-----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, IlrmmkzRpIFRBom6g8icoh4IxjqvxONkf7AxpdxrePV28NnI/ik4MHfa84dxx/rZ +ng8HtnkMVV5GYMqj07KeA== 0000950153-98-000317.txt : 19980401 0000950153-98-000317.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950153-98-000317 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11370 FILM NUMBER: 98584241 BUSINESS ADDRESS: STREET 1: 1150 NORTH FIESTA BLVD CITY: GILBERT STATE: AZ ZIP: 85233-2237 BUSINESS PHONE: 6029677885 MAIL ADDRESS: STREET 1: 600 S ROCKFORD DR CITY: TEMPE STATE: AZ ZIP: 85281 10-K405 1 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-11370 CERPROBE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0312814 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1150 NORTH FIESTA BOULEVARD, GILBERT, ARIZONA 85233 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 333-1500 ISSUER TELEPHONE NUMBER, INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.05 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-K or any amendment to this Form 10-K. [X] As of March 20, 1998, 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 $120,707,766. 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 20, 1998, there were 8,103,979 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. ================================================================================ 2 CERPROBE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business.................................................... 1 Item 2. Properties.................................................. 17 Item 3. Legal Proceedings........................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......... 18 PART II Item 5. Market for the Registrant's Common Equity and Related 18 Stockholder Matters......................................... Item 6. Selected Consolidated Financial Data........................ 18 Item 7. Management's Discussion and Analysis of Financial Condition 20 and Results of Operations................................... Item 7A. Quantitative and Qualitative Disclosures About Market 27 Risk........................................................ Not applicable. Item 8. Financial Statements and Supplementary Data................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting 26 and Financial Disclosure.................................... PART III Item 10. Directors and Executive Officers of the Registrant.......... 26 Item 11. Executive Compensation...................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and 26 Management.................................................. Item 13. Certain Relationships and Related Transactions.............. 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 27 8-K......................................................... Signatures............................................................ 32 Financial Statements.................................................. F-1
3 PART I ITEM 1. BUSINESS INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS Cerprobe Corporation ("Cerprobe" or the "Company") offers comprehensive solutions for semiconductor test integration and is a leading manufacturer of probe cards, automatic test equipment ("ATE") interface assemblies, and ATE test boards. The Company believes it is the only company that designs, manufactures, and assembles each of the electromechanical components that assure the integrity of the electrical test signal that passes from the ATE to the integrated circuit ("IC") device under test ("DUT"). The Company also refurbishes, reconfigures, and services wafer probers. The Company's products address critical functions to assure IC quality, reduce manufacturing costs, improve the accuracy of manufacturing yield data, and identify repairable memory ICs. The Company has grown its business and expanded its product lines primarily through internal product development. The development of the Company's CerCard technology in 1990 served as the foundation for the growth of the Company's core probe card business. The Company has also grown through strategic acquisitions and joint ventures. The acquisition of Fresh Test Technology ("Fresh Test") Corporation in April 1995 enabled the Company to expand its product line to include ATE interface assemblies. The acquisition of CompuRoute, Inc. ("CompuRoute") in December 1996 enabled the Company to offer ATE test boards, the Company's first packaged IC testing product. In January 1997, the Company acquired SVTR, Inc. ("SVTR"), which refurbishes, reconfigures, and services wafer prober equipment. In March 1997, the Company entered into a strategic international joint venture with Upsys for the assembly of a memory IC testing product, which the Company will distribute in the United States and Asia. Upsys is a joint venture between IBM and a French test and engineering company. In May 1997, the Company established an international joint venture with Mitsubishi Materials to develop next generation probe card technology. The Company maintains regional full service facilities in Arizona, California, and Texas as well as sales offices in Colorado, Florida, Massachusetts, and Oregon to serve the U.S. market for its products and services. The Company also maintains a full service facility in Scotland to serve the European market and full service facilities in Singapore and Taiwan to serve the Southeast Asian market. Each of the Company's facilities is located in proximity to major semiconductor manufacturing centers. The Company's focus on high quality products and innovative technologies has enabled it to establish strong relationships with leading worldwide semiconductor manufacturers. In 1997, the Company's top five customers were Intel Corporation, IBM Corporation, LSI Logic, Motorola, and Texas Instruments. The Company believes it is a leader in providing high quality semiconductor testing products and services. The Company's goal is to enhance its leadership position and increase its domestic and international market share. The Company's strategy to achieve its goal includes the following key elements: (i) provide comprehensive solutions for semiconductor test integration, (ii) continue to maintain strong customer relationships, (iii) expand its global presence, (iv) focus on technological innovation, and (v) provide quality products and services. The Company was incorporated in California in 1976 and reincorporated in Delaware in 1987. The Company maintains its principal executive offices at 1150 North Fiesta Boulevard, Gilbert, Arizona 85233, and its telephone number is (602) 333-1500. Unless the context indicates otherwise, all references to "Cerprobe" or the "Company" refer to Cerprobe Corporation and its subsidiaries. INDUSTRY OVERVIEW The IC market is a high volume, high growth commodity market characterized by rapid technological change. According to independent semiconductor market research, worldwide production of ICs increased from approximately 39 billion units in 1993 to nearly 60 billion units in 1997. Growing demand for ICs has driven the increased demand for semiconductor testing products, such as probe cards, ATE interface assemblies, ATE test boards, and wafer probing equipment. Because probe cards, 1 4 and to a lesser extent ATE test boards, are consumable products rather than capital equipment, the rapid unit growth of ICs and new IC designs are in particular fueling the demand for probe cards and ATE test boards. VLSI Research Inc. ("VLSI"), an independent semiconductor market research company, estimated the worldwide market for probe cards in 1998 to be approximately $450 million. The Company estimates that the market for ATE test boards is approximately $300 million. Based upon VLSI and other industry data on projected sales of new material handling equipment (wafer probers/handlers), the Company estimates the market for ATE interface assemblies to be $150 million. The long-term growth in demand for ICs and the required production capacity to meet this demand drives the market for wafer prober equipment and services as well. The market for wafer probers and associated equipment in new and existing IC fabrication facilities ("fabs") in 1998 is estimated by VLSI to be approximately $600 million. Because of the escalating costs of new fabs, reconditioned and upgraded wafer probers increasingly are being utilized by manufacturers in order to extend the life of existing fabs and minimize capital expenditures. As a result of the increasing size and the age of the installed base of wafer probers, the Company expects the demand for wafer prober reconditioning and remanufacturing services to increase; however, there can be no assurance that such an increase will occur. In addition to the rapid unit growth in ICs, technological advances in ICs have also fueled the increased demand for semiconductor testing products. IC technology is changing rapidly due to constantly increasing demand for greater functionality and higher processing speeds. Advances in IC design and process technologies have enabled manufacturers to meet these demands by producing smaller ICs with ever greater circuit densities, higher pin counts, more varied configurations, and increased complexity. The intense competition among semiconductor manufacturers to be first to market with a new IC and gain a competitive edge has caused design and production cycles to continue to shrink. As a result of the increased complexity of ICs and shorter product life cycles, demand for sophisticated test products that can be produced in short lead times has increased. These trends in the IC market have caused corresponding trends in the probe card, ATE interface assembly, and ATE test board markets, as well as in the market for wafer prober equipment and services. IC manufacturers are placing added emphasis on greater test accuracy, testing at higher speeds, multiple DUT testing, and quicker turnaround times for probing devices and packaged testing products. As IC technology has become increasingly sophisticated and complex, it has become more difficult for IC manufacturers to maintain the necessary technology, expertise, personnel, and equipment to design and produce internally all of the various components required to carry the electrical signal between the ATE tester and the DUT. The Company believes competitive market conditions have led manufacturers to rely increasingly on outsourcing to reduce their own investment in the personnel, equipment, and facilities necessary for the specialized design and manufacturing of testing products in order to concentrate on the design, production, and distribution of their core IC products. INTEGRATED CIRCUIT TESTING Semiconductor manufacturers test ICs during the design and manufacturing processes to assure IC quality, reduce manufacturing costs, improve the accuracy of manufacturing yield data, and identify repairable memory ICs. Semiconductor manufacturers generally test each IC two or three times before completion of the fabrication process in order to maintain high manufacturing yields and acceptable profit margins. The increased cost associated with manufacturing ICs has increased the importance of IC testing in the manufacturing process. Wafer Probing Most semiconductor manufacturers test ICs in wafer form by probing each individual IC to determine whether it meets design specifications. Probing involves establishing temporary electrical contact between the ATE and the DUT. The ATE transmits electrical signals to the ICs and analyzes the signals upon their return. The testing of ICs in wafer form is important to avoid incurring the significant expense of assembling and packaging ICs that do not meet specifications. The principal components of a wafer probing system include: 2 5 (i) the ATE, which is capital equipment that transmits the electrical signals to the IC and evaluates the signals upon their return; (ii) the ATE test board, a complex, multilayer printed circuit board ("PCB") that is mounted directly to the ATE and transfers the test signals between the ATE and the pogo tower of the ATE interface assembly; (iii) an ATE interface assembly, typically consisting of a pogo tower, lock ring, and insert ring, that mechanically connects the ATE with the wafer prober and carries the electrical signals between the ATE and the probe card attached to the wafer prober; (iv) a probe card, which consists of a complex, multilayer PCB and numerous probes positioned to "touch down" on or make electrical contact with metallized test pads on the IC; and (v) a wafer prober, which is the capital equipment that moves the wafers into position enabling the probe card probes to touch down on the test pads. During the probing process, the wafer prober successively positions each IC on a wafer so that the pads on the IC align and make contact with the probes on a probe card. The ATE transmits electrical signals through the ATE interface assembly to the probe card. The ATE evaluates the return signals from the probe card to determine whether each IC meets design specifications. Depending on the complexity of the DUT, the probe testing of a single IC can last from a few milliseconds to over a minute. Package (Final) Testing ICs that pass the initial testing at the wafer level are separated from the wafer and bonded onto plastic, ceramic, or other packages with extended leads. The packaged IC must then be tested to validate design and performance specifications. Packaged devices are loaded into a machine called a handler. The ATE test board is placed on the ATE, and the ATE is coupled to the handler using an ATE interface assembly. The handler, which performs a function similar to the wafer prober in the wafer test process, successively positions each IC into a test socket device that is connected to the ATE test board. The ATE tests the IC and evaluates the return signals to determine whether a particular IC meets performance specifications. After package testing, the handler sorts the IC devices according to test performance. THE COMPANY'S STRATEGY The Company believes it is a leading provider of high quality semiconductor testing products and services. The Company's goal is to enhance its leadership position and increase its domestic and international market share. The Company's strategy to achieve its goal includes the following key elements: - Provide Comprehensive Solutions for Semiconductor Test Integration. The Company is focused on providing its worldwide customers with comprehensive solutions for semiconductor test integration, consisting of each of the electromechanical components necessary to assure the integrity of the electrical test signal. Historically, each component of the testing system has been supplied by different vendors. The Company believes IC manufacturers increasingly are seeking a single source provider capable of supplying comprehensive solutions for the components necessary to assure a clean test signal. The Company believes it is the only company that designs, manufactures, and assembles each of the components in the critical test signal path. The Company intends to capitalize on its market position and technical expertise by broadening existing product lines through internally developed products and as appropriate through acquisitions or joint ventures. - Maintain Strong Customer Relationships. The Company intends to continue to maintain its long standing relationships with its broad customer base, which includes leading semiconductor manufacturers such as Intel, Texas Instruments, IBM, and Motorola, as well as with emerging companies. Engineering, sales, and management personnel collaborate closely with customer counterparts to determine customer needs and specifications, and custom design specific testing solutions. The Company has accumulated substantial design expertise through these collaborations and believes this expertise, along with its in-house staff of over 100 engineers and designers, provides it with a competitive advantage in meeting customer requirements for increasingly sophisticated testing products. To help meet the demanding service needs of the semiconductor manufacturing industry, all of the Company's facilities are located in proximity to semiconductor manufacturing centers in the United States, Europe, and Asia. 3 6 - Expand Global Presence. The Company believes that the international market for its products is at least as large as the domestic market. The Company intends to continue its expansion into international markets, including Europe and Asia, and has begun to pursue these markets by aggressively mounting a focused sales and marketing effort directed at key semiconductor manufacturers. To date, the Company's international expansion includes the establishment of full service facilities in Scotland, Singapore, and Taiwan. The Company also intends to enter the Japanese market within the next 12 months through a joint venture arrangement with local Japanese partners. In the Company's overseas operations, the Company employs managers native to such markets to minimize language and cultural barriers and provide market-specific technical and operational insight. - Focus on Technological Innovation. The Company custom designs or customizes its products to manufacturers' particular IC design specifications. Changes in the IC design require changes in the probe card and, depending on the design change, in the ATE test board. Consequently, the Company continually develops new designs and product enhancements. The Company collaborates with IC manufacturers and semiconductor equipment manufacturers to anticipate and address technological advances in semiconductor testing and to improve performance of its products. The Company has also worked closely with SEMATECH, the U.S. semiconductor industry consortium that defines the standards for future semiconductor products, over the past several years on research and development contracts. The Company is focusing its engineering and new product development efforts toward producing a variety of high performance custom designed products to test more complex ICs and to test at higher speeds. In addition, the Company is developing a next generation probe card through a joint development relationship with Mitsubishi Materials Corporation. - Provide Quality Products and Services. The Company believes it has developed a reputation as a leader in providing high quality products and services. This high quality level is achieved through a robust, documented, and controlled manufacturing process, and the application of sound quality management policies and practices. The Company's use of advanced metrology tools, which ensure precise measurement of all key product parameters, is a cornerstone of its quality management system. The Company believes that its design capabilities, customer focus, and production methods enhance its ability to provide its customers with high quality products and services with quick turnaround times. PRODUCTS AND SERVICES Historically, each component of the IC testing system has been supplied by different vendors. As a result, IC manufacturers frequently have been left with the task of combining separate components from many small vendors into a single integrated testing system. The Company believes IC manufacturers increasingly are seeking a single source provider capable of supplying comprehensive solutions for the components necessary to assure a clean test signal between the testing equipment and the DUT. Through its manufacture of probe cards, ATE interface assemblies, and ATE test boards and through its wafer prober services, the Company is able to be a single source provider for its customers. Probe Card Products The Company believes it is the leading U.S. producer of probe cards, which constitute the majority of the Company's business. Probe cards accounted for approximately 64%, 81%, and 84% of net sales in 1997, 1996, and 1995. Probe card sales continue to grow; however, as a result of the CompuRoute and SVTR acquisitions and the related new product and service offerings, the Company expects that future probe card sales will account for an increasingly smaller percentage of net sales. The probe card consists of a complex, multilayer (some in excess of 30 layers) PCB and utilizes a number of probes designed to contact (or "probe") separately a series of electrical contact points (or "pads") on the IC in wafer form. At the point of contact with the wafer, each probe is significantly smaller than a human hair. The majority of the Company's probe cards have fewer than 200 probes; the Company's complex probe cards can have more than 1,500 probes. Because the type and complexity of ICs vary, the number and 4 7 positioning of the probes and the size of each probe card must be custom designed for the specific IC being tested to ensure proper alignment. The probe testing of a single IC can last from a few milliseconds to over a minute, depending on the complexity of the semiconductor device. Unlike the capital equipment used in the semiconductor manufacturing process, probe cards are considered consumable products. The Company believes the average life of a probe card is approximately three months, which provides for 200,000 to 500,000 touchdowns with each touchdown generally representing the testing of a single IC. However, probe cards for application specific integrated circuits ("ASICs") might be used to test a single batch order of 50,000 ICs and then discarded. The Company estimates that about one-third of its probe cards become obsolete within six months of being placed into service, primarily as a result of customer initiated design changes. However, damage due to faulty test handling equipment or operator error can render a probe card useless prior to the expiration of its normal life. The Company has invested over 20 years in the design of different types of probe card components and the manufacturing processes required to assemble a finished probe card. Because the signals carried by the probe card are complex and vary by customer, the Company manufactures many types of probe cards. The Company's probe card products utilize three technologies: 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. The Company introduced its first ceramic based epoxy ring probe card, the CerCard, in October 1990. Sales of ceramic based epoxy ring probe cards generated approximately 54%, 73%, and 68% of the Company's net sales for 1997, 1996 and 1995. The Company anticipates that such cards will continue to account for a substantial portion of its net sales. Ceramic blade technology uses a ceramic blade attached to a needle designed to make contact with the IC pads. Probe cards using ceramic blade technology, which was developed and patented by the Company, are capable of low speed, low density probing. With optional features, the ceramic blade can be used for high speed probing. Cobra probe (buckle beam) technology uses vertical probes that match the pattern of the pads on the IC being tested. This technology allows for the probing of pads in the center of an IC and is used generally for high density applications. Vertical contact probing is particularly well-suited for multiple-IC and memory IC testing. In May 1997, the Company entered into a joint venture with a French semiconductor testing and engineering company to assemble and repair the Cobra probe card, which is based on technology originally developed by IBM. The Company will be the exclusive distributor for the product in the United States and Asia. The Company's probe cards generally range in price from $500 to $65,000, depending upon the complexity and performance specifications of the probe cards. ATE Interface Assemblies The Company entered the ATE interface business through the acquisition in April 1995 of Fresh Test, a company engaged primarily in the design, manufacture, and sale of ATE interface products. An ATE interface assembly securely connects the ATE to the wafer prober or handler and is used to carry signals from the ATE to the DUT. An interface assembly typically consists of custom mechanical docking hardware such as a lock ring and insert ring, as well as two intricate multilayer PCBs connected by either a system of cables or, increasingly, spring-loaded "pogo" contact pins. Interface assemblies range from small, single board, cable-type interfaces for less complex systems to high speed, high frequency, digital or mixed signal interfaces used in testing more complex ICs. One end of the interface connects to the ATE and the other to either a probe card fixture mounted on a prober or a test socket mounted to a handler for packaged IC testing. In each case, the reliability of the test is highly dependent on maintaining the integrity of the signal between the ATE and the IC being tested. 5 8 Each ATE interface assembly is custom designed or customized for each application. The Company's ATE interface product line transmits a clean signal from the ATE to the probe card or test socket and carries a return signal back to the ATE after the circuit processes the signal. The Company's ATE 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 increasing the accuracy of the test data. Because the Company's ATE interface assemblies enable the ATE to provide reliable yield data by allowing for clear signal transmission, its interfaces can also be cost saving devices. The Company's interface assemblies feature ease of mechanical installation and facilitate access to the probe card or test socket during testing. The ATE and related wafer prober and handler typically have useful lives of five to seven years. While the Company's ATE interface assemblies have a similar useful life, any upgrade of the ATE or reconfiguration of the prober or handler used with a specific ATE requires a new ATE interface assembly. As a result, the Company believes its ATE interface products have an average life of two to three years. The Company's ATE interface assemblies generally range in price from $10,000 to $65,000. ATE Test Boards Through the acquisition of CompuRoute in December 1996, the Company expanded its product offerings to include custom-designed ATE test boards. The CompuRoute acquisition also enabled the Company to internalize the fabrication of PCBs, which are a critical component in its probe card and ATE interface assembly products, rather than rely exclusively on third party PCB manufacturers. ATE test board products are also referred to as prober interface boards, DUT boards, load boards, or performance boards, depending on whether the ATE test board is used for wafer probing or package testing. The Company has developed a database for different ATE designs, which are used as starting designs and customized for the particular IC to be tested. The ATE test board is a complex, multilayer PCB that is mounted to the ATE and transfers the test signals between the ATE and the ATE interface assembly of a wafer prober or handler. ATE test boards were the Company's first packaged IC testing product. The Company believes its ATE test boards have an average life of one year although their useful life could be much longer. The Company's ATE test board products range in price from $2,000 to $30,000. Wafer Prober Products and Services Through the acquisition of SVTR in January 1997, the Company expanded its services to include remanufacturing, upgrading, and servicing wafer probers. The wafer prober positions each IC on a wafer so that the pads on the IC align and make contact with the probes on the probe card, which is mounted on the wafer prober. The Company currently is focusing its services on wafer probers originally manufactured by Electroglas, Inc. ("Electroglas"), because the Company believes that Electroglas has the largest installed base of wafer probers in the world, outside of Japan. Prober remanufacturing requires the Company to overhaul, reprofile, and recertify its customers' wafer probers. Remanufacturing extends the life of the equipment, deferring the need to buy new capital intensive probing equipment. The Company develops independent sources for most of the components necessary for remanufacturing or internally produces the part, particularly when the required part has been discontinued by the original equipment manufacturer. Prober reconfiguration requires the Company to retrofit its customers' wafer probers to handle larger diameter wafers and improve the accuracy of wafer positioning. The Company has developed the components and processes necessary to reconfigure probers originally designed to handle four and six-inch wafers to the current advanced fab requirement of eight-inch wafers. Many fab production managers consider conversion of their existing four and six-inch equipment as an effective way to optimize their capital equipment budgets and an expedient way to upgrade to eight-inch wafer capability. Additionally, each conversion provides the Company with salvageable components, which can be reconditioned and used for the Company's service and repair business. The Company also converts older generation four-inch probers into a single unit that is able to handle five and six-inch wafers. The demand for six-inch wafer probers remains strong, especially in 6 9 developing nations. The Company recently introduced a reaccurization service in which the customer's existing six-inch wafer probers are reprofiled and upgraded beyond their originally manufactured specifications to achieve the greater accuracy and performance that is required by many current standards. Additionally, the Company has developed add-on and enhancement products, including an automatic wafer transfer/handling system, and probe-to-pad alignment positioning products. The Company also provides other prober services, including providing on-site maintenance and repair services and replacement parts for wafer probers through a network of direct and contract field service personnel in the United States, Europe, and parts of Asia. The Company's wafer prober products and services range in price from $25,000 to $150,000 per unit, depending on options. ENGINEERING AND PRODUCT DEVELOPMENT The customized nature of the Company's products results in ongoing engineering and product development being included in the cost of goods sold for the Company's products. In addition, the Company has devoted and will continue to devote substantial resources to materials and process