issuable upon the exercise of such Option, a portion of those shares of Stock with an aggregate fair market value equal to the percentage of the applicable Taxes (not to exceed 100 percent) designated by the Optionholder. (ii) Stock Delivery. The Board may, in its discretion, provide the Optionholder with the election to deliver to the Company, at the time the Option is exercised, one or more shares of Stock previously acquired by such individual (other than pursuant to the transaction triggering the Taxes) with an aggregate fair market value equal to the percentage of the taxes incurred in connection with such Option exercise (not to exceed 100 percent) designated by the Optionholder. A-15 ARTICLE V Definitions The following capitalized terms used in this Plan shall have the meaning described below: "Affiliates" shall mean all "executive officers" (as that term is defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the Company and all persons who own ten percent or more of the Company's issued and outstanding Stock. "Annual Grant Date" shall mean the date of the Company's annual stockholder meeting commencing as of the next annual meeting occurring after the annual meeting held on the Effective Date. "Automatic Grant Program" shall mean that program set forth in Article III of this Agreement pursuant to which non-employee members of the Board are automatically granted Options upon certain events. "Automatic Option Grant" shall mean those automatic option grants made on the Annual Grant Date, on the Initial Grant Date, and on the Effective Date. Automatic Options" shall mean those Options granted pursuant to the Automatic Grant Program. "Award" shall mean a Stock Award, SAR or Cash Award. "Board" shall mean the Board of Directors of the Company. "Cash Award" shall mean an award to be paid in cash and granted under Section 2.5 hereunder. "Change in Control" shall mean (i) a person or related group of persons, other than the Company or a person that directly or indirectly controls, is controlled by, or under common control with the Company, acquires ownership of 40 percent or more of the Company's outstanding common stock pursuant to a tender or exchange offer which the Board of Directors recommends that the Company's stockholders not accept, or (ii) the change in the composition of the Board occurs such that those individuals who were elected to the Board at the last stockholders' meeting at which there was not a contested election for Board membership subsequently ceased to comprise a majority of the Board by reason of a contested election. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Company" shall mean Cerprobe Corporation, a Delaware corporation. "Corporate Transaction" shall mean (a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purposes of which is to change the state in which the Company is incorporated; (b) the sale, transfer of or other disposition of all or substantially all of the assets of the Company and complete liquidation or dissolution of the Company, or (c) any reverse merger in which the Company is the surviving entity but in which the securities possessing more than 50 percent of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. A-16 "Discretionary Grant Program" shall mean the program described in Article II of this Agreement pursuant to which certain Eligible Persons are granted Options or Awards in the discretion of the Plan Administrator. "Discretionary Options" shall mean options granted under the Discretionary Grant Program. "Disinterested Directors" shall mean those Directors who satisfy the definition of "Disinterested Person" under Rule 16b-3(c)(2)(i) promulgated under the 1934 Act. "Effective Date" shall mean the date that the Plan has been approved by the stockholders as required by Section 1.3(c) hereof. "Eligible Persons" shall mean (a) with respect to the Discretionary Grant Program, those persons who, at the time that the Discretionary Option or Award is granted, are (i) key personnel (including officers and directors) of the Company or Parent or Subsidiary Corporations, or (ii) consultants or independent contractors who provide valuable services to the Company or Parent or Subsidiary Corporations; provided that if a Senior Committee is formed pursuant to Section 1.3(a) hereof, the members of that Committee shall not be included as "Eligible Persons" under the Discretionary Grant Program during their tenure on the Senior Committee; and (b) with respect to the Automatic Grant Program, those persons who are non-employee Board members. "Employee Committee" shall mean that committee appointed by the Board to administer the Plan with respect to the Non-Affiliates and comprised of one or more persons who are members of the Board. "Exercise Date" shall be the date on which written notice of the exercise of an Option is delivered to the Company in accordance with the requirements of the Plan. "Expiration Date" shall be the 10-year anniversary of the date on which an Automatic Option Grant was made. "Incentive Stock Option" shall mean a Discretionary Option that is intended to qualify as an "inventive stock option" under