engineering and product development. Engineering and product development expenses were $1,604,000, $903,000, and $707,000 for the years ended December 31, 1997, 1996, and 1995, respectively, which represented 2.1%, 2.4%, and 2.7% of net sales, respectively. The Company employs over 100 engineers and designers. During 1995, the Company was awarded two engineering and product 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, the Company 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. The second agreement with SEMATECH called for the Company to determine the best solution for probing the interior contact points of semiconductors. The Company retains the rights to any technology developed by it through these engineering and product development efforts. The Company also believes it gains an added benefit from the SEMATECH relationship by being able to work with its semiconductor manufacturer customers to anticipate and address technological advances in semiconductor processing and testing. The Company has from time to time collaborated with certain customers that pay the Company to develop new products. Funds received from such engineering and product development are accounted for as offsets to the total expenses for the related project. The Company recently entered into a joint development agreement with Mitsubishi Materials Corporation to accelerate the research and development of the Company's next generation probe card, which will utilize the Company's proprietary technology to address increasing demand for tighter pitches and the higher performance requirements for wafer probing. Under such agreement each party will own any patents and know-how resulting from its own efforts, subject to a royalty free license back to the other party. Patents and know-how resulting from the efforts of both parties will be owned jointly. MANUFACTURING The Company's manufacturing objective is to produce quality products that meet its customers' testing needs and design specifications on a timely and cost efficient basis. The Company's manufacturing operations consist of procurement and/or fabrication of components and subassemblies, assembly, and extensive testing of finished products. All components and subassemblies are inspected for mechanical and electrical compliance to Company specifications and all finished products are tested against Company and customer specifications. The Company believes that it is able to respond more quickly and accurately to its customers' needs by maintaining manufacturing facilities and technical support in geographic markets where its semiconductor manufacturing customers are located. The Company designs and manufactures its probe cards in Arizona, 7 10 California, and Texas as well as in Scotland, Singapore, and Taiwan. The Company typically designs and manufactures its probe cards within two weeks of receiving a customer order. The Company manufactures its interface assemblies in its Gilbert, Arizona facility. The Company typically designs and manufactures its ATE interface assemblies within 12 weeks of receiving an order. The Company conducts its ATE test board and related PCB fabrication and assembly operations at its Dallas, Texas facility. The Company typically designs and fabricates its ATE test boards within four weeks of receiving an order. The Company refurbishes, reconfigures, and services wafer probers in its facility in Tempe, Arizona. The Company's wafer prober services business provides a variety of services to a large installed base of wafer probers in North America, Europe, and Asia. These services include factory-based remanufacturing, upgrading to allow for the processing of larger wafers and/or to improve prober accuracy, and providing field service at the user's site. The Company emphasizes quality and reliability in both the design and manufacture of its products. While the Company's facilities are not ISO 9000 certified, ISO 9000, the internationally recognized standard for quality management, sets the criteria for the Company's quality management system throughout its manufacturing processes. The Company's use of advanced metrology tools, which ensure precise measurement of all key product parameters, is a cornerstone of its quality management system. As the size of the ICs is driven smaller by advances in IC technology, the accuracy of measurements becomes increasingly important. The Company's Quality and Engineering Departments work together to define measurement needs and develop tools that can achieve desired results. The Company relies on third party suppliers in the production and shipment of its products. Although the Company believes that all raw materials, component parts, and services are currently available in adequate amounts, there can be no assurance that shortages will not develop in the future. Certain of the raw materials and component parts for the Company's products are purchased from single or a limited group of suppliers. The Company does not have long-term written agreements with such suppliers. Although the Company believes there are alternative suppliers for all such raw materials, component parts, and services, termination or a significant disruption of any of its existing supplier arrangements could have a material adverse effect on the Company's business, financial condition, and operating results. CUSTOMERS An integral part of the Company's strategy is to continue to maintain its long standing customer relationships. All of the Company's top 15 customers in 1997 were repeat customers. The top 15 customers fluctuate from year to year depending on the growth cycles of the individual customers. These semiconductor manufacturers provide the Company with a diversified customer base whose products serve the communications, computer, automotive, military, and aerospace industries. In addition to serving high volume established manufacturers, the Company's products also are designed to meet the needs of emerging and leading edge technology firms such as those offering ASICs and Gallium Arsenide ICs. During 1997, the Company's largest customer, Intel, accounted for approximately 17% of net sales. The Company's top 15 customers in 1997, which together accounted for approximately 67% of net sales, were as follows: Advanced Micro Devices Hewlett-Packard IBM Intel Corporation Linear Technology LSI Logic Lucent Technologies Macronix International Micron Semiconductor Motorola National Semiconductor Symbios Logic Teradyne Tech-Semiconductor Texas Instruments MARKETING, SALES, AND SERVICES The Company's customers place a high value on service. Technical features and product quality also are attributes expected by the Company's customers. The unique needs of purchasers of semiconductor testing products demand a high level of customer responsiveness. The Company's products usually require a high degree 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 8 11 evaluation of the design and performance of completed products can be quite subjective. Engineering, sales, and management personnel collaborate closely with customer counterparts to determine their needs and product specifications. Additionally, in order to meet the demanding service needs of its customers, all of the Company's facilities are located in proximity to manufacturing centers worldwide. The Company intends to leverage its worldwide sales facilities to market and distribute all of the Company's products. The Company markets its products in North America through direct technical sales personnel. To meet the demanding service requirements of its customers, the Company has five regional manufacturing, repair, and sales centers in Arizona, California, and Texas. In addition to its regional full service facilities, the Company serves its domestic customers through sales offices strategically located to facilitate rapid response to major market centers and key customers. The Company maintains sales offices in Oregon, Colorado, Florida, and Massachusetts. The Company utilizes a network of independent foreign distributors in both Europe and Asia. The Company's international business represented approximately 17%, 20%, and 11% of net sales for 1997, 1996, and 1995, respectively. The Company believes the potential exists to increase sales in international markets, and the Company is positioning itself to initiate a more aggressive marketing and sales program in these markets in the future. In particular, the Company intends to expand its sales efforts throughout Europe and has opened a manufacturing, repair, and sales facility in Scotland for the purpose of serving customers in Europe. In June 1995, the Company formed Cerprobe Asia PTE LTD, a joint venture with Asian investors. Through the joint venture, the Company established full service manufacturing and repair facilities in Singapore and Taiwan in April 1996 and January 1997, respectively, to penetrate the growing markets for the Company's products in Southeast Asia. Within the next 12 months, the Company intends to enter into the highly competitive Japanese market through a joint venture arrangement with local Japanese partners. COMPETITION The semiconductor testing products industry is highly competitive. The Company faces substantial competition in each of the probe card, interface assembly, and ATE test board markets. In addition, the Company anticipates that it may face substantial competition in the future from new entrants in the Company's markets. The principal competitive factors in the industry are product performance, service, delivery time, and price. Competition in international markets is also significant, particularly in Asia where the Company is expanding into new geographic markets while simultaneously addressing the testing requirements of the memory IC market, a new product market for the Company. Some of the Company's competitors, particularly in Asia, have substantially greater financial, engineering, or manufacturing resources than the Company and larger sales and service organizations. To compete successfully, the Company must make substantial investments in its engineering and product development, marketing, and customer service and support activities. There can be no assurance that competition in the Company's markets will not intensify or that the Company's technological advantages may not be reduced or lost as a result of technological advances by competitors or customers. Wafer prober manufacturers, such as Electroglas, Tokyo Electron Labs, and Tokyo Semitsu, provide limited refurbishment services and offer new wafer probers as an alternative. These wafer prober manufacturers have greater financial, engineering, and manufacturing resources and larger service organizations than the Company as well as long-standing customer relationships. There can be no assurance that levels of competition in the market for wafer prober remanufacturing and reconfiguration services will not intensify in the future or that customers will not elect to purchase new wafer probers. BACKLOG As of December 31, 1997, the Company had a backlog of orders of approximately $10.5 million. These orders are believed to be firm and all are expected to be filled during fiscal 1998. The Company's business has not been seasonal to date. Because of possible changes in delivery schedules and cancellations of orders, the Company's backlog at any particular date is not necessarily indicative of future sales. 9 12 ENVIRONMENTAL REGULATIONS The Company is subject to federal, state, and local provisions regulating the discharge of materials into the environment. The Company has made certain leasehold improvements in order to comply with Environmental Protection Agency and local regulations. Proper waste disposal is a major consideration for PCB manufacturers because metals and chemicals are used in the manufacturing process. Water used in the printed circuit board manufacturing process must be treated to remove metal particles and other contaminants before it can be discharged into the municipal sanitary sewer system. The Company operates and maintains wastewater treatment systems and effluent testing facilities at its PCB manufacturing plant in Dallas, Texas. The Company's PCB manufacturing plant operates under effluent discharge permits issued by the appropriate governmental authorities. These permits must be renewed periodically and are subject to revocation in the event of violations of environmental laws. The Company believes that the waste treatment equipment in its PCB manufacturing facility is currently in compliance with environmental protection requirements in all material respects. However, there can be no assurance that violations will not occur in the future as a result of human error, equipment failure, or other causes. The Company is also subject to environmental laws relating to the storage, use, and disposal of chemicals, solid waste, and other hazardous materials as well as air quality regulations. Furthermore, environmental laws could become more stringent over time, and the costs of compliance with more stringent laws could be substantial. Although the Company believes that it is in full compliance with all regulations, the Company is unable to predict what effect, if any, the adoption of more stringent regulations would have on its future operations. The Company does not anticipate incurring any future material expenditures to remain in substantial compliance with presently applicable environmental regulations. INTELLECTUAL PROPERTY While the Company considers intellectual property rights, patents, and licenses to be important, the Company does not consider any single patent to be material to the conduct of its business. The Company relies primarily on trade secret protection for its proprietary information rather than patents to avoid publicly disclosing its technology in a patent application. The Company believes that its success will depend primarily on the technological competence and creative skills of its personnel rather than the protection of its existing patents or future patents. EMPLOYEES As of December 31, 1997, the Company had 707 employees, consisting of 116 in engineering and product development, 410 in manufacturing, 78 in sales and marketing, and 103 in administration. There are no collective bargaining agreements, and the Company considers its relations with its employees to be good. EXECUTIVE OFFICERS The following table sets forth certain information regarding Cerprobe's executive officers.
NAME AGE POSITION ---- --- -------- C. Zane Close.......... 48 President, Chief Executive Officer, and Director Eswar Subramanian...... 40 Senior Vice President and Chief Operating Officer Michael K. Bonham...... 59 Senior Vice President -- Sales and Marketing Randal L. Buness....... 41 Vice President, Chief Financial Officer, Secretary, and Treasurer
C. Zane Close has served as President and Chief Executive Officer and as a director of the Company since July 1990. From September 1989 to July 1990, Mr. Close served as Vice President and General Manager of Probe Technology Corporation ("Probe Technology"), a manufacturer of probing devices for testing integrated circuits. Mr. Close served as Vice President of Operations of Probe Technology from February 1985 to September 1989. 10 13 Eswar Subramanian has served as Senior Vice President and Chief Operating Officer of the Company since June 1996. Mr. Subramanian served as Vice President of Engineering of the Company from July 1990 to June 1996. From April 1990 to July 1990, Mr. Subramanian was Director of Development at Probe Technology, 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 and was responsible for the design, development, manufacture, and engineering of probing products. Michael K. Bonham has served as Senior Vice President -- Sales and Marketing of the Company since June 1996. Mr. Bonham served as Vice President of Sales and Marketing of the Company from July 1990 to June 1996. From October 1988 to June 1990, Mr. Bonham served as Marketing Manager of the IC Probe and Curve Tracer Group of Tektronix, Incorporated, a manufacturer of electronic test measurement equipment. Randal L. Buness has served as Vice President, Chief Financial Officer, Secretary, and Treasurer of the Company since June 1996. From September 1994 to June 1996, Mr. Buness served as Vice President -- Finance and Administration, Chief Financial Officer, Secretary, and Treasurer of Three-Five Systems, Inc., a publicly held manufacturer of liquid crystal displays. Mr. Buness served as Chief Financial Officer, Secretary, and Treasurer of United Medical Network, a developer of video conferencing networks for healthcare providers, from January 1993 to September 1994. From January 1989 to January 1993, Mr. Buness worked as a self-employed consultant. Mr. Buness served as principal and manager with Arthur Young from January 1986 to January 1989 and served as a manager, senior, and staff accountant with Price Waterhouse from July 1979 to January 1986. Mr. Buness is a Certified Public Accountant. 11 14 SPECIAL CONSIDERATIONS The following risk factors should be considered carefully in addition to the other information in this Report in evaluating the Company and its business. Except for the historical information contained herein, the discussion in this Report contains certain forward-looking statements that involve risks and uncertainties. When used in this Report, the words "believes," "expects," "anticipates," "intends," "estimates," "should," "will likely," and similar expressions are intended to identify such forward-looking statements. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear in this Report. The Company's actual results could differ materially from those discussed here. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly and annual operating results will be affected by a wide variety of factors that could have a material adverse effect on net sales and profitability, many of which are beyond its control, including factors pertaining to (i) customer demand for the Company's products, such as the cyclical nature of the semiconductor industry, market acceptance of the Company's products, changes in product mix, the level of orders that are received and can be delivered in a quarter, and customer order patterns; (ii) competition, such as competitive pressures on delivery time, product performance and reliability, prices, the introduction or announcement of new products by competitors, and intellectual property rights of third parties; (iii) product development, such as the Company's ability to introduce new product designs and innovations on a timely basis in response to advances in IC technology; (iv) manufacturing and operations, such as the availability and cost of raw materials, equipment and other supplies, fluctuations in manufacturing yields, availability and cost of production capacity, and concentration of suppliers; and (v) generally prevailing economic conditions in the U.S. and worldwide markets served by the Company. Fluctuations in operating results could materially and adversely affect the market price of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this Report and "Business" contained in Item 1 of this Report . CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY The Company's business depends substantially on both the volume of IC production by semiconductor manufacturers as well as new IC designs, which in turn depend on the demand of ICs and products utilizing ICs. The semiconductor industry is highly cyclical and historically has experienced periods of oversupply, resulting in reduced demand for IC testing products, including the products manufactured by the Company. There can be no assurance that demand for ICs or products utilizing ICs will not decline. Furthermore, there can be no assurance that demand for the Company's products will continue at the current level. The Company anticipates that a significant portion of new orders for its products will depend upon demand from IC manufacturers building or expanding IC fabrication facilities or otherwise increasing production capacity or shifting production to new IC designs, and there can be no assurance that such demand will exist. Future downturns or slowdowns in the IC market will have a material adverse effect on the Company's business, financial condition, and operating results. Moreover, the Company's need to invest in engineering and product development, marketing, and customer service and support capabilities will limit its ability to reduce expenses in response to such downturns or slowdowns. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this Report and "Business" contained in Item 1 of this Report . RISK ASSOCIATED WITH EXPANSION STRATEGY The Company intends to expand, in part, through strategic acquisitions and joint ventures and by entering into new geographic and product markets. The Company's ability to expand through acquisitions will depend primarily on its ability to identify, acquire, and operate other businesses that complement the Company's existing business. There can be no assurance that any suitable acquisitions can be identified or consummated or that the operations and product offerings of any businesses that are acquired will be successfully integrated 12 15 into the Company's operations and product offerings. The Company anticipates that it will use cash and/or its securities, including Common Stock, as the primary consideration for any future acquisitions. The size, timing, and integration of any future acquisitions could cause substantial fluctuations in operating results. The Company faces similar risks and uncertainties with respect to joint ventures. The Company is not engaged in any negotiations with any third parties and has no specific agreements or plans with respect to any acquisitions or joint ventures, and there can be no assurance the Company will consummate any acquisitions or joint ventures. The Company believes that its future success will depend, in part, on its ability to expand into new international markets, particularly Asia, and new product markets. The Company believes that its Asian competitors have a competitive advantage because of their dominance of the Asian market. There can be no assurance that the Company will be able to establish a significant presence in these international markets. There also can be no assurance that or to what extent the Company will be able to gain market acceptance for any new product. See "Business" contained in Item 1 of this Report. MANAGEMENT OF GROWTH The Company has undergone a period of rapid growth and expansion of its worldwide organization. Continued expansion by the Company may strain its management, manufacturing, and human resources and the ability of materials suppliers and other third parties on which the Company is dependent. The Company's operating results could be materially and adversely affected if it is unable to maintain high levels of productivity and/or to maintain satisfactory delivery schedules. Moreover, to manage its growth effectively, the Company will be required to expand its existing operating and financial systems and controls and to manage a substantial increase in its employee base. To the extent that the Company's management is unable to assume or perform these duties, the business of the Company could be materially and adversely affected. There can be no assurance that the management systems and controls currently in place or any steps taken to expand such management systems and controls will be adequate in the future. DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES The Company operates in an industry subject to rapid change. The Company custom-designs or customizes its products to a customer's particular IC design specifications. The Company's inability to introduce new product designs and enhancements and to adapt its manufacturing techniques in response to technological advances in IC and capital equipment designs would have a material adverse effect on the Company's business, financial condition, and operating results. There can be no assurance that any new product designs or enhancements will receive or maintain substantial market acceptance. Probe card technologies, other than those being utilized by the Company, are being developed. To the extent that such other probe card technologies gain market acceptance, the Company's probe card products could lose market share and the Company's business, financial condition, and operating results would be materially and adversely affected. If the Company is unable to design, develop, and introduce competitive products on a timely basis, its future operating results may be materially and adversely affected. See "Business -- Products and Services" contained in Item 1 of this Report. COMPETITION The semiconductor testing products industry is highly competitive. The Company faces substantial competition in each of the probe card, ATE interface assembly, and ATE test board markets. In addition, the Company anticipates that it may face substantial competition in the future from new entrants in the Company's markets. The principal competitive factors in the industry are product performance, service, delivery time, and price. Competition in international markets is also significant, particularly in Asia where the Company is expanding into new geographic markets while simultaneously addressing the testing requirements of the memory IC market, a new product market for the Company. Some of the Company's competitors, particularly in Asia, have substantially greater financial, engineering, or manufacturing resources than the Company and larger sales and service organizations. To compete successfully, the Company must make substantial investments in its engineering and product development, marketing, and customer service and support activities. There can be no assurance that competition in the Company's markets will not intensify or 13 16 that the Company's technological advantages will not be reduced or lost as a result of technological advances by competitors or customers. Wafer prober manufacturers, such as Electroglas, Inc., Tokyo Electron Labs, and Tokyo Semitsu, provide limited refurbishment services and offer new wafer probers as an alternative. These wafer prober manufacturers have greater financial, engineering, and manufacturing resources and larger service organizations than the Company, as well as long standing customer relationships. There can be no assurance that levels of competition in the market for wafer prober remanufacturing and reconfiguration services will not intensify in the future or that customers will not elect to purchase new wafer probers. RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS The Company markets and sells its products internationally primarily through a network of third party foreign distributors that are not under the direct control of the Company. The Company's international business represented approximately 17% of net sales for 1997. A reduction in the sales efforts by the Company's foreign distributors or termination of their relationships with the Company could materially and adversely affect the Company's international sales and, as a result, its business, financial condition, and operating results. See "Business -- Marketing, Sales, and Services" contained in Item 1 of this Report. RISKS OF INTERNATIONAL OPERATIONS Given the Company's efforts in establishing production and sales facilities in Scotland, Singapore, and Taiwan, the Company anticipates that sales to international customers will increase in the future. The foreign manufacture and sale of products and the purchase of raw materials and equipment from foreign suppliers may be materially and adversely affected by political and economic conditions abroad. Protectionist 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, as well as the Company's ability to form effective joint venture alliances in order to compete in restrictive markets, could materially and adversely affect the Company's ability to manufacture or sell products in foreign markets and purchase materials or equipment from foreign suppliers. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. See "Business" contained in Item 1 of this Report. CURRENCY EXCHANGE FLUCTUATIONS A portion of the Company's foreign transactions are denominated in currencies other than the U.S. dollar. Such transactions expose the Company to exchange rate fluctuations for the period of time from inception of the transaction until it is settled. The Company has not engaged in transactions to hedge its currency risks, but may do so in the future. The Company may purchase a portion of its raw materials and equipment from foreign suppliers and will incur labor costs in a foreign currency. There can be no assurance that fluctuations in the currency exchange rates in the future will not have a material adverse effect on the Company's operating results. DEPENDENCE ON KEY CUSTOMERS Sales of the Company's products are concentrated with a small number of customers. During 1997, sales to the Company's largest customer, Intel, accounted for approximately 17% of net sales. The Company's top 15 customers in 1997 together accounted for approximately 67% of net sales. The Company expects that sales of its products to relatively few customers will continue to account for a high percentage of its net sales. None of the Company's customers has entered into a long-term agreement requiring it to purchase the Company's products. The loss of a significant customer or any reduction in orders from any significant customer, including reductions due to changes in customer buying patterns, market, economic, or competitive conditions in the IC industry or in the industries that manufacture products utilizing ICs, would have a material adverse effect on the Company's business, financial condition, and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of this Report, and "Business -- Customers" contained in Item 1 of this Report. 14 17 DEPENDENCE ON KEY SUPPLIERS The Company relies on third party suppliers in the production and shipment of its products. Although the Company believes that all raw materials, component parts, and services are currently available in adequate amounts, there can be no assurance that shortages will not develop in the future. Certain of the raw materials and component parts for the Company's products are purchased from single or a limited group of suppliers. The Company does not have long-term written agreements with such suppliers. Termination or a significant disruption of any of its key supplier arrangements could have a material adverse effect on the Company's business, financial condition, and operating results. See "Business -- Manufacturing" contained in Item 1 of this Report. INTELLECTUAL PROPERTY While the Company currently holds certain patents, the Company does not consider any single patent to be material to the conduct of its business. The Company believes that its competitors have been and will be able to continue to circumvent many of the Company's patents. To the extent the Company wishes to assert its patent rights, there can be no assurance that any patents issued to the Company will not be challenged, invalidated, or circumvented, that any rights granted thereunder will provide adequate protection to the Company, or that the Company will have sufficient resources to prosecute its rights. The Company believes that its success will depend primarily on the technological competence and creative skills of its personnel rather than the protection of its existing patents or future patents. The Company relies primarily on trade secret protection for its proprietary information. There can be no assurance that the Company will be able to protect its technology. Although there are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights, there can be no assurance that third parties will not assert intellectual property infringement claims against the Company. See "Business -- Intellectual Property" contained in Item 1 of this Report. SIGNIFICANT CAPITAL REQUIREMENTS The probe card, ATE interface, ATE test board, and wafer prober services industries are capital intensive. In order to remain competitive, the Company must make significant investments in capital equipment for engineering and product development. As a result of the increase in fixed costs and operating expenses related to these capital expenditures, the Company's operating results may be materially and adversely affected if net sales do not increase sufficiently to offset the increased costs. The Company may from time to time seek additional equity or debt financing to provide for the capital expenditures required to maintain or expand its production facilities and capital equipment. The timing and amount of any such capital requirements cannot be predicted at this time and will depend on a number of factors, including demand for the Company's products, product mix, changes in industry conditions, and competitive factors. There can be no assurance that any such financing will be available on acceptable terms, and that any additional equity financing, if available, would not result in additional dilution to existing investors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" contained in Item 7 of this Report. POTENTIAL LIABILITY FOR FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS The Company is subject to a variety of federal, state, and local governmental regulations related to the use, storage, discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals used in its manufacturing process. Although the Company believes that its activities are in substantial compliance with presently applicable environmental regulations, the failure to comply with present or future regulations could result in fines being imposed on the Company, suspension of its production, or a cessation of its operations. Such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Any failure by the Company to control the use or adequately 15 18 restrict the discharge of hazardous substances could subject it to future liabilities. See "Business -- Environmental Regulations" contained in Item 1 of this Report. DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL The Company's success depends, in part, upon the retention of certain key personnel and the recruitment and retention of additional key personnel, including technical and engineering staff. The loss of existing key personnel or the failure to recruit and retain necessary additional personnel by the Company could materially and adversely affect its business, financial condition, and operating results. There can be no assurance that the Company will be able to retain its current personnel or attract and retain necessary additional personnel. Future growth will further increase the demand on the Company's resources and require the addition of new personnel and the development of additional expertise by existing personnel. The failure of the Company to attract and retain personnel with the requisite expertise or to develop such expertise internally could materially and adversely affect the prospects for its success. CONTROL BY CURRENT STOCKHOLDERS Stockholders of the Company have the right to cumulate their votes for the election of directors. The directors and executive officers of the Company and their affiliates currently own beneficially approximately 15.1% of the Common Stock. Accordingly, these persons, if they act as a group, will be able to elect one or more members to the Company's Board of Directors and may be able to exert significant influence regarding the outcome of other matters requiring approval by the stockholders of the Company. PRICE VOLATILITY OF COMMON STOCK The market price of the Company's Common Stock has experienced significant volatility during the past three years. See "Market for the Registrant's Common Equity and Related Stockholder Matters" contained in Item 5 of this Report. The trading price of the Company's Common Stock in the future could be subject to wide fluctuations in response to quarterly variations in operating results of the Company and others in its industry, actual or anticipated announcements concerning the Company or its competitors, changes in analysts' estimates of the Company's financial performance, general conditions in the semiconductor industry, general economic and financial conditions, and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations, which have adversely affected the market prices for many companies involved in high technology manufacturing and related industries and which often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors could have a material adverse effect on the market price of the Common Stock. RIGHTS TO ACQUIRE SHARES; POTENTIAL ISSUANCE OF ADDITIONAL SHARES As of December 31, 1997, options to acquire a total of 639,866 shares were outstanding under the Company's stock option plans. An additional 366,334 shares of Common Stock were reserved for issuance pursuant to the exercise of options that may be granted in the future under the Company's stock option plans. The Company also has granted non-employee options to purchase up to 10,000 shares of Common Stock. The Company also has issued warrants to purchase up to 39,275 shares of Common Stock in connection with the sale of the Series A Convertible Preferred Stock. During the terms of such options and warrants, the holders thereof will have the opportunity to profit from an increase in the market price of the Common Stock with resulting dilution in the interests of holders of Common Stock. The existence of such stock options and warrants could adversely affect the terms on which the Company can obtain additional financing, and the holders of such options and warrants can be expected to exercise such options and warrants at a time when the Company, in all likelihood, would be able to obtain additional capital by offering shares of its Common Stock on terms more favorable to the Company than those provided by the exercise of such options and warrants. The Company also has the authority to issue additional shares of Common Stock and shares of one or more series of convertible preferred stock. The issuance of such shares could result in the dilution of the voting power of outstanding shares of Common Stock and could have a dilutive effect on earnings per share. 16 19 CHANGE IN CONTROL PROVISIONS The Company's First Restated Certificate of Incorporation (the "Restated Certificate") and the Delaware General Corporation Law (the "Delaware GCL") contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of the Company, even when these attempts may be in the best interest of stockholders. The Restated Certificate also authorizes the Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect the voting power of the holders of the Company's Common Stock. The Delaware GCL also imposes conditions on certain business combination transactions with "interested stockholders" (as defined therein). ITEM 2. PROPERTIES The Company's principal executive offices and primary manufacturing facility are located in Gilbert, Arizona. The facility is owned by CRPB Investors, L.L.C. ("CRPB Investors"). The Company owns a 36% interest in CRPB Investors. The Company has entered into a long-term lease with CRPB Investors, the initial term of which expires in May 2012 with seven options to extend the lease for successive five-year terms. The Company's major facilities are described in the table below:
LEASE EXPIRATION FACILITY SQUARE FEET FUNCTION PRODUCTS DATE - -------- ----------- -------- -------- -------------- Gilbert, Arizona.......... 83,000 Corporate Probe cards and ATE May 2012 headquarters, interface manufacturing, assemblies sales and service Dallas, Texas............. 35,000 CompuRoute ATE test boards Company owned headquarters, manufacturing, sales and service San Jose, California...... 34,000 Manufacturing, Probe cards July 2002 sales and service Tempe, Arizona............ 30,000 SVTR headquarters, Remanufactured/ September 2004 manufacturing, upgraded wafer sales and service probers Chandler, Arizona......... 16,000 Upsys-Cerprobe, Cobra probe cards November 1998 L.L.C. headquarters, manufacturing and service Hsin Chu, Taiwan.......... 9,000 Manufacturing and Probe cards April 2003 service Austin, Texas............. 7,000 Manufacturing, Probe cards March 2002 sales and service East Kilbride, Scotland... 11,700 Manufacturing, Probe cards December 2007 sales and service Singapore................. 1,000 Manufacturing and Probe cards September 1998 service
In addition, the Company leases space for its sales and service offices in Colorado Springs, Colorado; Boca Raton, Florida; Westboro, Massachusetts; Beaverton, Oregon; Richardson, Texas; Dallas, Texas; and Santa Clara, California. The Company believes that its existing facilities are adequate to meet its current requirements. 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. 17 20 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 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S 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 20, 1998, the closing price for the Company's common stock was $17 7/8. The following table sets forth the high and low last sale prices of the Company's common stock for the periods indicated, as reported on the Nasdaq National Market, except that prior to August 10, 1995 prices represent high ask and low bid quotations on Nasdaq. Bid and Ask quotations represent interdealer quotations, which exclude retail markups or markdowns and commissions and may not necessarily represent actual transactions.
HIGH LOW ---- --- 1995: First Quarter............................................. $ 6 5/8 $ 4 3/4 Second Quarter............................................ 8 3/4 4 3/4 Third Quarter............................................. 10 3/4 8 Fourth Quarter............................................ 17 3/8 9 1/4 1996: First Quarter............................................. 17 1/2 13 Second Quarter............................................ 16 11 7/8 Third Quarter............................................. 12 1/8 7 7/8 Fourth Quarter............................................ 14 3/8 9 1997: First Quarter............................................. 15 7/8 11 1/8 Second Quarter............................................ 13 3/4 9 3/8 Third Quarter............................................. 25 3/4 12 3/4 Fourth Quarter............................................ 26 1/4 15 3/8
Cerprobe does not intend to pay any cash dividends in the future and intends to retain any future earnings for reinvestment in its business. The Company's revolving credit facility contains restrictions on the Company's ability to pay cash dividends, and future borrowings may contain similar restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." As of March 20, 1998, there were approximately 3,800 holders of record of Cerprobe common stock. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this Report. The consolidated statement of operations data for the years ended December 31, 1997, 1996, and 1995 and the consolidated balance sheet data as of December 31, 1997 and 1996 are derived from, and are qualified by reference to, the consolidated financial statements included elsewhere in this Report, which have been audited by KPMG Peat Marwick LLP. The consolidated statement of operations data for the years ended December 31, 1994 and 1993, and the consolidated balance sheet data as of December 31, 1995, 1994 and 1993, are derived from audited consolidated financial statements not included in this Report. These historical results are not necessarily indicative of the results to be expected in the future. 18 21
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1997(1) 1996(2) 1995 1994 1993 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales................................ $77,110 $37,308 $26,099 $14,251 $11,212 Cost of goods sold....................... 45,477 20,343 13,706 8,214 6,768 ------- ------- ------- ------- ------- Gross profit............................. 31,633 16,965 12,393 6,037 4,444 Expenses: Selling, general and administrative.... 19,640 10,725 7,503 3,693 2,398 Engineering and product development.... 1,604 903 707 417 336 Acquisition related expenses........... 4,996 4,584 -- -- -- ------- ------- ------- ------- ------- Total expenses...................... 26,240 16,212 8,210 4,110 2,734 ------- ------- ------- ------- ------- Operating income (loss).................. 5,393 753 4,183 1,927 1,710 Other income (expense): Interest income........................ 353 467 45 19 1 Interest expense....................... (486) (222) (154) (115) (132) Other income, net...................... 318 247 140 92 13 ------- ------- ------- ------- ------- Total other income (expense)........ 185 492 31 (4) (118) ------- ------- ------- ------- ------- Income before income taxes, and minority interest............................... 5,578 1,245 4,214 1,923 1,592 Provision for income taxes............... (3,712) (2,701) (1,812) (710) (90) Minority interest share of loss.......... 30 95 -- -- -- ------- ------- ------- ------- ------- Net income (loss)........................ $ 1,896 $(1,361) $ 2,402 $ 1,213 $ 1,502 ======= ======= ======= ======= ======= Net income (loss) per share: Basic.................................. $ 0.28 $ (0.30) $ 0.62 $ 0.38 $ 0.46 ======= ======= ======= ======= ======= Diluted................................ $ 0.27 $ (0.30) $ 0.53 $ 0.30 $ 0.35 ======= ======= ======= ======= ======= Weighted average number of shares: Basic.................................. 6,690 4,580 3,874 3,213 3,292 Diluted................................ 6,982 4,580 4,666 4,007 4,323 BALANCE SHEET DATA: Working capital.......................... $42,505 $10,004 $ 4,771 $ 3,572 $ 2,777 Total assets............................. 69,455 31,512 14,967 7,015 4,674 Long-term debt........................... 1,315 1,741 981 791 748 Stockholders' equity..................... 59,211 23,130 10,656 4,923 3,063
- --------------- (1) Includes a one-time write-off of purchased research and development of $4.5 million in 1997, or $0.64 per share, related to the acquisition of SVTR. Also includes the cost to move SVTR's manufacturing operations from California to Arizona during 1997 of $500,000, or $0.04 per share, net of taxes, for a total of $0.68 per share. (2) Includes a one-time write-off of purchased research and development of $4.6 million in 1996, or $1.00 per share, related to the acquisition of CompuRoute. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements and related Notes thereto of the Company appearing elsewhere in this Report. 19 22 OVERVIEW Cerprobe offers comprehensive solutions for semiconductor test integration and is a leading manufacturer of probe cards, ATE interface assemblies, and ATE test boards. The Company's products and services enable semiconductor manufacturers to test ICs in wafer form and as packaged ICs. The Company has grown substantially over the last five years as the Company has increased its market share and has benefited from the substantial growth in the worldwide demand for ICs. Net sales have increased from $11.2 million for 1993 to $77.1 million for 1997, representing an average annualized growth rate of approximately 62%. Similarly, the Company's net income has increased from $1.5 million for 1993 to $6.7 million for 1997 (before a one-time charge for purchased research and development of $4.5 million and SVTR moving expenses of $300,000, net of tax benefit of $200,000, which together reduced net income to $1.9 million). Until 1995, substantially all of the Company's growth was from the existing probe card product line. Beginning with the April 1995 acquisition of Fresh Test Technology Corporation ("Fresh Test"), acquisitions have contributed to the Company's growth. Fresh Test expanded the Company's product line to include ATE interface assemblies. The Company acquired CompuRoute in December 1996, which enabled the Company to offer ATE test boards. The Company acquired SVTR in January 1997, which added wafer prober remanufacturing and upgrading services. Net sales from these acquired products and services together approximated $28 million, $7 million, and $4 million for years 1997, 1996, and 1995, respectively. In May 1997 the Company entered into a joint venture with Upsys Reseau Erisys ("Upsys"), a French company owned by IBM and GAME, a French test and engineering company. The joint venture, called Upsys-Cerprobe, L.L.C., assembles and repairs the Cobra probe card for distribution by the Company in the United States and Asia. The Company believes the Cobra probe is well-suited for area array IC and multiple memory IC testing, both new markets for the Company. The Company believes that it is positioned to continue its growth as a result of its strength in designing, producing, and delivering, on a timely and cost-efficient basis, a broad range of custom or customized, high quality test products and services for semiconductor manufacturers in the United States, Europe, and Asia. There can be no assurance that the Company can continue its growth. The Company maintains regional full service facilities in Arizona, California, and Texas as well as sales offices in Colorado, Florida, Massachusetts, and Oregon to service the U.S. market for its products and services. The Company continues to expand into international markets, including Europe and Asia. The Company maintains a full service facility in Scotland to serve the European market and full service facilities in Singapore and Taiwan to serve the Southeast Asia market. Each of the Company's facilities is located in proximity to semiconductor manufacturing centers. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales of certain items in the Consolidated Statement of Operations of the Company. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto. 20 23
YEAR ENDED DECEMBER 31, --------------------------- 1997(1) 1996(2) 1995 ------- ------- ----- Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 59.0 54.5 52.5 ----- ----- ----- Gross profit................................................ 41.0 45.5 47.5 Expenses: Selling, general and administrative....................... 25.4 28.7 28.8 Engineering and product development....................... 2.1 2.4 2.7 Acquisition related expenses.............................. 6.5 12.3 -- ----- ----- ----- Total expenses......................................... 34.0 43.4 31.5 ----- ----- ----- Operating income............................................ 7.0 2.1 16.0 Other income (expense): Interest income........................................... 0.4 1.3 0.2 Interest expense.......................................... (0.6) (0.6) (0.6) Other income, net......................................... 0.4 0.6 0.5 ----- ----- ----- Total other income (expense)........................... 0.2 1.3 0.1 ----- ----- ----- Income before income taxes and minority interest............ 7.2 3.4 16.1 Provision for income taxes.................................. (4.8) (7.2) (6.9) Minority interest share of loss............................. -- 0.2 -- ----- ----- ----- Net income (loss)........................................... 2.4% (3.6)% 9.2% ===== ===== =====
- --------------- (1) Includes a one-time write-off of purchased research and development costs of $4.5 million in 1997 related to the acquisition of SVTR and the cost to move SVTR's manufacturing operations from California to Arizona during 1997 of $500,000. (2) Includes a one-time write-off of purchased research and development costs of $4.6 million in 1996 related to the acquisition of CompuRoute. YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 Net Sales. Net sales for 1997 were $77.1 million, an increase of 106.7% over net sales of $37.3 million for 1996. This increase in net sales of $39.8 million resulted from acquisitions of CompuRoute and SVTR (together $20.8 million), higher domestic order rates for the Company's probe card and interface products ($13.2 million), and increased international sales ($5.8 million). Gross Profit. The gross profit for 1997 was $31.6 million, an increase of 85.9% from the gross profit of $17.0 million for 1996. Gross margin decreased from 45.5% in 1996 to 41.0% in 1997. The decrease in gross margin was primarily a result of a change in product mix due to acquisitions. Approximately 27% of net sales in the period were attributed to ATE test boards and wafer prober products and services. Both product lines from CompuRoute and SVTR have lower gross profits than the Company's core products of probe cards and ATE interfaces. Selling, General, and Administrative. Selling, general, and administrative expenses were $19.6 million, or 25.4% of net sales, for 1997, compared to $10.7 million, or 28.7% of net sales, for 1996, an increase of $8.9 million. The increase in selling, general, and administrative expenses resulted primarily from the two recent acquisitions of CompuRoute and SVTR ($5.2 million) and the Company's continued domestic and international expansion ($3.7 million). Engineering and Product Development. Engineering and product development expenses were $1.6 million, or 2.1% of net sales, for 1997, an increase of 77.6% over $903,000, or 2.4% of net sales, for 1996. These increased expenses resulted from the Company's recent acquisitions of CompuRoute and SVTR, and continued emphasis on engineering and product development in an effort to anticipate and address 21 24 technological advances in semiconductor testing. Total expenses were partially offset by increased project funding receipts from collaborations on engineering and product development with certain customers and the re-assignment of personnel and other resources to the joint venture with Upsys. Acquisition Related Expenses. Acquisition related expenses from the January 1997 acquisition of SVTR totaled $5.0 million. The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon their estimated fair values. The value of purchased research and development in connection with the acquisition was $4.5 million. The state of the research and development products/processes was not at a technologically feasible or commercially viable stage. Therefore, consistent with generally accepted accounting principles, the Company took a one-time charge for the full value of the purchased research and development. The additional $500,000 was related to the move of SVTR's manufacturing operations from California to Arizona in 1997. Interest Income. Interest income was $353,000 in 1997, compared to $467,000 for 1996. This decrease is attributable to the utilization of net proceeds from the issuance of Series A Convertible Preferred Stock in January 1996, for the CompuRoute and SVTR acquisitions in December 1996 and January 1997, respectively. Interest income is expected to increase in 1998 due to the interest earned on the net proceeds of the Company's secondary offering completed in September 1997. Provision for Income Taxes. The provision for income taxes increased to $3.7 million, which represented an effective tax rate of 36.8% for 1997 (excluding the nondeductible purchased research and development expenses of $4.5 million), compared to $2.7 million, which represented an effective rate of 46.3% for 1996 (excluding the non-deductible acquisition related expenses of $4.6 million). The decreased effective tax rate, as adjusted for 1997 and 1996, was due primarily to the benefit in 1997 from CompuRoute's net operating loss carryforwards as well as net operating loss carryforwards from foreign subsidiaries (4%). The Company also benefited in 1997 from the reduced effective tax rate for export sales through the Company's foreign sales corporation and income from non-taxable annuities (2%). Minority Interest Share of Loss. The minority interest share of loss of $30,000 for 1997 represented the Company's joint venture partners' share of the loss from the Company's Asian operations and joint venture with UPSYS. Net Income (Loss). Net income for 1997 was $1.9 million, compared to the loss of $1.4 million for 1996. Excluding acquisition related expenses, net income for 1997 would have been $6.7 million, or 8.7% of net sales for 1997, compared to 8.6% of net sales for 1996. YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 Net Sales. Net sales for 1996 were $37.3 million, an increase of 43.5% over net sales of $26.0 million for 1995. The increase in net sales reflected a continuation of higher order rates for the Company's probe card products and increased international sales. International net sales in 1996 were $7.3 million compared to $3.0 million in 1995, an increase of 147.0%, primarily attributable to the international expansion in Scotland in 1995 and Singapore in 1996. Gross Profit. The gross profit for 1996 was $17.0 million, an increase of 37.1% from the gross profit of $12.4 million for 1995. Gross margin decreased from 47.5% in 1995 to 45.5% in 1996. The decrease in gross margin was primarily as a result of a change in product mix, which included a higher ratio of lower margin ATE interface product sales as well as higher fixed costs related to increased manufacturing capacity to meet anticipated customer demand and maintain satisfactory delivery schedules. Selling, General, and Administrative. Selling, general, and administrative expenses were $10.7 million, or 28.7% of net sales, for 1996, compared to $7.5 million, or 28.8% of net sales, for 1995, an increase of 42.7%. 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 domestic expansion and the start-up of Asian operations. 22 25 Engineering and Product Development. Engineering and product development expenses were $903,000, or 2.4% of net sales, for 1996, an increase of 27.7% over $707,000, or 2.7% of net sales, for 1995. These increased expenses resulted from the Company's continued emphasis on engineering and product development in an effort to anticipate and address technological advances in semiconductor testing. During 1995, the Company was awarded two engineering and product development contracts by SEMATECH, the U.S. semiconductor industry consortium. The Company also performs ongoing contract engineering and product development in collaboration with customers. Revenues from these collaborations are accounted for as an offset to the total expenses incurred for the respective projects. Acquisition Related Expenses. Purchased research and development costs from the December 1996 acquisition of CompuRoute totaled $4.6 million. The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based upon their estimated fair values. The value of purchased research and development in connection with the acquisition was $4.6 million. The state of the research and development products/processes was not at a technologically feasible or commercially viable stage. Therefore, consistent with generally accepted accounting principles, the Company took a one-time charge for the full value of the purchased research and development. Interest Income. Interest income was $467,000 in 1996, compared to $45,000 for 1995. This increase is attributable to the interest earned on the net proceeds from the issuance of Series A Convertible Preferred Stock in January 1996. Provision for Income Taxes. The provision for income taxes increased to $2.7 million, which represented an effective tax rate of 46.3% for 1996 (excluding the nondeductible acquisition related expenses of $4.6 million), compared to $1.8 million, which represented an effective rate of 43.0% for 1995. The increased effective tax rate, as adjusted for 1996, was due primarily to the benefit in 1995 of the Company's net operating loss carryforwards and the tax benefit of research tax credits. Minority Interest Share of Loss. The minority interest share of loss of $95,000 for 1996 represented the Company's joint venture partners' share of the loss from the Company's Asian operations. Net Income (Loss). Net loss for 1996 was $1.4 million, compared to the income of $2.4 million for 1995. Excluding acquisition related expenses, net income for 1996 would have been $3.2 million, or 8.6% of net sales for 1996, compared to 9.2% of net sales for 1995. 23 26 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table presents unaudited consolidated financial results for each of the eight quarters in the period ended December 31, 1997. The Company believes that all necessary adjustments have been included to present fairly the quarterly information when read in conjunction with the Consolidated Financial Statements and Notes thereto. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.