Code ss. 422. "Initial Grant Date" shall mean the date that an Eligible Person is first appointed or elected to the Board. "Non-Affiliates" shall mean all persons who are not Affiliates. "$100,000 Limitation" shall mean the limitation in which the aggregate fair market value (determined as of the respective date or dates of grant) of the Stock for which one or more Discretionary Options granted to any person under this Plan (or any other option plan of the Company or its parent or subsidiary corporations) may for the first time be exercisable as Incentive Stock Options during any one calendar year shall not exceed the sum of $100,000. "Optionholder" shall mean an Eligible Person to whom Options have been granted. "Optioned Shares" shall be those shares of Stock to be optioned from time to time to any Eligible Person. A-17 "Option Price" shall mean 100 percent of the fair market value per share of the Stock on the date any Option was granted, as determined in accordance with the valuation provisions of Section 4.5 hereof. "Options" shall mean options granted under the Plan to acquire Stock. "Parent Corporation" shall mean any corporation in the unbroken chain of corporations ending with the employer corporation, where, at each link of the chain, the corporation and the link above owns at least 50 percent of the combined total voting power of all classes of the stock in the corporation in the link below. "Plan" shall mean this stock option plan for Cerprobe Corporation. "Plan Administrator" shall mean (a) either the Board or the Senior Committee, whichever is applicable, with respect to the administration of the Discretionary Grant Program as it relates to Affiliates and (b) either the Board or the Employee Committee, whichever is applicable, with respect to the administration of the Discretionary Grant Program as it relates to Non-Affiliates. "SAR" shall mean stock appreciation rights granted pursuant to Section 2.4 hereunder. "Senior Committee" shall mean that committee appointed by the Board to administer the Discretionary Grant Program with respect to the Affiliates and comprised of two or more Disinterested Directors. "Service" shall have the meaning set forth in Section 2.2(o) hereof. "Stock" shall mean shares of the Company's common stock, $.05 par value per share, which may be unissued or treasury shares, as the Board may from time to time determine. "Stock Awards" shall mean Stock directly granted under the Discretionary Grant Program. "Subsidiary Corporation" shall mean any corporation in the unbroken chain of corporations starting with the employer corporation, where, at each link of the chain, the corporation and the link above owns at least 50 percent of the combined voting power of all classes of stock in the corporation below. EXECUTED as of the 8th day of May, 1995. CERPROBE CORPORATION By: /s/ C. Zane Close ------------------ Name: C. Zane Close ---------------- Its: President and CEO ----------------- ATTESTED BY: ______________________________ Secretary A-18 EX-11 9 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE
Year Ended December 31, 1995 1994 1993 ---------- ---------- ---------- Net income $2,402,247 $1,212,823 $1,502,358 ========== ========== ========== Weighted average shares: Common shares outstanding 3,775,327 2,976,018 2,619,518 Common equivalent shares representing shares issuable upon exercise of stock options 295,906 411,202 1,068,222 ---------- ---------- ---------- Total weighted average shares - primary 4,071,233 3,387,220 3,687,740 Incremental common equivalent shares (calculated using the higher of end of period or average market value) 790,904 619,581 661,132 ---------- ---------- ---------- Total weighted average shares - fully diluted 4,862,137 4,006,801 4,348,872 ========== ========== ========== Primary net income per common and common equivalent share $ 0.59 $ 0.36 $ 0.41 ========== ========== ========== Fully diluted net income per common and common equivalent share $ 0.49 $ 0.30 $ 0.35 ========== ========== ==========
EX-23 10 INDEPENDENT ACCOUNTANTS CONSENT [KPMG Peat Marwick LLP LETTERHEAD] The Board of Directors Cerprobe Corporation: We consent to incorporation by reference in the registration statements (No. 33- 8348 and No. 33-65200) filed on Form S-8 of Cerprobe Corporation of our report dated February 2, 1996, relating to the consolidated balance sheets of Cerprobe Corporation and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-KSB of Cerprobe Corporation. /s/ KPMG Peat Marwick LLP Phoenix, Arizona March 27, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the Balance Sheet at December 31, 1995 and the Statements of Operations and Retained Earnings (deficit) and is qualified in its entirety by reference to such financial statements. 725259 CERPROBE CORPORATION 1 U.S.DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 263,681 0 0 0 2,802,081 7,988,539 7,746,492 3,078,706 14,967,450 3,217,080 981,206 0 0 204,792 3,212,038 14,967,450 26,098,637 26,098,637 13,706,435 13,706,435 0 173,000 0 4,213,974 1,811,727 2,402,247 0 0 0 2,402,247 0.59 0.49
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