QUARTERS ENDED -------------------------------------------------------------------------------- 1997 1996 ----------------------------------------- ------------------------------------ DEC 31 SEP 30(1) JUN 30 MAR 31(2) DEC 31(3) SEP 30 JUN 30 MAR 31 ------- --------- ------- --------- --------- ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales........................ $22,641 $19,886 $18,684 $15,899 $9,149 $8,799 $9,660 $9,700 Gross profit..................... 9,266 8,187 7,675 6,505 4,091 3,861 4,485 4,528 Operating income................. 2,927 3,027 2,556 1,879 1,058 920 1,542 1,817 Net income....................... 2,240 1,794 1,589 1,069 692 663 861 1,007 Diluted net income per share(4)....................... $ 0.27 $ 0.27 $ 0.24 $ 0.17 $ 0.13 $0.11 $0.15 $ 0.18 AS A PERCENTAGE OF NET SALES: Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit..................... 41.0 41.2 41.1 40.9 44.7 43.9 46.4 46.7 Operating income................. 13.0 15.2 13.7 11.8 11.6 10.5 16.0 18.7 Net income....................... 9.9% 9.0% 8.5% 6.7% 7.6% 7.5% 8.9% 10.4%
- --------------- (1) Does not include a one-time recovery of purchased research and development costs of $1.2 million, or $0.17 per share, related to the re-negotiation of the SVTR purchase price. (2) Does not include a one-time write-off of purchased research and development costs of $5.7 million for the three months ended March 31, 1997, or $0.90 per share, related to the acquisition of SVTR nor the cost to move SVTR's manufacturing operations from California to Arizona for $500,000 or $0.05 per share, net of taxes, for a total of $0.95 per share. (3) Does not include a one-time write-off of purchased research and development costs of $4.6 million for the three months ended December 31, 1996, or $0.86 per share, related to the acquisition of CompuRoute. (4) Net income per share calculations have been restated to reflect the adoption of Statement of Financial Accounting Standard No. 128, Earnings Per Share. Quarterly results can be affected by a number of factors, including the cyclical nature of the semiconductor industry, market acceptance of the Company's products, product mix, customer order patterns, competition, the availability and cost of raw materials and production capacity, and the Company's ability to respond to technological advances. LIQUIDITY AND CAPITAL RESOURCES Cerprobe has financed its operations and capital requirements primarily through cash flow from operations, equipment lease financing arrangements and sales of equity securities. In January 1996, Cerprobe completed a private placement of Series A Convertible Preferred Stock, which raised net proceeds of $9.4 million. The net proceeds have been used in domestic and international expansion and acquisition of companies and/or technologies. In September 1997 the Company completed a secondary offering which raised net proceeds of approximately $31.1 million. In October 1997, the managing underwriters of the secondary offering exercised their over-allotment option, which raised an additional $6.0 million. A portion of the proceeds has been used to repay existing Company debt. The remainder, approximately $29.0 million, will be used for general corporate purposes, including working capital, and for possible future acquisitions. At December 31, 1997, cash and cash equivalents were $30.3 million compared to $5.6 million at December 31, 1996. Cerprobe generated $5.9 million in cash flow from operating activities for the year ended December 31, 1997. Accounts receivable increased by $4.8 million, or 87.3%, to $10.3 million at December 31, 1997. Of this increase, $824,000 resulted from the acquisition of SVTR with the balance a result of increased sales. 24 27 Inventories increased $4.6 million, or 117.9%, over December 31, 1996, to $8.5 million at December 31, 1997. The increase resulted primarily from the acquisition of SVTR. Accounts payable and accrued expenses increased $3.3 million, or 76.7%, to $7.6 million at December 31, 1997. The increase resulted from the acquisition of SVTR and Cerprobe's continued expansion activities. Cerprobe borrowed approximately $2.0 million from its revolving line of credit during the second quarter to payoff notes payable and capital lease obligations of CompuRoute and SVTR whose obligation interest rates were higher than Cerprobe's borrowing rate. The $2.0 million borrowed from the revolving line has been paid off with proceeds from the secondary offering. Working capital increased $33.5 million, or 324.9%, to $42.5 million at December 31, 1997, primarily as a result of the secondary offering. The current ratio increased from 2.6 at December 31, 1996, to 6.1 at December 31, 1997. This increase was due to the net proceeds from the Secondary Offering. Cerprobe increased its investment in property, plant, and equipment during the year ended December 31, 1997, by $3.7 million, or 32.5%, to $15.1 million. This increase was attributable to the acquisition of SVTR and the Company's efforts to expand capacity to meet customer demand for its products. These capital expenditures were funded primarily from cash flow from operations. In February 1997, Cerprobe entered into a $10.0 million unsecured revolving line of credit, which matures August 15, 1998, with its primary lender. Advances under the revolving line may be made as prime rate advances, which accrue interest payable monthly, at the bank's prime lending rate, or as LIBOR rate advances, which bear interest at 175 basis points in excess of the LIBOR base rate. At December 31, 1997, there were no amounts outstanding under the unsecured revolving line of credit. In May 1997, Cerprobe entered into a $3.0 million capital lease line of credit, which matured February 28, 1998. The advances were collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware and the term of each lease is 60 months. At December 31, 1997, advances totaling $357,000 had been made under the agreement. In February 1998, the Company entered into a new lease line of credit agreement that replaced the previous line. The $5.0 million lease line of credit, which matures February 28, 1999, has a maximum lease term for each lease of 60 months. Pricing will be indexed to like term treasuries plus 150 basis points. The advances will be collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware. Cerprobe believes that its working capital, together with the loan and lease commitments described above and anticipated cash flow from operations, will provide adequate sources to fund operations for at least the next 12 months. Cerprobe anticipates that any additional cash requirements for operations or capital expenditures will be financed through cash flow from operations, by borrowing from Cerprobe's primary lender, by lease financing arrangements, or by sales of equity securities. There can be no assurance that any such financing will be available on acceptable terms and that any additional equity financing, if available, would not result in additional dilution to existing investors. YEAR 2000 COSTS The Company is currently implementing new worldwide computerized manufacturing and information systems, which implementation is expected to be completed by 1999. Such systems will have the ability to process transactions with dates for the year 2000 and beyond at no incremental cost and, accordingly, "Year 2000" issues are not expected to have any material impact upon the Company's future financial condition or results of operations. INFLATION AND CHANGING PRICES Cerprobe is impacted by inflationary trends and business trends within the semiconductor industry and by the general condition of the worldwide semiconductor markets. Market price pressures are exerted on semiconductor manufacturers by the global marketplace and global competition. Such pressures mandate that semiconductor manufacturers closely scrutinize the prices they pay for goods and services purchased from Cerprobe and other suppliers. Accordingly, the price structure for Cerprobe's products must be competitive. 25 28 Changes in Cerprobe's supplier prices did not have a significant impact on cost of sales during 1997 or 1996. As a result of Cerprobe's operation of the manufacturing, repair, and sales facilities in Scotland, Singapore, and Taiwan, Cerprobe's foreign transactions may be denominated in currencies other than the U.S. dollar. Such transactions may expose Cerprobe 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 Cerprobe's foreign operations. In addition, Cerprobe 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 material 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 Cerprobe's ability to manufacture or sell its products in foreign markets and purchase materials or equipment from foreign suppliers. In countries in which Cerprobe conducts business in local currency, currency exchange fluctuations could adversely affect Cerprobe's net sales or costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS The Independent Auditors' Report and Consolidated Financial Statements of the Company are set forth on pages F-1 to F24 of this report and are incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item relating to directors of the Company and disclosure relating to compliance with 16(a) of the Securities Act of 1934 is included under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Act of 1934" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and is incorporated herein by reference. The information required by this Item relating to the Company's executive officers is included under the caption "Executive Officers" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is included under the caption "Executive Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is included under the caption "Security Ownership of Principal Stockholders and Management" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is included under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and is incorporated herein by reference. 26 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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, 1997 and 1996..... F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.......................... F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995.............. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................... F-5 Notes to Consolidated 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) First Restated Certificate of Incorporation of the Company dated August 20, 1996. 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 filed as Exhibit 4(c) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 4(d) Certificate of Designations of Series A Preferred Stock dated January 11, 1996, as filed with the Secretary of State of Delaware filed as Exhibit 4(d) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 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.
27 30
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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.
28 31
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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 filed as Exhibit 10(hh) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10(ii) Security Agreement between the Company and Zions Credit Corporation dated December 27, 1995 filed as Exhibit 10(ii) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10(jj) Assignment of Lease between Fresh Test Technology, Inc. and the Company dated August 31, 1995 filed as Exhibit 10(jj) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10(kk) Lease Agreement between Fresh Test Technology, Inc. and Mission West Properties dated September 21, 1993 filed as Exhibit 10(kk) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10(ll) The Company's 1995 Stock Option Plan filed as Exhibit 10(ll) to the Company's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10(mm) Capital Lease Agreement between the Company and Wells Fargo Leasing Corporation dated October 10, 1996 filed as an Exhibit to the Company's Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference. 10(nn) Capital Lease Agreement between the Company and Wells Fargo Leasing Corporation dated September 9, 1996 filed as an Exhibit to the Company's Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference.
29 32
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10(oo) Memorandum of Lease with respect to the Lease Agreement between the Company and CRPB Investors, L.L.C. dated August 21, 1996, and the Addendum to the Lease Agreement filed as an Exhibit to the Company's Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference. 10(pp) Employment Agreement between the Company and Randal L. Buness dated June 26, 1996 filed as an Exhibit to the Company's Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference. 10(qq) Operating Agreement between the Company and CRPB Investors, L.L.C. dated September 18, 1996 filed as an Exhibit to the Company's Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference. 10(rr) Agreement of Merger and Plan of Reorganization, dated as of October 25, 1996, by and among the Company, C-Route Acquisition, Inc., CROUTE, Inc., COMPUROUTE, INCORPORATED, and Souad Shrime filed as Exhibit 10(rr) to the Company's Registration Statement on Form S-4 (No. 333-15785) and incorporated herein by reference. 10(ss) Agreement and Plan of Merger, dated as of October 25, 1996, by and between COMPUROUTE, INCORPORATED, and CROUTE, Inc. filed as Exhibit 10(ss) to the Company's Registration Statement on Form S-4 (No. 333-15785) and incorporated herein by reference. 10(tt) Purchase and Sale Agreement dated as of October 25, 1996, by and between Souad Shrime and the Company filed as Exhibit 10(tt) to the Company's Registration Statement on Form S-4 (No. 333-15785) and incorporated herein by reference. 10(uu) Indemnification Agreement by Souad Shrime in favor of and for the benefit of the Company and C-Route Acquisition, Inc. filed as Exhibit 10(uu) to the Company's Registration Statement on Form S-4 (No. 333-15785) and incorporated herein by reference. 10(vv) Agreement of Merger and Plan of Reorganization dated January 15, 1997, by and among the Company, EMI Acquisition, Inc., Silicon Valley Test & Repair, Inc., and William and Carol Mayer filed as Exhibit 1 to the Company's Current Report on Form 8-K filed with the Commission on or about January 30, 1997 and incorporated herein by reference. 10(ww) Registration Rights Agreement dated January 15, 1997, by and between the Company and William and Carol Mayer filed as Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on or about January 30, 1997 and incorporated herein by reference. 10(xx) Employment Agreement dated January 15, 1997, by and between the Company and William and Carol Mayer filed as Exhibit 2 to the Company's Current Report on Form 8-K filed with the Commission on or about January 30, 1997 and incorporated herein by reference. 10(yy) Credit Agreement between the Company and Wells Fargo Bank, National Association dated February 28, 1997 filed as Exhibit 10(yy) to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10(zz) Revolving Line of Credit Note between the Company and Wells Fargo Bank, National Associated dated February 28, 1997 filed as Exhibit 10(zz) to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10(aaa) Lease agreement between CompuRoute and Bank One Leasing dated November 17, 1997, filed as exhibit 10(aaa) to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10(bbb) Master Lease Agreement between Company and Bank One Leasing Corporation, dated February 16, 1998, filed as exhibit 10(bbb) to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 11 Schedule of Computation of Net Income (Loss) per Share. 21 List of Subsidiaries. 23 Independent Auditors' Consent. 27.1 Financial Data Schedule for twelve months ended December 31, 1997. 27.2 Restated Financial Data Schedule for twelve months ended December 31, 1996. 27.3 Restated Financial Data Schedule for twelve months ended December 31, 1995.
(B) REPORTS ON FORM 8-K None. 30 33 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 30, 1998 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 Directors March 30, 1998 - ------------------------------------------------ and Director Ross J. Mangano /s/ C. ZANE CLOSE President, Chief Executive Officer, March 30, 1998 - ------------------------------------------------ and Director (Principal Executive C. Zane Close Officer) /s/ RANDAL L. BUNESS Vice President, Chief Financial March 30, 1998 - ------------------------------------------------ Officer, Secretary, and Treasurer Randal L. Buness (Principal Financial and Accounting Officer) /s/ WILLIAM A. FRESH Director March 30, 1998 - ------------------------------------------------ William A. Fresh /s/ KENNETH W. MILLER Director March 30, 1998 - ------------------------------------------------ Kenneth W. Miller /s/ DONALD F. WALTER Director March 30, 1998 - ------------------------------------------------ Donald F. Walter
31 34 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Cerprobe Corporation: We have audited the accompanying consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. 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 subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Phoenix, Arizona February 6, 1998 F-1 35 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- ASSETS Current assets: Cash and cash equivalents................................. $30,347,173 $ 5,564,557 Accounts receivable, net of allowance of $292,000 in 1997 and $223,000 in 1996................................... 10,341,428 5,564,203 Inventories, net.......................................... 8,483,141 3,862,753 Note receivable........................................... -- 250,000 Accrued interest receivable............................... 202,939 6,221 Prepaid expenses.......................................... 388,692 370,782 Income taxes receivable................................... 624,574 214,097 Deferred tax asset........................................ 518,778 303,265 ----------- ----------- Total current assets.............................. 50,906,725 16,135,878 Property, plant and equipment, net.......................... 15,141,902 11,446,291 Intangibles, net............................................ 2,396,301 2,602,812 Other assets................................................ 1,009,916 1,326,592 ----------- ----------- Total assets...................................... $69,454,844 $31,511,573 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,346,039 $ 2,739,064 Accrued expenses.......................................... 3,286,304 1,600,120 Demand note payable....................................... -- 1,030,000 Current portion of notes payable.......................... 139,661 128,180 Current portion of capital leases......................... 629,798 634,755 ----------- ----------- Total current liabilities......................... 8,401,802 6,132,119 Notes payable, less current portion......................... 148,985 278,645 Capital leases, less current portion........................ 1,165,722 1,462,799 Deferred tax liability...................................... 377,701 100,789 Other liabilities........................................... 16,700 394,011 ----------- ----------- Total liabilities................................. 10,110,910 8,368,363 ----------- ----------- Minority interest........................................... 132,437 12,851 Commitments and contingencies Stockholders' equity: Preferred stock, $.05 par value; authorized 10,000,000 shares; issued and outstanding 330 shares of Series A Convertible Preferred Stock, liquidation preference of $3,354,120 in 1996..................................... -- 16 Common stock, $.05 par value; authorized, 10,000,000 shares; issued and outstanding 8,097,979 shares in 1997 and 6,027,714 shares in 1996........................... 404,899 301,386 Additional paid-in capital................................ 55,136,307 20,652,290 Retained earnings......................................... 4,001,642 2,105,674 Foreign currency translation adjustment................... (331,351) 70,993 ----------- ----------- Total stockholders' equity........................ 59,211,497 23,130,359 ----------- ----------- Total liabilities and stockholders' equity........ $69,454,844 $31,511,573 =========== ===========
See accompanying notes to consolidated financial statements. F-2 36 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net sales........................................... $77,110,204 $37,308,199 $26,098,637 Costs of goods sold................................. 45,477,486 20,343,516 13,706,435 ----------- ----------- ----------- Gross margin.............................. 31,632,718 16,964,683 12,392,202 ----------- ----------- ----------- Expenses: Selling, general and administrative............... 19,640,112 10,725,075 7,502,598 Engineering and product development............... 1,603,853 902,909 706,680 Acquisition related expenses...................... 4,996,467 4,584,000 -- ----------- ----------- ----------- Total expenses............................ 26,240,432 16,211,984 8,209,278 ----------- ----------- ----------- Operating income.................................... 5,392,286 752,699 4,182,924 ----------- ----------- ----------- Other income (expense): Interest income................................... 353,367 467,043 44,697 Interest expense.................................. (486,069) (221,248) (153,758) Other income, net................................. 318,416 246,862 140,111 ----------- ----------- ----------- Total other income........................ 185,714 492,657 31,050 ----------- ----------- ----------- Income before income taxes and minority interest.... 5,578,000 1,245,356 4,213,974 Minority interest share of loss..................... 29,715 94,854 -- ----------- ----------- ----------- Income before income taxes.......................... 5,607,715 1,340,210 4,213,974 Provision for income taxes.......................... (3,711,747) (2,701,000) (1,811,727) ----------- ----------- ----------- Net income (loss)................................... $ 1,895,968 $(1,360,790) $ 2,402,247 =========== =========== =========== Net income (loss) per share: Basic............................................. $ 0.28 $ (0.30) $ 0.62 =========== =========== =========== Weighted average number of common shares outstanding.................................... 6,690,265 4,579,598 3,874,459 =========== =========== =========== Diluted........................................... $ 0.27 $ (0.30) $ 0.53 =========== =========== =========== Weighted average number of common and common equivalent shares outstanding.................. 6,982,368 4,579,598 4,666,232 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 37 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NUMBER OF NUMBER OF COMMON PREFERRED SHARES SHARES ADDITIONAL ISSUED AND ISSUED AND COMMON PREFERRED PAID-IN RETAINED UNEARNED OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL EARNINGS COMPENSATION ----------- ----------- -------- --------- ----------- ----------- ------------ Balance, January 1, 1995....... 3,223,351 -- $161,167 $ -- $ 3,685,432 $ 1,064,217 $ -- Issuance of stock options at less than fair market value...................... -- -- -- -- 387,000 -- (387,000) Compensation expense related to stock options........... -- -- -- -- -- -- 145,128 Stock options exercised...... 160,000 -- 8,000 -- 199,464 -- -- Tax benefit from exercise of nonqualified stock options.................... -- -- -- -- 340,170 -- -- Issuance of common stock for acquisition................ 712,500 -- 35,625 -- 2,627,344 -- -- Translation adjustment....... -- -- -- -- -- -- -- Net income................... -- -- -- -- -- 2,402,247 -- --------- ----- -------- ---- ----------- ----------- --------- Balance, December 31, 1995..... 4,095,851 -- $204,792 $ -- $ 7,239,410 $ 3,466,464 $(241,872) Issuance of preferred stock...................... -- 1,000 -- 50 9,399,950 -- -- Conversion of subordinated debentures................. 595,000 -- 29,750 -- 565,250 -- -- Compensation expense related to stock options........... -- -- -- -- (192,489) -- 241,872 Stock options exercised...... 164,702 -- 8,235 -- 556,744 -- -- Tax benefit from exercise of nonqualified stock options.................... -- -- -- -- 542,000 -- -- Conversion of preferred stock for common stock........... 772,161 (670) 38,609 (34) (38,575) -- -- Issuance of common stock for acquisition................ 400,000 -- 20,000 -- 2,580,000 -- -- Translation adjustment....... -- -- -- -- -- -- -- Net loss..................... -- -- -- -- -- (1,360,790) -- --------- ----- -------- ---- ----------- ----------- --------- Balance, December 31, 1996..... 6,027,714 330 $301,386 $ 16 $20,652,290 $ 2,105,674 $ -- Stock options exercised...... 95,265 -- 4,763 -- 811,702 -- -- Issuance of common stock for acquisition................ 175,000 -- 8,750 -- 1,662,062 -- -- Issuance of common stock in secondary offering, net of issuance cost of $226,764................... 1,800,000 -- 90,000 -- 37,015,237 -- -- Preferred stock redemption... -- (330) -- (16) (5,249,984) -- -- Tax benefit from exercise of nonqualified stock options.................... -- -- -- -- 245,000 -- -- Translation adjustment....... -- -- -- -- -- -- -- Net income................... -- -- -- -- -- 1,895,968 -- --------- ----- -------- ---- ----------- ----------- --------- Balance, December 31, 1997..... 8,097,979 -- $404,899 $ -- $55,136,307 $ 4,001,642 $ -- ========= ===== ======== ==== =========== =========== ========= FOREIGN CURRENCY TOTAL TRANSLATION STOCKHOLDERS' ADJUSTMENT EQUITY ----------- ------------- Balance, January 1, 1995....... $ 12,138 $ 4,922,954 Issuance of stock options at less than fair market value...................... -- -- Compensation expense related to stock options........... -- 145,128 Stock options exercised...... -- 207,464 Tax benefit from exercise of nonqualified stock options.................... -- 340,170 Issuance of common stock for acquisition................ -- 2,662,969 Translation adjustment....... (24,692) (24,692) Net income................... -- 2,402,247 --------- ----------- Balance, December 31, 1995..... $ (12,554) $$10,656,240 Issuance of preferred stock...................... -- 9,400,000 Conversion of subordinated debentures................. -- 595,000 Compensation expense related to stock options........... -- 49,383 Stock options exercised...... -- 564,979 Tax benefit from exercise of nonqualified stock options.................... -- 542,000 Conversion of preferred stock for common stock........... -- -- Issuance of common stock for acquisition................ -- 2,600,000 Translation adjustment....... 83,547 83,547 Net loss..................... -- (1,360,790) --------- ----------- Balance, December 31, 1996..... $ 70,993 $$23,130,359 Stock options exercised...... -- 816,465 Issuance of common stock for acquisition................ -- 1,670,812 Issuance of common stock in secondary offering, net of issuance cost of $226,764................... -- 37,105,237 Preferred stock redemption... -- (5,250,000) Tax benefit from exercise of nonqualified stock options.................... -- 245,000 Translation adjustment....... (402,344) (402,344) Net income................... -- 1,895,968 --------- ----------- Balance, December 31, 1997..... $(331,351) $59,211,497 ========= ===========
See accompanying notes to consolidated financial statements. F-4 38 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ----------- ------------ ----------- Cash flows from operating activities: Net income (loss)......................................... $ 1,895,968 $ (1,360,790) $ 2,402,247 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 3,684,591 1,930,341 1,125,584 Purchased research and development...................... 4,496,467 4,584,000 -- Tax benefit from exercise of nonqualified stock options.............................................. 245,000 542,000 340,170 Gain on sale of equipment............................... 12,583 -- 4,787 Deferred income taxes................................... 56,477 2,000 (110,502) Provision for losses on accounts receivable............. 112,000 12,000 12,000 Provision for obsolete inventory........................ 629,000 75,000 80,000 Compensation expense.................................... (33,536) 49,383 145,128 Loss applicable to minority interest in consolidated subsidiaries......................................... (29,715) (94,854) -- Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.................................. (4,065,025) (194,293) (1,444,689) Inventories.......................................... (1,384,298) (812,904) (1,038,216) Prepaid expenses and other assets.................... 297,788 (562,590) (389,988) Income taxes receivable.............................. (410,477) (50,633) (163,464) Accounts payable and accrued expenses................ 921,054 1,229,408 1,101,238 Accrued income taxes................................. -- -- (376,442) Other liabilities.................................... -- 311,947 (42,289) ----------- ------------ ----------- Net cash provided by operating activities:......... 5,921,535 5,660,015 1,645,564 ----------- ------------ ----------- Cash flows from investing activities: Purchase of property, plant and equipment................. (6,386,534) (4,922,960) (1,960,775) Investment in CRPB Investors, L.L.C....................... 107,292 (659,233) -- Purchase of SVTR, Inc. net of cash acquired............... (2,590,697) -- -- Purchase of Fresh Test Technology Corp., net of cash acquired................................................ -- -- (81,698) Purchase of CompuRoute, Inc., net of cash acquired........ (80,102) (4,327,162) -- Proceeds from sale of equipment........................... 74,684 -- 42,062 (Issuance) payment of notes receivable.................... 250,000 (250,000) -- ----------- ------------ ----------- Net cash used in investing activities.............. (8,625,357) (10,159,355) (2,000,411) ----------- ------------ ----------- Cash flows from financing activities: Principal payments on notes payable and capital leases.... (4,882,920) (356,015) (302,563) Net proceeds from issuance of preferred stock............. -- 9,400,000 -- Redemption of preferred stock............................. (5,250,000) -- -- Net proceeds from issuance of common stock................ 37,105,237 -- -- Net proceeds from exercise of stock options............... 816,465 564,979 207,464 Capital contribution by minority interest partners........ 100,000 107,705 -- ----------- ------------ ----------- Net cash provided by (used in) financing activities....................................... 27,888,782 9,716,669 (95,099) ----------- ------------ ----------- Effect of exchange rates on cash and cash equivalents....... (402,344) 83,547 (24,692) ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents........ 24,782,616 5,300,876 (474,638) Cash and cash equivalents, beginning of year................ 5,564,557 263,681 738,319 ----------- ------------ ----------- Cash and cash equivalents, end of year...................... $30,347,173 $ 5,564,557 $ 263,681 =========== ============ ===========
See accompanying notes to consolidated financial statements. F-5 39 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Supplemental schedule of non-cash financing activities: Conversion of subordinated debentures............. $ -- $ 595,000 $ -- =========== =========== =========== Equipment acquired under capital leases and issuance of note payable....................... $ 357,010 $ 1,553,968 $ 1,056,817 =========== =========== =========== Supplemental disclosures of cash flow information: Interest paid..................................... $ 486,069 $ 218,383 $ 153,690 =========== =========== =========== Income taxes paid................................. $ 3,937,456 $ 2,060,000 $ 1,679,876 =========== =========== =========== Supplemental disclosures of non-cash investing activities: The Company made acquisitions for $4.5 million, $7.4 million and $3.1 million in the years ended December 31, 1997, 1996 and 1995, respectively. The purchase prices were allocated to the assets acquired and liabilities assumed based on their fair values as indicated in the notes to the consolidated financial statements. A summary of the acquisitions is as follows: Purchase price.................................... $ 4,546,825 $ 7,432,543 $ 3,065,834 Less cash acquired................................ (285,316) (505,381) (321,167) Common stock issued............................... (1,670,812) (2,600,000) (2,662,969) ----------- ----------- ----------- Cash invested.................................. $ 2,590,697 $ 4,327,162 $ 81,698 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 40 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Cerprobe Corporation offers comprehensive solutions for semiconductor test integration and is a leading manufacturer of probe cards, automatic test equipment ("ATE") interface assemblies, and ATE test boards. The Company believes it is the only company that designs, manufactures, and assembles each of the electromechanical components that assure the integrity of the electrical test signal that passes from the ATE to the integrated circuits ("ICs") device under test. The Company also refurbishes, reconfigures, and services wafer probers. The Company's products and services enable semiconductor manufacturers to test ICs in wafer form and as packaged ICs. Testing ICs assures IC quality, reduces manufacturing costs, improves the accuracy of manufacturing yield data, and identifies repairable memory ICs. The Company markets its products and services worldwide to semiconductor manufacturers, both those who manufacture ICs for resale and those who manufacture ICs for inclusion in their own products. Unless the context indicates otherwise, all references to "Cerprobe" or the "Company" refer to Cerprobe Corporation and its subsidiaries. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Cerprobe and its subsidiaries: Cerprobe Europe Limited, Cerprobe Asia Holdings PTE LTD, CompuRoute, Inc., SVTR, Inc. and Cobra Venture Management, Inc. Cerprobe Asia Holdings PTE LTD together with Asian investors, formed Cerprobe Asia PTE LTD in 1995. Cerprobe Asia Holdings PTE LTD is a 70% owner of Cerprobe Asia PTE LTD. Cerprobe Asia PTE LTD created wholly-owned subsidiaries, Cerprobe Singapore PTE LTD and Cerprobe Taiwan Co. LTD, to operate full service sales and manufacturing plants. Cerprobe Singapore became operational in April of 1996 and Cerprobe Taiwan in January of 1997. All significant intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of December 31, 1996 includes the assets and liabilities of CompuRoute, Inc. ("CompuRoute") a wholly-owned subsidiary, acquired on December 27, 1996; the consolidated financial statements do not include the 1996 operations of CompuRoute, Inc. due to the date of acquisition. On January 15, 1997, the company acquired all of the outstanding stock of STVR, Inc., ("SVTR"), a company that refurbishes, reconfigures, and services wafer probing equipment. Accordingly, the consolidated financial statements as of and for the year ended December 31, 1997 include SVTR's activities since the date of acquisition. On March 17, 1997, the Company entered into a joint venture with Upsys Reseau Eurisys ("Upsys"), a French company owned by IBM and GAME, a French test and engineering company. The joint venture, called Upsys-Cerprobe, L.L.C., assembles and repairs the Cobra Probe in Arizona for distribution by Cerprobe throughout the United States and Asia. Cerprobe owns 55% of the joint venture and Upsys owns 45%. Accordingly, the consolidated financial statements as of and for the year ended December 31, 1997 include the activities of Upsys-Cerprobe since the formation of the venture. The Company manages the joint venture and established a wholly owned subsidiary called Cobra Venture Management, Inc. to function as manager of Upsys-Cerprobe, L.L.C. F-7 41 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On August 18, 1997, Cerprobe Asia Holdings PTE LTD sold 10% of its ownership in Cerprobe Asia PTE LTD to a Taiwanese investor. Accordingly, the consolidated financial statements as of and for the year ended December 31, 1997 reflect a 60% ownership in Cerprobe Asia PTE LTD since the transaction date. 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 maturities of three months or less. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated by the straight-line method over the following estimated useful lives: Building.................................................... 39 years Manufacturing tools and equipment........................... 3-7 years Office furniture and equipment.............................. 3-7 years Computer hardware and software.............................. 3-5 years Leasehold improvements...................................... Life of lease
INTANGIBLES Intangibles consists of goodwill, patents and technology. 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. Patents and technology are stated at fair market value at the date of acquisition 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. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of intangibles may warrant revision or that the remaining balances may not be recoverable. When factors indicate that the assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the assets in measuring whether the asset is recoverable. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, 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. F-8 42 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Europe and Asia subsidiaries are translated into US dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". Assets and liabilities of the subsidiaries are translated into US 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. All transaction gains or losses are recorded in the statement of operations. REVENUE RECOGNITION The Company records revenue when goods are shipped. NET INCOME (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. STOCK BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS No. 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (2) INVENTORIES Inventories consist of the following:
1997 1996 ---------- ---------- Raw materials....................................... $7,614,152 $3,328,422 Work-in-process..................................... 1,075,353 615,360 Finished goods...................................... 127,636 47,971 Reserve for obsolete inventories.................... (334,000) (129,000) ---------- ---------- $8,483,141 $3,862,753 ========== ==========
F-9 43 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1997 1996 ----------- ----------- Land.............................................. $ 364,017 $ 359,253 Building.......................................... 1,973,704 1,947,877 Manufacturing tools and equipment................. 11,315,590 8,789,140 Office furniture and equipment.................... 2,120,917 1,063,547 Leasehold improvements............................ 1,856,107 1,112,576 Computer hardware and software.................... 3,903,769 2,402,551 Construction in progress.......................... 807,811 483,591 Accumulated depreciation and amortization......... (7,200,013) (4,712,244) ----------- ----------- $15,141,902 $11,446,291 =========== ===========
(4) INTANGIBLES Intangibles consist of the following:
1997 1996 ---------- ---------- Goodwill............................................ $3,089,740 $3,009,638 Patents and technology.............................. 207,794 90,839 Accumulated amortization............................ (901,233) (497,665) ---------- ---------- $2,396,301 $2,602,812 ========== ==========
(5) OTHER ASSETS Other assets consist of the following:
1997 1996 ---------- ---------- Investment in CRPB Investors, L.L.C................. $ 551,941 $ 659,233 Deferred compensation............................... -- 343,755 Other assets and deposits........................... 457,975 323,604 ---------- ---------- $1,009,916 $1,326,592 ========== ==========
In September 1996, the Company acquired a 36% interest in CRPB Investors, L.L.C., for $659,233. CRPB Investors, L.L.C., an Arizona limited liability company, was formed for the purpose of owning and operating the 83,000 square foot facility which serves as Cerprobe's worldwide headquarters. The investment is accounted for by the equity method of accounting. In 1997, approximately $107,000 was received by Cerprobe as a distribution from CRPB Investors, L.L.C. In November 1997, the Company liquidated the deferred compensation plan. F-10 44 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) ACCRUED EXPENSES Accrued expenses consist of the following:
1997 1996 ---------- ---------- Accrued payroll and related taxes................... $2,369,411 $1,070,777 Other accrued expenses.............................. 916,893 529,343 ---------- ---------- $3,286,304 $1,600,120 ========== ==========
(7) DEMAND NOTE PAYABLE On December 27, 1996, the Company assumed a demand note with Security Bank of Garland, Texas for approximately $1,030,000 on the purchase of land and building occupied by CompuRoute, Inc., located in Dallas, Texas. Interest on the outstanding balance was 1.00% in excess of the prime rate. The note was paid in full in October 1997. (8) NOTES PAYABLE AND CAPITAL LEASES In February 1997, the Company entered into a $10,000,000 revolving line of credit agreement with Wells Fargo Bank for general corporate purposes and possible future acquisitions, which matures on August 15, 1998. Interest on the outstanding balance is at the prime rate or 30, 60, or 90 day LIBOR plus 1.75%. The non-use fee under the line of credit is 0.125% for the outstanding balances exceeding $3,000,000 and 0.25% for outstanding balances less than $3,000,000. The line of credit contains certain restrictive covenants which include, among other things, restrictions of the declaration or payment of dividends, the incurrance or assumption of other indebtedness, and the making of loans to or investments in others. The line also requires the Company to maintain a specified net worth, as defined, to maintain a required debt to equity ratio, and to maintain certain other financial ratios. The Company was in compliance with all covenants as of December 31, 1997. There were no amounts outstanding under this agreement as of December 31, 1997. In May 1997, the Company entered into a $3,000,000 lease line of credit agreement, which matures February 28, 1998, with Banc One Leasing Corporation. The maximum term for each lease schedule may not exceed 60 months. Pricing is indexed to like term treasuries plus 170 basis points. Advances are collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware. On November 17, 1997, the Company financed $357,010 for manufacturing equipment. The note accrues interest at 7.49% annually with monthly payments of $7,152, including interest for 60 months. As of December 31, 1997, there was $347,132 outstanding under the note. In February 1998, the Company entered into a new lease line of credit agreement with Banc One Leasing Corporation that replaced the previous line. The $5,000,000 lease line of credit, which matures February 28, 1999, has a maximum lease term for each lease of 60 months. Pricing is indexed to like term treasuries plus 150 basis points. Advances are collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware. Long-term debt consists of the following:
1997 1996 -------- -------- Notes payable.......................................... 288,646 406,825 Less current portion................................... (139,661) (128,180) -------- -------- Notes payable, less current portion.................... $148,985 $278,645 ======== ========
F-11 45 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Annual maturities of long-term debt are as follows: 1998.............................................. $139,661 1999.............................................. 148,985 -------- $288,646 ========
The Company has a note payable for the purchase of equipment which accrues interest at 9.4%. A monthly payment of $13,185 including interest is due through December 1999. (9) STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In January 1996, the Company issued 1,000 shares of convertible preferred stock for $10,000,000. Net proceeds, after deducting expenses, were $9,400,000. During 1996, 670 shares of convertible preferred stock were converted into 772,161 shares of common stock. On August 25, 1997, the Company redeemed the remaining 330 shares of convertible preferred stock for $5,250,000 in cash. The redemption was funded through an advance on the Company's line of credit, which was paid off in September 1997, with the proceeds from the Secondary Offering. As of December 31, 1997, no shares of convertible preferred stock were outstanding. WARRANTS AND NON-EMPLOYEE STOCK OPTIONS Additionally, the Company issued 39,275 common stock warrants in January 1996. These warrants give the holder the right to purchase from the Company not more than 39,275 fully paid and non-assessable shares of the Company's common stock, $.05 par value, at a price of $16.55 per share on or after January 16, 1997, with expiration in January 2001. In October 1996, 10,000 common stock options were issued to Silverman Heller Associates. These options give the holder the right to purchase not more than 10,000 fully paid and non-assessable shares of the Company's common stock, $.05 par value, at a price of $9.00 per share. (10) INCOME TAXES The components of the provision for income taxes are as follows:
1997 1996 1995 ---------- ---------- ---------- Foreign........................................ $ 115,763 $ -- $ -- Federal........................................ 2,792,531 2,093,000 1,391,499 State.......................................... 803,453 608,000 420,228 ---------- ---------- ---------- $3,711,747 $2,701,000 $1,811,727 ========== ========== ========== Current........................................ $3,655,270 $2,699,000 $1,922,229 Deferred....................................... 56,477 2,000 (110,502) ---------- ---------- ---------- $3,711,747 $2,701,000 $1,811,727 ========== ========== ==========
F-12 46 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the provision for income taxes and income taxes at the United States federal corporate income tax rate of 34% is as follows:
1997 1996 1995 ---------- ---------- ---------- Income tax expense at federal corporate rate... $1,906,623 $ 456,000 $1,433,000 State income taxes, net of federal Tax benefit...................................... 529,980 362,700 253,000 Purchased research and development not benefited.................................... 1,528,799 1,558,560 -- Foreign losses not benefited (income taxed at lower than U.S. federal rate)................ (79,408) 167,450 199,000 Amortization of intangibles.................... 131,406 90,200 67,000 Foreign sales corporation benefit.............. (82,501) -- -- Nontaxable income.............................. (79,013) Utilization of net operating loss carryforwards................................ (47,706) -- (38,045) Research tax credit............................ -- -- (54,440) Other.......................................... (96,433) 66,090 47,788 ---------- ---------- ---------- $3,711,747 $2,701,000 $1,811,727 ========== ========== ==========
The components of the Company's deferred tax asset and deferred tax liability are as follows:
1997 1996 ---------- ---------- Deferred tax assets: Foreign tax loss carry forward............................ $ 177,554 $ 545,000 Reserves and accruals not currently deductible............ 518,778 303,265 Deferred compensation..................................... -- 87,747 ---------- ---------- Total gross deferred tax assets................... 1,208,248 936,012 Less valuation allowance.................................. (177,554) (545,000) ---------- ---------- Deferred tax asset........................................ 518,778 391,012 ---------- ---------- Deferred tax liability: Difference between book and tax depreciation of property, plant and equipment.................................... 377,701 188,536 ---------- ---------- Net deferred tax asset.................................... $ 141,077 $ 202,476 ========== ==========
The valuation allowance increased by $144,470 and $80,000 in 1997 and 1996 respectively, and is due 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 management believes realization of the deferred tax assets is considered more likely than not. During 1997 and 1996, tax benefits were recorded for the exercise of stock options under the Company's stock option plans. The benefits of $245,000 and $542,000 were recorded as additional paid-in capital. (11) STOCK OPTION PLANS The Company adopted in 1983, 1989, and 1995, respectively, an incentive stock option plan, a nonqualified stock option plan, and a combination stock option plan. The combined plans provided for the issuance of options to purchase 1,985,000 shares of the Company's common stock, of which 366,334 were available for grant as of December 31, 1997. 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 of the Board of Directors and are exercisable for a period of 5 to 10 years. The Company extended the exercise date on 72,000 options issued F-13 47 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under the nonqualified stock option plan in 1995. Compensation expense related to these options was $49,383 and $145,128 during the years ended December 31, 1996 and 1995, respectively. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123 and it has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value of each option granted for 1997, 1996, and 1995 was estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996, and 1995, respectively; risk-free interest rates of 5.6%, 6.1%, and 5.8%; dividend yields of zero for all years; volatility factors of the expected market price of the Company's common stock of 52%, 53%, and 51%, respectively; and weighted average expected lives of the options of 3 years for all years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma net income (loss) reflects only options granted in 1997, 1996, and 1995. Therefore, the full impact of calculating compensation cost for employee stock options under SFAS No. 123 is not reflected in the pro forma amounts presented below because compensation cost is reflected over the options' vesting periods of generally between 3 and 4 years and the compensation cost for options granted prior to January 1, 1995 is not considered. The Company's pro forma information follows:
1997 1996 1995 ---------- ----------- ---------- UNAUDITED --------------------------------------- Net income (loss)............... As reported $1,895,968 $(1,360,790) $2,402,247 Pro forma $1,784,019 $(1,470,158) $2,377,094 Basic net income (loss) per As reported $ 0.28 $ (0.30) $ 0.62 share......................... Pro forma $ 0.27 $ (0.32) $ 0.62 Diluted net income (loss) per As reported $ 0.27 $ (0.30) $ 0.53 share......................... Pro forma $ 0.26 $ (0.32) $ 0.52
F-14 48 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's employee stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 ------------------ -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- --------- -------- --------- -------- Outstanding at beginning of year................. 593,631 $ 8.46 598,333 $ 6.44 562,333 $ 3.52 Granted................. 153,000 $10.38 160,000 $10.86 206,000 $10.42 Exercised............... (95,265) $ 8.57 (164,702) $ 3.43 (160,000) $ 1.30 Expired/Canceled........ (11,500) 12.88 0 (10,000) $ 6.75 ------- --------- --------- Outstanding at end of year................. 639,866 $ 8.81 593,631 $ 8.46 598,333 $ 6.44 ======= ========= ========= Exercisable at end of year................. 367,320 $ 7.45 360,233 $ 6.94 347,940 $ 4.68 ======= ========= ========= Weighted average fair value of options granted.............. $ 4.16 $ 4.45 $ 4.20 ======= ========= =========
Exercise prices for the options outstanding as of December 31, 1997 ranged from $5.50 to $12.75. The weighted average remaining contractual life of those options was approximately 7 years as of December 31, 1997. (12) LEASES 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 and equipment and office furniture at a cost of $2,962,383 and $3,381,836 with related accumulated amortization of $1,184,886 and $896,637 as of December 31, 1997 and 1996, 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. On August 21, 1996, Cerprobe entered into a long term commercial operating lease to consolidate its Arizona operations into a single facility on a twelve acre parcel in Gilbert, Arizona. The lease commenced upon the completion of the 83,000 square foot facility in May 1997. The facility serves as the Company's worldwide headquarters and was built for Cerprobe's use by CRPB Investors, L.L.C., a limited liability company formed for the purpose of owning and operating the property. Cerprobe is a 36% shareholder in CRPB Investors, L.L.C. The initial term of the lease is 15 years with 7 options to extend the lease for successive 5 year terms. The initial lease rate is $875,000 per year. F-15 49 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ---------- ----------- ---------- 1998........................................... $ 766,498 $ 1,925,880 $ 75,300 1999........................................... 566,155 1,784,071 78,900 2000........................................... 437,394 1,689,968 47,600 2001........................................... 218,166 1,595,721 -- 2002........................................... 71,523 1,507,164 -- Thereafter..................................... -- 10,594,636 -- ---------- ----------- -------- Total minimum future lease payments............ $2,059,736 $19,097,440 $201,800 =========== ======== Less amounts representing interest (at rates ranging from 4.5% to 10.5%).................. (264,216) ---------- Present value of net minimum future lease payments..................................... $1,795,520 Less current portion........................... (629,798) ---------- Long-term portion.............................. $1,165,722 ==========
Amortization expense applicable to assets under capital leases is charged to depreciation and amortization expense. Rental expense for the years ended December 31, 1997, 1996 and 1995 was $1,915,544, $1,002,856 and $723,396, respectively. (13) BUSINESS SEGMENT The Company is engaged in the design, development, manufacture and market of semiconductor integrated circuit test products and services. For the years ended December 31, 1997, 1996 and 1995, 17%, 20% and 11%, respectively, of the Company's sales were shipped to customers outside of the United States. One customer accounted for 17%, 16% and 19% of net sales for the years ended December 31, 1997, 1996 and 1995. The accounts receivable from that customer at December 31, 1997, and 1996 was $1,081,424 and $449,380 respectively. (14) ACQUISITIONS FRESH TEST TECHNOLOGY CORPORATION On April 3, 1995, the Company acquired all of the outstanding stock of Fresh Test Technology Corporation ("Fresh Test"), a manufacturer of test and interface hardware products, 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 F-16 50 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) basis over eight years. The purchase price of $2,662,969 plus acquisition costs of $402,865 was allocated as follows: Purchase price: Common Stock........................................... $2,662,969 Costs of acquisition................................... 402,865 ---------- $3,065,834 ========== Assets acquired and liabilities assumed: Current assets......................................... $1,252,176 Property, plant and equipment.......................... 253,684 Other assets........................................... 83,051 Goodwill............................................... 2,120,505 Current liabilities.................................... (531,634) Noncurrent liabilities................................. (111,948) ---------- $3,065,834 ==========
The operating results of Fresh Test have been included in the consolidated statement of operations 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 on January 1, 1995:
YEAR ENDED DECEMBER 31, 1995 ------------ Net sales................................................... $27,601,795 Net income.................................................. 2,543,690 Basic net income per share.................................. 0.62 Diluted net income per share................................ 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 1995 or as a projection of future results. COMPUROUTE, INC. On December 27, 1996, the Company acquired all of the outstanding stock of CompuRoute, Inc. ("CompuRoute"), a manufacturer of printed circuit boards, for $7,037,797. The purchase price consisted of $4,437,797 in cash and 400,000 shares of 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 acquired and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired was $969,235 and has been recorded as goodwill, which is being amortized on a straight-line basis over eight years. The purchase price of $7,037,797 plus acquisition costs of $474,848 (which includes $80,102 of acquisition costs paid in 1997) was allocated as follows. F-17 51 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Purchase price: Cash...................................................... $ 4,437,797 Common stock.............................................. 2,600,000 Costs of acquisition...................................... 474,848 ----------- $ 7,512,645 =========== Assets acquired and liabilities assumed: Current assets............................................ $ 1,870,903 Property, plant and equipment............................. 1,948,189 Other assets.............................................. 18,498 Purchased research and development........................ 4,584,000 Goodwill.................................................. 969,235 Current liabilities....................................... (1,177,286) Noncurrent liabilities.................................... (700,894) ----------- $ 7,512,645 ===========
At acquisition, the state of the research and development products was not yet at a technological or commercially viable stage. The Company did not believe that the research and development products had any future alternative use because if these products were not finished and brought to ultimate product completion, they would have no other value. Therefore, consistent with generally accepted accounting principles, the Company recorded a one-time charge for the full value of the purchased research and development. The consolidated balance sheet as of December 31, 1996 includes the accounts of CompuRoute; however, due to the fact that the acquisition occurred on December 27, 1996, CompuRoute's 1996 results of operations are not included in the consolidated statements of operations. The following summary, prepared on a pro forma basis, excluding the charge for purchased research and development, presents the results of operations as if the acquisition had occurred on January 1, 1995:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- (UNAUDITED) Net sales................................................. $47,732,502 $36,296,077 Net income................................................ 3,585,440 3,261,074 Basic net income per share................................ 0.78 0.84 Diluted net income per share.............................. 0.67 0.70
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 1995 or as a projection of future results. SVTR, INC. On January 15, 1997, the Company acquired all of the outstanding stock of SVTR, a company that refurbishes, reconfigures, and services wafer probing equipment for $5,617,467 excluding costs of acquisition. The purchase price consisted of $2,753,217 in cash and 300,000 shares of common stock. The acquisition has been accounted for under the purchase method of accounting and accordingly, the purchase price has been allocated to assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. On August 18, 1997, a letter of understanding detailing the settlement of certain open terms related to the purchase of SVTR, was signed by the former owners of SVTR. In general, the letter of understanding required F-18 52 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the former owners to return 125,000 shares of the Company's common stock then held in escrow to the Company. In addition, the former owners were required to release any claims or interest they may have to receive any payments or shares of common stock of the Company with respect to an earnout provision detailed in the January 15, 1997 agreement of merger between the two entities. On September 26, 1997, a formal agreement was signed consummating the details in the letter of understanding. As a result, the Company has recorded a $1,167,689 reduction in previously recorded acquisition related expenses. The re-negotiated purchase price of $4,546,825 including acquisition costs of $122,796 was allocated as follows: Purchase price: Cash...................................................... $ 2,753,217 Common stock.............................................. 1,670,812 Costs of acquisition...................................... 122,796 ----------- $ 4,546,825 =========== Assets acquired and liabilities assumed: Current assets............................................ $ 4,918,904 Property, plant and equipment............................. 517,413 Other assets.............................................. 146,867 Purchased research and development........................ 4,496,467 Current liabilities....................................... (4,795,473) Noncurrent liabilities.................................... (737,353) ----------- $ 4,546,825 ===========
The following summary, prepared on a pro forma basis, excluding the charges for purchased research and development, presents the results of operations as if the acquisitions of CompuRoute and SVTR had occurred on January 1, 1996:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ----------- ----------- (UNAUDITED) Net sales................................................. $77,163,584 $62,269,096 Net income................................................ 6,552,369 2,951,871 Basic net income per share................................ 0.98 0.64 Diluted net income per share.............................. 0.94 0.55
The pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 1996 and are not a projection of future results. (15) 401(K) PLAN The Company established the Cerprobe Corporation 401(k) Plan ("the Plan") in 1993. Employees who have reached 18 years of age and who have completed 90 days 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 and only for those participants who have completed one year of service for the Company. The Company expensed discretionary contributions pursuant to the Plan F-19 53 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the amount of $241,000, $91,000, and $90,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The participants are fully vested in their and the Company's contributions. (16) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 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 equivalents approximates fair value because their maturity is generally less than three months. The carrying amount of 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, demand note 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. (17) SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1997, 1996 and 1995 follows:
BALANCE AT BALANCE BEGINNING AT END OF YEAR ADDITIONS ACQUISITIONS DEDUCTIONS OF YEAR ---------- --------- ------------ ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1997................. $223,000 $112,000 $ 12,000 $ (55,000) $292,000 Year ended December 31, 1996................. $173,000 $ 12,000 $ 44,000 $ (6,000) $223,000 Year ended December 31, 1995................. $ 23,000 $ 12,000 $139,094 $ (1,094) $173,000 Allowance for obsolescence of inventories: Year ended December 31, 1997................. $129,000 $629,000 $ 82,000 $(506,000) $334,000 Year ended December 31, 1996................. $ 83,000 $ 75,000 $ -- $ (29,000) $129,000 Year ended December 31, 1995................. $ 52,000 $ 80,000 $ 30,600 $ (79,600) $ 83,000
F-20 54 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (18) NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
1997 1996 1995 ---------- ----------- ---------- Net income (loss)............................. $1,895,968 $(1,360,790) $2,402,247 Convertible debenture interest after tax affect...................................... -- -- 53,291 ---------- ----------- ---------- Income (loss) available to common stockholders................................ $1,895,968 $(1,360,790) $2,455,538 ========== =========== ========== Weighted average outstanding common shares.... 6,690,265 4,579,598 3,874,459 Effect of dilutive securities: Stock options............................... 292,103 194,883 196,773 Convertible preferred stock................. -- 553,858 -- Convertible debentures...................... -- -- 595,000 Antidilutive effect of dilutive securities............................... -- (748,741) -- ---------- ----------- ---------- Weighted average and common equivalent shares outstanding................................. 6,982,368 4,579,598 4,666,232 ========== =========== ========== Basic net income (loss) per share............. $ 0.28 $ (0.30) $ 0.62 ========== =========== ========== Diluted net income (loss) per share........... $ 0.27 $ (0.30) $ 0.53 ========== =========== ==========
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- YEAR ENDED DECEMBER 31, 1997 - --------------------------------- Net sales................................... $15,899 $18,684 $19,886 $22,641 Gross profit................................ 6,505 7,675 8,187 9,266 Operating income (loss)..................... (4,285) 2,556 4,194 2,927 Net income (loss)........................... (4,895) 1,589 2,962 2,240 Basic net income (loss) per share........... (0.78) 0.25 0.47 0.28 Diluted net income (loss) per share......... (0.78) 0.24 0.44 0.27 Basic weighted average common shares outstanding............................... 6,293 6,353 6,316 8,068 Diluted weighted average and common equivalent shares outstanding............. 6,293 6,596 6,733 8,431 YEAR ENDED DECEMBER 31, 1996 - --------------------------------- Net sales................................... $ 9,700 $ 9,660 $ 8,799 $ 9,149 Gross profit................................ 4,528 4,485 3,861 4,091 Operating income (loss)..................... 1,817 1,542 920 (3,526) Net income (loss)........................... 1,007 861 663 (3,892) Basic net income (loss) per share........... 0.24 0.19 0.14 (0.73) Diluted net income (loss) per share......... 0.18 0.15 0.11 (0.73) Basic weighted average common shares outstanding............................... 4,185 4,446 4,690 5,362 Diluted weighted average and common equivalent shares outstanding............. 5,548 5,878 5,821 5,362
Basic and diluted net income (loss) per share amounts have been restated to reflect the adoption of SFAS No. 128. F-21 EX-10.AAA 2 EX-10.AAA 1 10 (aaa) Ex-10(aaa) FINANCING LEASE [BANK ONE LOGO (R)] LEASE SCHEDULE NO. 1000063309 LESSOR: BANC ONE LEASING CORPORATION LESSEE: COMPUROUTE, INC. 1. GENERAL. Reference is made to the Master Lease Agreement dated as of November 17, 1997, as amended from time to time ("Master Lease"), between the above Lessee and Lessor. This Lease Schedule is signed and delivered under the Master Lease. Unless otherwise defined herein, capitalized terms defined in the Master Lease will have the same meaning when used in this Schedule. 2. FINANCING. Lessor finances for Lessee, and Lessee finances with Lessor, all of the property ("Equipment") described below:
Quantity Description (New Unless Specified as Used) Amount Financed - -------- ------------------------------------------ --------------- See Attached Schedule A-1 Equipment Cost 356,635.51 Documentation Fee 375.00 Sales Tax 0.00 TOTAL $357.010.51 ===========
3. FINANCING TERM AND INSTALLMENT PAYMENTS. The Lease Term for the Equipment begins on the earlier of the Acceptance Date or the Commencement Date and continues for the number of months after the Commencement Date as stated in the Lease Term box below. The Acceptance Date is the date that Lessor accepts this Schedule as stated below Lessor's signature. The Commencement Date is the [ ] 1st [X] 15th day of the month in which the Acceptance Date occurs.
Lease Term Number of Payments Installment Payments (excluding Taxes) 60 Months 60 60 MONTHLY 7,152.06
PAYMENT DUE DATES: On the Commencement Date and on the same day of each Month thereafter until paid in full. Total Advance Payment of $0.00 to be applied as follows: $0.00 Security Deposit $0.00 First and Last 0 Payment(s) $0.00 Set-up/Filing/Search Fees $0.00 Other (Specify) Lessee shall pay to Lessor all amounts stated above on the due dates stated above, except that the Total Advance Payment is due on the Commencement Date. There shall be added to each installment payment all applicable Taxes as in effect from time to time. 4. SECURITY INTEREST. This Schedule is not intended to be a true lease, but is intended to be a secured debt financing transaction. As collateral security for payment and performance of all Secured Obligations (as defined in Paragraph A on the reverse side of this Schedule) and to induce Lessor to extend credit from time to time to Lessee (under the Lease or otherwise). Lessee hereby grants to Lessor a first priority security interest in all of Lessee's right, title and interest in the Equipment, whether now existing or hereafter acquired, and in all Proceeds (as defined in Paragraph A on the reverse side of this Schedule). Lessee represents, warrants and agrees that Lessee currently is the lawful owner of the Equipment and that good and marketable title to the Equipment shall remain with Lessee at all times. Lessee represents, warrants and agrees: that Lessee has granted to Lessor a first priority security interest in the Equipment and all Proceeds; and that the Equipment and all Proceeds are, and at all times shall be, free and clear of any Liens other than Lessor's security interest therein. Lessee at its sole expense will protect and defend Lessor's first priority security interest in the Equipment against all claims and demands whatsoever. 5. LESSEE'S ASSURANCES. Lessee irrevocably and unconditionally: (a) reaffirms all of the terms and conditions of the Master Lease and agrees that the Master Lease remains in full force and effect; (b) agrees that the Equipment is and will be used at all times solely for commercial purposes, and not for personal, family or household purposes; and (c) incorporates all of the terms and conditions of the Master Lease as if fully set forth in this Schedule. 6. PURCHASE ORDERS AND ACCEPTANCE OF EQUIPMENT. Lessee agrees that (i) Lessor has not selected, manufactured, sold or supplied any of the Equipment, (ii) Lessee has selected all of the Equipment and its suppliers, and (iii) Lessee has received a copy of, and approved, the purchase orders or purchase contracts for the Equipment. AS BETWEEN LESSEE AND LESSOR, LESSEE AGREES THAT: (a) LESSEE HAS RECEIVED, INSPECTED AND APPROVED ALL OF THE EQUIPMENT; (b) ALL EQUIPMENT IS IN GOOD WORKING ORDER AND COMPLIES WITH ALL PURCHASE ORDERS OR CONTRACTS AND ALL APPLICABLE SPECIFICATIONS; (c) LESSEE IRREVOCABLY ACCEPTS ALL EQUIPMENT FOR PURPOSES OF THE LEASE "AS-IS, WHERE-IS" WITH ALL FAULTS; AND (d) LESSEE UNCONDITIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO REVOKE ITS ACCEPTANCE OF THE EQUIPMENT. 7. MISCELLANEOUS: At the end of lease term, Lessee shall make a final payment of $1.00. Principal Amount: $357,010.51 Interest Rate Per Annum: 7.49% Lessee Promises to pay said principal amount, with interest at said rate, in the amount and at the times stated in this schedule. Interest calculated on basis of a 360-Day year. LESSEE HAS READ AND UNDERSTOOD ALL OF THE TERMS OF THIS SCHEDULE. LESSEE AGREES THAT THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS WITH LESSOR REGARDING THE EQUIPMENT OR THIS SCHEDULE. THIS SCHEDULE IS EXPRESSLY SUBJECT TO THE TERMS AND CONDITIONS ON THE REVERSE SIDE OF THIS SCHEDULE. Accepted By: COMPUROUTE, INC. BANC ONE LEASING CORPORATION ------------------------------------ (Name of Lessee) By: By: /s/ Alexander D. Wasserzug --------------------------- --------------------------------- Title: Title: President ------------------------ ------------------------------ Acceptance Date: Witness Signature: /s/ Terry A. Ritz -------------- ------------------ White: Lessor's Original Yellow: Duplicate Pink: Duplicate MM-3A (3/94) 2 CORPORATE LEASE ACKNOWLEDGEMENT State of Texas : ------------- : :SS County of Dallas : ------------- : The above mentioned foregoing instrument, was acknowledged before me this 11/17, 1997 by (Officers' Name) ALEXANDER D. WASSERZUG, (Officer's Title) - ----- -- ----------------------- PRESIDENT, of COMPUROUTE, INC., a DELAWARE corporation, on behalf of the - --------- ---------------- -------- corporation. /s/ Linda J. Adams --------------------------------- [Notary Seal] Notary Public Commission Expires 6/23/98 -------------- 3 [BANK1ONE LOGO (R)] Banc One Leasing Corporation MASTER LEASE AGREEMENT This MASTER LEASE AGREEMENT is made, entered and dated as of NOVEMBER 17, 1997, by and between: LESSOR: LESSEE: BANC ONE LEASING CORPORATION COMPUROUTE, INC. 1111 Polaris Parkway, Suite A-3 10365 SANDEN DRIVE Columbus, Ohio 43240 DALLAS, TX 75238 1. LEASE OF EQUIPMENT: Lessor leases to Lessee, and Lessee leases from Lessor, all the property described in the Lease Schedules which are signed from time to time by Lessor and Lessee. 2. CERTAIN DEFINITIONS: "Schedule" means each Lease Schedule signed by Lessee and Lessor which incorporates the terms of this Master Lease Agreement, together with all exhibits, riders, attachments and addenda thereto. "Equipment" means the property described in each Schedule, together with all attachments, additions, accessions, parts, repairs, improvements, replacements and substitutions thereto. "Lease", "herein", "hereunder", "hereof" and similar words mean this Master Lease Agreement and all Schedules, together with all exhibits, riders, attachments and addenda to any of the foregoing, as the same may from time to time be amended, modified or supplemented. "Prime Rate" means the prime rate of interest announced from time to time as the prime rate by Bank One, Columbus, NA; provided, that the parties acknowledge that the Prime Rate is not intended to be the lowest rate of interest charged by said bank in connection with extensions of credit. "Lien" means any security interest, lien, mortgage, pledge, encumbrance, judgment, execution, attachment, warrant, writ, levy, other judicial process or claim of any nature whatsoever by or of any person. "Fair Market Value" means the amount which would be paid for an item of Equipment by an informed and willing buyer (other than a used equipment or scrap dealer) and an informed and willing seller neither under a compulsion to buy or sell. "Lessor's Cost" means the invoiced price of any item of Equipment plus any other cost to Lessor of acquiring an item of Equipment. All terms defined in the Lease are equally applicable to both the singular and plural form of such terms. 3. LEASE TERM AND RENT: The term of the lease of the Equipment described in each Schedule ("Lease Term") commences on the date stated in the Schedule and continues for the term stated therein. As rent for the Equipment described in each Schedule, Lessee shall pay Lessor the rent payments and all other amounts stated in such Schedule, payable on the dates specified therein. All payments due under the Lease shall be made in United States dollars at Lessor's office stated in the opening paragraph or as otherwise directed by Lessor in writing. 4. ORDERING, DELIVERY, REMOVAL AND INSPECTION OF EQUIPMENT: If an event of default occurs or if for any reason Lessee does not accept, or revokes its acceptance of, equipment covered by a purchase order or purchase contract or if any commitment or agreement of Lessor to lease equipment to Lessee expires, terminates or is otherwise canceled, then automatically upon notice from Lessor, any purchase order or purchase contract and all obligations thereunder shall be assigned to Lessee and Lessee shall pay and perform all obligations thereunder. Lessee agrees to pay, defend, indemnify and hold Lessor harmless from any liabilities, obligations, claims, costs and expenses (including reasonable attorney fees and expenses) of whatever kind imposed on or asserted against Lessor in any way related to any purchase orders or purchase contracts. Lessee shall make all arrangements for, and Lessee shall pay all costs of, transportation, delivery, installation and testing of Equipment. The Equipment shall be delivered to Lessee's premises stated in the applicable Schedule and shall not be removed without Lessor's prior written consent. Lessor has the right upon reasonable notice to Lessee to inspect the Equipment wherever located. Lessor may enter upon any premises where Equipment is located and remove it immediately, without notice or liability to Lessee, upon the expiration or other termination of the Lease Term. 5. MAINTENANCE AND USE: Lessee agrees it will, at its sole expense: (a) repair and maintain the Equipment in good condition and working order and supply and install all replacement parts or other devices when required to so maintain the Equipment or when required by applicable law or regulation, which parts or devices shall automatically become part of the Equipment; (b) use and operate the Equipment in a careful manner in the normal course of its business and only for the purposes for which it was designed in accordance with the manufacturer's warranty requirements, and comply with all laws and regulations relating to the Equipment, and obtain all permits or licenses necessary to install, use or operate the Equipment; and (c) make no alterations, additions, subtractions, upgrades or improvements to the Equipment without Lessor's prior written consent, but any such alterations, additions, upgrades or improvements shall automatically become part of the Equipment. The Equipment will not be used or located outside of the United States. 6. NET LEASE; NO EARLY TERMINATION: The Lease is a net lease. Lessee's obligation to pay all rent and all other amounts payable under the Lease is absolute and unconditional under any and all circumstances and shall not be affected by any circumstances of any character including, without limitation, (a) any setoff, claim, counterclaim, defense or reduction which Lessee may have at any time against Lessor or any other party for any reason, or (b) any defect in the condition, design or operation of, any lack of fitness for use of, any damage to or loss of, or any lack of maintenance or service for any of the Equipment. Each Schedule is a noncancelable lease of the Equipment described therein and Lessee's obligation to pay rent and perform all other obligations thereunder and under the Lease are not subject to cancellation or termination by Lessee for any reason. 7. NO WARRANTIES BY LESSOR: LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS, AND WITH ALL FAULTS. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATION: ITS MERCHANTABILITY; ITS FITNESS FOR ANY PARTICULAR PURPOSE; ITS DESIGN, CONDITION, QUALITY, CAPACITY, DURABILITY, CAPABILITY, SUITABILITY OR WORKMANSHIP; ITS NON-INTERFERENCE WITH OR NON-INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHT; OR ITS COMPLIANCE WITH ANY LAW, RULE, SPECIFICATION, PURCHASE ORDER OR CONTRACT PERTAINING THERETO. Lessor hereby assigns to Lessee the benefit of any assignable manufacturer's or supplier's warranties, but Lessor, at Lessee's written request, will cooperate with Lessee in pursuing any remedies Lessee may have under such warranties. Any action taken with regard to warranty claims against any manufacturer or supplier by Lessee will be at Lessee's sole expense. LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE FINANCIAL CONDITION OR FINANCIAL STATEMENTS OF ANY PARTY OR AS TO THE TAX OR ACCOUNTING TREATMENT OR CONSEQUENCES OF THE LEASE, THE EQUIPMENT OR THE RENTAL PAYMENTS. 8. INSURANCE: Lessee at its sole expense shall at all times keep each item of Equipment insured against all risks of loss or damage from every cause whatsoever for an amount not less than the greater of the full replacement value or the Lessor's Cost of such item of Equipment. Lessee at its sole expense shall at all times carry public liability and property damage insurance in amounts satisfactory to Lessor protecting Lessee and Lessor from liabilities for injuries to persons and damage to property of others relating in any way to the Equipment. All insurers shall be reasonably satisfactory to Lessor. Lessee shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any insurance covering damage or loss of the Equipment shall be payable to Lessor as loss payee and shall, at Lessor's option, be applied toward (a) the replacement, restoration or repair of the Equipment, or (b) payment of the obligations of Lessee under the Lease. Proceeds of any public liability or property insurance shall be payable first to Lessor as additional insured to the extent of its liability, then to Lessee. If an event of default occurs and is continuing, or if Lessee fails to make timely payments due under Section 9 hereof, then Lessee automatically appoints Lessor as Lessee's attorney-in-fact with full power and authority in the place of Lessee and in the name of Lessee or Lessor to make claim for, receive payment of, and sign and endorse all documents, checks or drafts for loss or damage under any such policy. Each insurance policy will require that the insurer give Lessor at least 30 days prior written notice of any cancellation of such policy and will require that Lessor's interests remain insured regardless of any act, error, omission, neglect or misrepresentation of Lessee. The insurance maintained by Lessee shall be primary without any right of contribution from insurance which may be maintained by Lessor. 9. LOSS AND DAMAGE: (a) Lessee bears the entire risk of loss, theft, damage or destruction of Equipment in whole or in part from any reason whatsoever ("Casualty Loss"), No Casualty Loss to Equipment shall relieve Lessee from the obligation to pay rent or from any other obligation under the Lease. Page 1 of 4 4 9. LOSS AND DAMAGE (CONTINUED): In the event of Casualty Loss to any item of Equipment, Lessee shall immediately notify Lessor of the same and Lessee shall, if so directed by Lessor, immediately repair the same. If Lessor determines that any item of Equipment has suffered a Casualty Loss beyond repair ("Lost Equipment"), then Lessee, at the option of Lessor, shall: (1) Immediately replace the Lost Equipment with similar equipment in good repair, condition and working order free and clear of any Liens and deliver to Lessor a bill of sale covering the replacement equipment, in which even such replacement equipment shall automatically be Equipment under the Lease; or (2) On the rent payment date which is at least 30 but no more than 60 days after the date of the Casualty Loss, pay to Lessor all amounts then due and payable by Lessee under the Lease for the Lost Equipment plus the Stipulated Loss Value for such Lost Equipment as of the date of the Casualty Loss. Upon payment by Lessee of all amounts due under the above clause (2), the lease of the Lost Equipment will terminate and Lessor shall transfer to Lessee all of Lessor's right, title and interest in such Equipment on an "as-is, where-is" basis with all faults, without recourse and without representation or warranty of any kind, express or implied. (b) "Stipulated Loss Value" of any item of Equipment during its Lease Term equals the present value discounted in arrears to the applicable date at the applicable SLV Discount Rate of (1) the remaining rents and all other amounts [including, without limitation, any balloon payment and, as to a terminal rental adjustment clause ("TRAC") lease, the TRAC value stated in the Schedule, and any other payments required to be paid by Lessee at the end of the applicable Lease Term] payable under the Lease for such item on and after such date to the end of the applicable Lease Term and (2) an amount equal to the Economic Value of the Equipment. For any item of Equipment, "Economic Value" means the Fair Market Value of the Equipment at the end of the applicable Lease Term as originally anticipated by Lessor at the Commencement Date of the applicable Schedule; provided, that Lessee agrees that such value shall be determined by the books of Lessor as of the Commencement Date of the applicable Schedule. After the payment of all rent due under the applicable Schedule and the expiration of the Lease Term of any item of Equipment, the Stipulated Loss Value of such item equals the Economic Value of such item. Stipulated Loss Value shall also include any Taxes payable by Lessor in connection with its receipt thereof. For any item of Equipment, "SLV Discount Rate" means an interest rate equal to the Prime Rate in effect on the Commencement Date of the Schedule for such item minus two percentage points. 10. TAX BENEFIT INDEMNITY. (a) The Lease has been entered into on the basis that Lessor shall be entitled to such deductions, credits and other tax benefits as are provided by federal, state and local income tax law to an owner of the Equipment (the "Tax Benefits") including, without limitation: (1) modified accelerated cost recovery deductions on each item of Equipment under Section 168 of the Code (as defined below) in an amount determined commencing with the taxable year in which the Commencement Date of the applicable Schedule occurs, using the maximum allowable depreciation method available under Section 168 of the Code, using a recovery period (as defined in Section 168 of the Code) reasonably determined by Lessor, and using an initial adjusted basis which is equal to the Lessor's Cost of such item; (2) amortization of the expenses paid by Lessor in connection with the Lease on a straight-line basis over the term of the applicable Schedule; and (3) Lessor's federal taxable income will be subject to the maximum rate on corporations in effect under the Code as of the Commencement Date of the applicable Schedule. (b) If on any one or more occasions (1) Lessor shall lose, shall not have or shall lose the right to claim all or any part of the Tax Benefits, (2) there shall be reduced, disallowed, recalculated or recaptured all or any part of the Tax Benefits, or (3) all or any part of the Tax Benefits is reduced by a change in law or regulation (each of the events described in subparagraphs 1, 2 or 3 of this paragraph (b) will be referred to as a "Tax Loss"), then, upon 30 days written notice by Lessor to Lessee that a Tax Loss has occurred, Lessee shall pay Lessor an amount which, in the reasonable opinion of Lessor and after the deduction of all taxes required to be paid by Lessor with respect to the receipt of such amount, will provide Lessor with the same after-tax net economic yield which was originally anticipated by Lessor as of the Commencement Date of the applicable Schedule. (c) A Tax Loss shall occur upon the earliest of: (1) the happening of any event (such as disposition or change in use of an item of Equipment) which may cause such Tax Loss; (2) Lessor's payment to the applicable taxing authority of the tax increase resulting from such Tax Loss; or (3) the adjustment of Lessor's tax return to reflect such Tax Loss. (d) Lessor shall not be entitled to payment under this section for any Tax Loss caused solely by one or more of the following events: (1) a disqualifying sale or disposition of an item of Equipment by Lessor prior to any default by Lessee; (2) Lessor's failure to timely or properly claim the Tax Benefits in Lessor's tax return; (3) a disqualifying change in the nature of Lessor's business or liquidation thereof; (4) a foreclosure by any person holding through Lessor a security interest on an item of Equipment which foreclosure results solely from an act of Lessor, or (5) Lessor's failure to have sufficient taxable income or tax liability to utilize the Tax Benefits. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. For the purposes of this section 10, the term "Lessor" shall include any affiliate group (within the meaning of section 1504 of the Code) of which Lessor is a member for any year in which a consolidated income tax return is filed for such affiliated group. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 11. GENERAL TAX INDEMNITY: Lessee will pay, and will defend, indemnify and hold Lessor harmless on an after-tax basis from, any and all Taxes (as defined below) and related audit and contest expenses on or relating to (a) any of the Equipment, (b) the Lease, (c) purchase, acceptance, ownership, lease, possession, use, operation, transportation, return or other disposition of any of the Equipment, and (d) rentals or earnings relating to any of the Equipment or the Lease. "Taxes" means present and future taxes or other governmental charges that are not based on the net income of Lessor, whether they are assessed to or payable by Lessee or Lessor, including, without limitation (i) sales, use, excise, licensing, registration, titling, franchise, business and occupation, gross receipts, stamp and personal property taxes, (ii) levies, imposts, duties, assessments, charges and withholdings, (iii) penalties, fines, and additions to tax and (iv) interest on any of the foregoing. Unless Lessor elects otherwise, Lessor will prepare and file all reports and returns relating to any Taxes and will pay all Taxes to the appropriate taxing authority. Lessee will reimburse Lessor for all such payments promptly on request. On or after any applicable assessment/levy/lien date for any personal property Taxes relating to any Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to Lessor the personal property Taxes which Lessor reasonably anticipates will be due, assessed, levied or otherwise imposed on any Equipment during its Lease Term. If Lessor elects in writing, Lessee will itself prepare and file all such reports and returns, pay all such Taxes directly to the taxing authority, and send Lessor evidence thereof. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 12. GENERAL INDEMNITY: Lessee assumes all risk and liability for, and shall defend, indemnify and keep Lessor harmless on an after-tax basis from, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses, including reasonable attorney fees and expenses, of whatsoever kind and nature imposed on, incurred by or asserted against Lessor, in any way relating to or arising out of the manufacture, purchase, acceptance, rejection, ownership, possession, use, selection, delivery, lease, operation, condition, sale, return or other disposition of the Equipment or any part thereof (including, without limitation, any claim for latent or other defects, whether or not discoverable by Lessee or any other person, any claim for negligence, tort or strict liability, any claim under any environmental protection or hazardous waste law and any claim for patent, trademark or copyright infringement). Lessee will not indemnify Lessor under this section for loss or liability arising from events which occur after the Equipment has been returned to Lessor or for loss or liability caused directly and solely by the gross negligence or willful misconduct of Lessor. In this section, "Lessor" also includes any director, officer, employee, agent, successor or assign of Lessor. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 13. PERSONAL PROPERTY: Lessee represents and agrees that the Equipment is, and shall at all times remain, separately identifiable personal property. Upon Lessor's request, Lessee shall furnish Lessor a landlord's and/or mortgagee's waiver and consent to remove all Equipment. Lessor may display notice of its interest in the Equipment by any reasonable identification. Lessee shall not alter or deface any such indicia of Lessor's interest. 14. DEFAULT: Each of the following events shall constitute an event of default under the Lease: (a) Lessee fails to pay any rent or other amount due under the Lease within ten days of its due date; or (b) Lessee fails to perform or observe any of its obligations in Sections 8, 18, or 22 hereof; or (c) Lessee fails to perform or observe any of its other obligations in the Lease for more than 30 days after Lessor notifies Lessee of such failure; or (d) Lessee or any Lessee affiliate defaults in the payment, performance or observance of any obligation under any loan, credit agreement or other lease in which Lessor or any subsidiary (direct or indirect) of Banc One Corporation (which is Lessor's ultimate parent corporation) is the creditor or lessor; or (e) any statement, representation or warranty made by Lessee in the Lease, in any Schedule or in any document, certificate or financial statement in connection with the Lease proves at any time to have been untrue or misleading in any material respect as of the time when made; or (f) Lessee becomes insolvent or bankrupt, or Lessee admits its inability to pay its debts as they mature, or Lessee makes an assignment for the benefit of creditors, or Lessee applies for, institutes or consents to the appointment of a receiver, trustee or similar official for Lessee or any substantial part of its property or any such official is appointed without Lessee's consent, or Lessee applies for, institutes or consents to any bankruptcy, insolvency, reorganization, debt moratorium, liquidation, or similar proceeding relating to Lessee or any substantial part of its property under the laws of any jurisdiction or any such proceeding is instituted against Lessee without stay or dismissal for more than 30 days, or Lessee commences any act amounting to a business failure or a winding up of its affairs, or Lessee ceases to do business as a going concern; or (g) with respect to any guaranty, letter of credit, pledge agreement, security agreement, mortgage, deed of trust, debt subordination agreement or other credit enhancement or credit support agreement (whether now existing or hereafter arising) signed or issued by any party in connection with all or any part of Lessee's obligations, under the Lease, the party signing or issuing any such agreement defaults in its obligations thereunder or any such agreement shall cease to be in full force and effect or shall be declared to be null, void, invalid or unenforceable by the party signing or issuing it; or (h) there shall occur in Lessor's reasonable opinion any material adverse change in the financial condition, business or operations of Lessee. Page 2 of 4 5 14. DEFAULT (CONTINUED): As used in this section 14, the term "Lessee" also includes any guarantor (whether now existing or hereafter arising) of all or any part of Lessee's obligations under the Lease and/or any issuer of a letter of credit (whether now existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease, and the term "Lease" also includes any guaranty or letter of credit (whether now existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease. 15. REMEDIES. If any event of default exists, Lessor may exercise in any order one or more of the remedies described in the lettered subparagraphs of this section, and Lessee shall perform its obligations imposed thereby: (a) Lessor may require Lessee to return any or all Equipment as provided in the Lease. (b) Lessor or its agent may repossess any or all Equipment wherever found, may enter the premises where the Equipment is located and disconnect, render unusable and remove it, and may use such premises without charge to store or show the Equipment for sale. (c) Lessor may sell any or all Equipment at public or private sale, with or without advertisement or publication, may re-lease or otherwise dispose of it or may use, hold or keep it. (d) Lessor may require Lessee to pay to Lessor on a date specified by Lessor, with respect to any or all Equipment (i) all accrued and unpaid rent, late charges and other amounts due under the Lease on or before such date, plus (ii) as liquidated damages for loss of a bargain and not as a penalty, and in lieu of any further payments of rent, the Stipulated Loss Value of the Equipment on such date, plus (iii) interest at the Overdue Rate on the total of the foregoing ("Overdue Rate" means an interest rate per annum equal to the higher of 18% or 2% over the Prime Rate, but not to exceed the highest rate permitted by applicable law). The parties acknowledge that the foregoing money damage calculation reasonably reflects Lessor's anticipated loss with respect to the Equipment and the related Lease resulting from the event of default. If an event of default under section 14(f) of this Master Lease Agreement exists, then Lessee will be automatically liable to pay Lessor the foregoing amounts as of the next rent payment date unless Lessor otherwise elects in writing. (e) Lessee shall pay all costs, expenses and damages incurred by Lessor because of the event of default or its actions under this section, including, without limitation any collection agency and/or attorney fees and expenses, any costs related to the repossession, safekeeping, storage, repair, reconditioning or disposition of the Equipment and any incidental and consequential damages. (f) Lessor may terminate the Lease and/or any or all Schedules, may sue to enforce Lessee's performance of its obligations under the Lease and/or may exercise any other right or remedy then available to Lessor at law or in equity. Lessor is not required to take any legal process or give Lessee any notice before exercising any of the above remedies. None of the above remedies is exclusive, but each is cumulative and in addition to any other remedy available to Lessor. Lessor's exercise of one or more remedies shall not preclude its exercise of any other remedy. No action taken by Lessor shall release Lessee from any of its obligations to Lessor. No delay or failure on the part of Lessor to exercise any right hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise of any right preclude any other exercise thereof or the exercise of any other right. After any default, Lessor's acceptance of any payment by Lessee under the Lease shall not constitute a waiver by Lessor of such default, regardless of Lessor's knowledge or lack of knowledge at the time of such payment, and shall not constitute a reinstatement of the Lease if the Lease has been declared in default by Lessor, unless Lessor has agreed in writing to reinstate the Lease and to waive the default. If Lessor actually repossesses any Equipment, then it will use commercially reasonable efforts under the then current circumstances to attempt to mitigate its damages; provided, that Lessor shall not be required to sell, re-lease or otherwise dispose of any Equipment prior to Lessor enforcing any of the remedies described above. Lessor may sell or re-lease the Equipment in any manner it chooses, free and clear of any claims or rights of Lessee and without any duty to account to Lessee with respect thereto except as provided below. If Lessor actually sells or re-leases the Equipment, it will credit the net proceeds of any sale of the Equipment, or the net present value (discounted at the then current Prime Rate) of the rents payable under any new lease of the Equipment, against and up to (but not exceeding) the Stipulated Loss Value of the Equipment and any other amounts Lessee owes Lessor, or will reimburse Lessee for and up to (but not exceeding) Lessee's payment thereof. The term "net" as used above shall mean such amount after deducting the costs and expenses described in clause (e) above of this section. If Lessor elects in writing not to sell or re-lease any Equipment, it will similarly credit or reimburse Lessee for Lessor's reasonable estimate of such Equipment's Fair Market Value. 16. LESSOR'S RIGHT TO PERFORM: If Lessee fails to make any payment under the Lease or fails to perform any of its other agreements in the Lease (including, without limitation, its agreement to provide insurance coverage as stated in the Lease), Lessor may itself make such payment or perform such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or performance shall be deemed to be additional rent, payable by Lessee on demand. 17. FINANCIAL REPORTS: Lessee agrees to furnish to Lessor: (a) annual financial statements setting forth the financial condition and results of operation of Lessee (financial statements shall include the balance sheet, income statement and changes in financial position and all notes thereto) within 120 days of the end of each fiscal year of Lessee; (b) quarterly financial statements setting forth the financial condition and results of operation of Lessee within 60 days of the end of each of the first three fiscal quarters of Lessee; and (c) such other financial information as Lessor may from time to time reasonably request including, without limitation, financial reports filed by Lessee with federal or state regulatory agencies. All such financial information shall be prepared in accordance with generally accepted accounting principles. If Lessee fails to furnish the annual financial statements to Lessor within 30 days of Lessor's written request, then Lessor may, at its option, charge Lessee a non-performance fee equal to all the rentals due under the Lease for the then current month (unless otherwise prohibited by law) and such fees shall be deemed to be additional rent, payable by Lessee on demand. 18. NO CHANGES IN LESSEE: Lessee shall not: (a) liquidate, dissolve or suspend business; (b) sell, transfer or otherwise dispose of all or a majority of its assets, except that Lessee may sell its inventory in the ordinary course of its business; (c) enter into any merger, consolidation or similar reorganization unless it is the surviving corporation; (d) transfer all or any substantial part of its operations or assets outside of the United States of America; or (e) without 30 days advance written notice to Lessor, change its name or chief place of business. Lessee shall at all times maintain a tangible net worth which is no less than the greater of 75% of its tangible net worth as of the date of the Master Lease Agreement or 75% of its highest tangible net worth thereafter. 19. LATE CHARGES: If any rent or other amount payable under the Lease is not paid when due, then as compensation for the administration and enforcement of Lessee's obligation to make timely payments, Lessee shall pay with respect to each overdue payment on demand an amount equal to the greater of fifteen dollars ($15.00) or five percent (5%) of the each overdue payment (but not to exceed the highest late charge permitted by applicable law) plus any collection agency fees and expenses. 20. NOTICES; POWER OF ATTORNEY: (a) Service of all notices under the Lease shall be sufficient if given personally or couriered or mailed to the party involved at its respective address set forth herein or at such other address as such party may provide in writing from time to time. Any such notice mailed to such address shall be effective three days after deposit in the United States mail with postage prepaid. (b) With respect to any power of attorney covered by the Lease, the powers conferred on Lessor thereby: are powers coupled with an interest; are irrevocable; are solely to protect Lessor's interests under the Lease; and do not impose any duty on Lessor to exercise such powers. Lessor shall be accountable solely for amounts it actually receives as a result of its exercise of such powers. 21. ASSIGNMENT BY LESSOR: Lessor and any assignee of Lessor, with or without notice to or consent of Lessee, may sell, assign, transfer or grant a security interest in all or any part of Lessor's rights, obligations, title or interest in the Equipment, the Lease, any Schedule or the amounts payable under the Lease or any Schedule to any entity ("transferee"). The transferee shall succeed to all of Lessor's rights in respect to the Lease (including, without limitation, all rights to insurance and indemnity protection described in the Lease). Lessee agrees to sign any acknowledgement and other documents reasonably requested by Lessor or the transferee in connection with any such transfer transaction. Lessee, upon receiving notice of any such transfer transaction, shall comply with the terms and conditions thereof. Lessee agrees that it shall not assert against any transferee any claim, defense, setoff, deduction or counterclaim which Lessee may now or hereafter be entitled to assert against Lessor. Unless otherwise agreed in writing, the transfer transaction shall not relieve Lessor of any of its obligations to Lessee under the Lease and Lessee agrees that the transfer transaction shall not be construed as being an assumption of such obligations by the transferee. 22. NO ASSIGNMENT, SUBLEASE OR LIEN BY LESSEE: LESSEE SHALL NOT, DIRECTLY OR INDIRECTLY, (a) MORTGAGE, ASSIGN, SELL, TRANSFER, OR OTHERWISE DISPOSE OF THE LEASE OR ANY INTEREST THEREIN OR THE EQUIPMENT OR ANY PART THEREOF, OR (b) SUBLEASE, RENT, LEND OR TRANSFER POSSESSION OR USE OF THE EQUIPMENT OR ANY PART THEREFOR TO ANY PARTY, OR (c) CREATE, INCUR, GRANT, ASSUME OR ALLOW TO EXIST ANY LIEN ON THE LEASE, ANY SCHEDULE, THE EQUIPMENT OR ANY PART THEREOF. Page 3 of 4 6 23. EXPIRATION OF LEASE TERM: (a) At least 90 days (or earlier if otherwise specified), but no more than 270 days prior to expiration of the Lease Term of each Schedule, Lessee shall give Lessor written notice of its electing one of the following options for all (but not less than all) of the Equipment covered by such Schedule: return the Equipment under clause (b) below; or purchase the Equipment under clause (c) below. The election of an option shall be irrevocable. If Lessee fails to give timely notice of its election, it shall be deemed to have elected to return the Equipment. (b) If Lessee elects or is deemed to have elected to return the Equipment at the expiration of the Lease Term of a Schedule or if Lessee is obligated at any time to return the Equipment, then Lessee shall, at its sole expense and risk, deinstall, disassemble, pack, crate, insure and return the Equipment to Lessor (all in accordance with applicable industry standards) at any location in the continental United States of America selected by Lessor. The Equipment shall be in the same condition as when received by Lessee, reasonable wear, tear and depreciation resulting from normal and proper use excepted (or, if applicable, in the condition set forth in the Lease or the Schedule), shall be in good operating order and maintenance as required by the Lease, shall be certified as being eligible for any available manufacturer's maintenance program, shall be free and clear of any Liens as required by the Lease, shall comply with all applicable laws and regulations and shall include all manuals, specifications, repair and maintenance records and similar documents. Until Equipment is returned as required above, all terms of the Lease shall remain in full force and effect including, without limitation, obligations to pay rent and insure the Equipment; provided, that after the expiration of any Schedule and before Lessee has completed its return of the Equipment or its purchase option (if elected), the term of the lease of the Equipment covered by such Schedule shall be month-to-month or such shorter period as may be specified by Lessor. (c) If Lessee gives Lessor timely notice of its election to purchase Equipment, then on the expiration date of the applicable Schedule Lessee shall purchase all (but not less than all) of the Equipment and shall pay to Lessor the Fair Market Value of the Equipment plus all Taxes (other than income taxes on Lessor's gains on such sale), costs and expenses incurred or paid by Lessor in connection with such sale plus all accrued but unpaid amounts due with respect to the Equipment and/or the Schedule. The Stipulated Loss Value or Economic Value of any item of Equipment shall have no bearing or influence on the determination of Fair Market Value under this clause (c). Upon payment in full of the above amounts, and if no default has occurred and is continuing under the Lease, Lessor shall transfer title to such Equipment to Lessee "as-is, where-is" with all faults and without recourse to Lessor and without any representation or warranty of any kind whatsoever by Lessor, express or implied. (d) For purposes of the purchase option of the Lease, the determination of the Fair Market Value of any Equipment shall be determined (1) without deducting any costs of dismantling or removal from the location of use, (2) on the assumption that the Equipment is in the condition required by the applicable return and maintenance provisions of the Lease and is free and clear of any Liens as required by the Lease, and (3) shall be determined by mutual agreement of Lessee and Lessor or, if Lessor and Lessee are not able to agree on such value, by the Appraisal Procedure. "Appraisal Procedure" means the determination of Fair Market Value by an independent appraiser acceptable to Lessor and Lessee, or, if the parties are unable to agree on an acceptable appraiser, by averaging the valuation (disregarding the one which differs the most from the other two) of three independent appraisers, the first appointed by Lessor, the second appointed by Lessee and the third appointed by the first two appraisers. For purposes of the "Remedies" section of the Lease, the Fair Market Value shall be determined by Lessor in good faith and any such valuation shall be on an "as-is, where-is" basis without regard to the first sentence of this clause (d). Lessee, at its sole expense, shall pay all fees, costs and expenses of the above described appraisers. 24. GOVERNING LAW: THE INTERPRETATION, CONSTRUCTION AND VALIDITY OF THE LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OHIO. WITH RESPECT TO ANY ACTION BROUGHT BY LESSOR AGAINST LESSEE TO ENFORCE ANY TERM OF THE LEASE, LESSEE HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT IN THE FRANKLIN COUNTY, OHIO, WHERE LESSOR HAS ITS PRINCIPAL PLACE OF BUSINESS AND WHERE PAYMENTS ARE TO BE MADE BY LESSEE. 25. MISCELLANEOUS: (a) Subject to the limitations herein, the Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, successors and assigns. (b) This Master Lease Agreement and each Schedule may be executed in any number of counterparts, which together shall constitute a single instrument. Only one counterpart of each Schedule shall be marked "Lessor's Original" and all other counterparts shall be marked "Duplicate". A security interest in any Schedule may be created through transfer and possession only of the counterpart marked "Lessor's Original". (c) Section and paragraph headings in this Master Lease Agreement and the Schedules are for convenience only and have no independent meaning. (d) The terms of the Lease shall be severable and if any term thereof is declared unconscionable, invalid, illegal or void, in whole or in part, the decision so holding shall not be construed as impairing the other terms of the Lease and the Lease shall continue in full force and effect as if such invalid, illegal, void or unconscionable term were not originally included herein. (e) All indemnity obligations of Lessee under the Lease and all rights, benefits and protections provided to Lessor by warranty disclaimers shall survive the cancellation, expiration or termination of the Lease. (f) Lessor shall not be liable to Lessee for any indirect, consequential or special damages for any reason whatsoever. (g) Each payment made by Lessee shall be applied by Lessor in such manner as Lessor determines in its discretion which may include, without limitation, application as follows: first, to accrued late charges; second, to accrued rent; and third, the balance to any other amounts then due and payable by Lessee under the Lease. (h) If the Lease is signed by more than one Lessee, each of such Lessees shall be jointly and severally liable for payment and performance of all of Lessee's obligations under the Lease. 26. ENTIRE AGREEMENT: THE LEASE REPRESENTS THE FINAL, COMPLETE AND ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO. THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS OR UNDERSTANDINGS AFFECTING THE LEASE OR THE EQUIPMENT. Lessee agrees that Lessor is not the agent of any manufacturer or supplier, that no manufacturer or supplier is an agent of Lessor, and that any representation, warranty or agreement made by a manufacturer, supplier or their employees, sales representatives or agents shall not be binding on Lessor. 27. JURY WAIVER: ALL PARTIES TO THIS MASTER LEASE AGREEMENT WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS MASTER LEASE AGREEMENT. COMPUROUTE, INC. BANC ONE LEASING CORPORATION -------------------------------------------- (Name of Lessee) Lessor By: By: /s/ Alexander D. Wasserzug ------------------------------ ---------------------------------------- Title: Title: PRESIDENT ---------------------------- ------------------------------------- Lessee's Witness: /s/ Terry A. Ritz -------------------------- - ------------------------------------------------------------------------------- COMPUROUTE, INC. Regardless of any prior, present or future oral agreement or course -------------------------------------------- of dealing, no term or condition (Name of Lessee) of the Lease may be amended, modified, waived, discharged, cancelled or terminated except by a written instrument signed by the party to be bound; except Lessee authorizes Lessor to complete the Acceptance Date of each Schedule and the serial numbers of any Equipment. By: /s/ Alexander D. Wasserzug ---------------------------------------- Title: PRESIDENT ------------------------------------- - ------------------------------------------------------------------------------- Page 4 of 4 7 CORPORATE MASTER LEASE ACKNOWLEDGEMENT State of Texas : -------------- : : SS County of Dallas : -------------- : The above mentioned foregoing instrument, was acknowledged before me this 11/17, 1997 by (Officers' Name) ALEXANDER D. WASSERZUG, (Officer's Title) PRESIDENT, of COMPUROUTE, INC., a DELAWARE corporation, on behalf of the corporation. /s/ Linda J. Adams -------------------------------- Notary Public [Notary Seal] Commission Expires 6/23/98 8 LESSEE'S SECRETARY CERTIFICATE OF COMPUROUTE, INC. (the "Corporation") - ----------------------------------------------------------- The undersigned, who is the duly elected and acting Secretary or Assistant Secretary of the Corporation, hereby certifies that the following is a true and correct copy of resolutions duly adopted by the Board of Directors of the Corporation in conformity with its charter, articles of incorporation and by-laws [SELECT ONE] at a meeting of said Board duly called and held - ------- 19 at which a quorum was present and acting -------------------, --- -or- X by unanimous written action of said Board as allowed by statute, - ------- effective 11/17, 1997 --------- --- and that such resolutions have not been amended or altered and are in full force and effect on the date hereof. "RESOLVED, that any officer of this Corporation be and is hereby authorized and empowered in the name and on behalf of this Corporation from time to time (i) to enter into one or more lease agreements, loan and security agreements or conditional sale agreements ("Agreements") with Banc One Leasing Corporation (the "Company") as lessor, secured party or seller, as the case may be, concerning property to be leased, pledged as collateral, or sold to this Corporation in such amounts and on such terms and conditions as such officer deems appropriate; (ii) to mortgage, pledge, assign, and/or grant a security interest in any of this Corporation's property, (iii) to supplement or amend any such Agreements, and (iv) to execute and deliver such other documents (including, without limitation, leases or promissory notes) and to do and perform all other acts as such officer deems necessary, convenient or proper to carry out the foregoing; and FURTHER RESOLVED, that all that any officer shall have done or may do in connection with the Agreements or the transactions described above is hereby ratified and approved; and FURTHER RESOLVED, that the foregoing resolutions shall remain in full force and effect until written notice of their amendment or rescission shall have been received by the Company." The undersigned further certifies that the following are names and specimen signatures of officers of the Corporation authorized by the above resolutions, each of whom has been duly elected to hold and currently holds the office of the Corporation set forth opposite his or her name: Name Office Signature ---- ------ --------- ALEXANDER D. WASSERZUG President /s/ Alexander D. Wasserzug - ---------------------- ----------------------------- TERRY A. RITZ Vice President /s/ Terry A. Ritz - ---------------------- ----------------------------- Vice President - ---------------------- ----------------------------- Page 1 of 2 9 Name Office Signature ---- ------ --------- RANDAL L. BUNESS Secretary /s/ Randal L. Buness - ---------------------- ----------------------------- - ---------------------- ---------------- ----------------------------- - ---------------------- ---------------- ----------------------------- IN WITNESS WHEREOF, I have hereto set my hand and affixed the seal of the Corporation this 17 day of NOVEMBER , 1997 . ------- ---------------- --- (Corporate Seal) /s/ Randal L. Buness ----------------------------------------------- Secretary or Assistant Secretary [Select One] Print Name: RANDAL L. BUNESS ----------------------------------------------- Page 2 of 2 10 PREPAYMENT SCHEDULE ADDENDUM (For Prepayment of a Financing Lease Schedule) Dated NOVEMBER 17, 1997 -------------------- Lease Schedule No. 1000063309 Dated NOVEMBER 17, 1997 ----------------------- -------------------------- Lessee: COMPUROUTE, INC. Reference is made to the above Lease Schedule as previously amended ("Schedule") and to the Master Lease Agreement as previously amended ("Master Lease") identified in the Schedule, which are by and between Banc One Leasing Corporation ("Lessor") and the above lessee ("Lessee"). As used herein: "Lease" shall mean the Schedule and the Master Lease, but only to the extent that the Master Lease relates to the Schedule; and "Equipment" shall mean the equipment covered by the Schedule. This Schedule Addendum amends and supplements the terms and conditions of the Lease. Unless otherwise defined herein, capitalized terms defined in the Lease shall have the same meaning when used herein. SOLELY FOR PURPOSES OF THE SCHEDULE, LESSOR AND LESSEE AGREE AS FOLLOWS: 1. Notwithstanding anything to the contrary in the Lease, Lessee and Lessor agree that so long as Lessee gives Lessor at least 20 days prior written notice (the "Notice Period"), Lessee may elect to prepay the outstanding principal balance of the Schedule, in whole or in part, on the rent payment date (a "Prepayment Date") following the Notice Period by paying to Lessor (whether made voluntarily or involuntarily as a result of an acceleration of the Maturity Date or otherwise), the total of the following: (a) all accrued rent or installment payments, interest, Taxes, late charges and other amounts then due and payable under the Schedule and the Master Lease to the extent it relates to the Schedule; plus (b) the principal amount selected by Lessee for prepayment in the notice of prepayment (hereinafter, the "Prepaid Principal"); plus (c) a prepayment premium, if any, equal to the product of (i) an Average Lost Monthly Interest Income and (ii) the number of months from the Prepayment Date to the Maturity Date (with any fraction of a month counted as a month), discounted to present value at the Discount Rate. At the option of Lessor, in its absolute and sole discretion, any prepayment shall be applied to installments coming due hereunder in the inverse order of their due dates. 2. Solely for purposes of this Addendum, the following definitions in this paragraph 2 shall apply to this Addendum. "Maturity Date" means the scheduled expiration of the Lease Term of the Schedule as set forth in the Schedule. "Average Lost Monthly Interest Income" means the amount determined by dividing (i) the product of the Average Principal and the Lost Rate, by (ii) twelve (12). "Average Principal" is the amount equal to either (i) one-half of the sum of (A) the amount of Prepaid Principal and (B) the amount of principal that is scheduled to be due on the Maturity Date ("Balloon Amount"), or (ii) the amount of Page 1 11 Prepaid Principal, if such amount is less than the Balloon Amount. "Lost Rate" is the rate per annum equal to the percentage, if any, by which (i) the yield to maturity of United States Treasury debt obligations having a maturity date nearest to the Maturity Date ("Treasury Obligations") determined on the date hereof exceeds (ii) the yield to maturity of Treasury Obligations determined on the date of prepayment. "Discount Rate" is the rate per annum equal to the yield to maturity of Treasury Obligations determined on the date of prepayment. The maturity date and yield to maturity of the Treasury Obligations shall be determined by Lessor, in its absolute and sole discretion, on the basis of quotations published in The Wall Street Journal, or other comparable sources. Treasury Obligations shall exclude any stripped U.S. Treasury obligations and any U.S. Treasury obligations which have multiple maturity or call dates, and if more than one issue of U.S. Treasury obligations has the applicable maturity month, then the U.S. Treasury obligation with the highest yield to maturity shall be used. 3. Except as expressly amended or supplemented by this Addendum and other instruments signed by Lessor, the Lease remains unchanged and in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the date referenced above. COMPUROUTE, INC. Banc One Leasing Corporation (Lessee) (Lessor) By: /s/ Alexander D. Wasserzug By: --------------------------- --------------------------- Title: PRESIDENT Title: ------------------------ ------------------------ Page 2 12 BANC ONE LEASING CORPORATION SCHEDULE A-1 EQUIPMENT LEASED HEREUNDER QUANTITY DESCRIPTION PAGE 1 =========== ================================================================= EQUIPMENT LOCATION: 10365 SANDEN DRIVE DALLAS, TEXAS 75238 COUNTY: DALLAS EQUIPMENT COST: $356,635.51 EQUIPMENT DESCRIPTION: ONE (1) ORANGE ENGINEERING & MACHINE CO. 26" X 32" VACUUM LAMINATION PRESS CONSISTING OF SIX PRODUCT TRAYS, ONE 26" X 32" COLD PRESS, ONE LOADER/UNLOADER, AND TWO NON-INDEXING ACCUMULATORS ONE (1) UNIDYNE CUT SHEET LAMINATOR REPLACEMENT PARTS FOR LAMINATOR INCLUDING: THREE CASTER INFED, ONE BELT DRIVE, TWO GEARS, FOUR BEARINGS, FOUR SWITCH TOGGLES, TWO THERMOCOUPLES, TWO INSULATORS, TWO TUBS SPAGHETI, ONE TAPE GLASS, TWO LOW SPEED CUT, AND ONE BRAKE KIT ONE (1) AUTOTECH ALKALINE ETCHING UNIT TOGETHER WITH ALL ATTACHMENTS, ADDITIONS, ACCESSIONS, PARTS, REPAIRS, IMPROVEMENTS, REPLACEMENTS AND SUBSTITUTIONS THERETO. This schedule A-1 is attached to and made a part of Lease Number 1000063309 and constitutes a true and accurate description of the equipment. Lessee: COMPUROUTE, INC. By: /s/ Alexander D. Wasserzug ------------------------ Date: NOVEMBER 17, 1997 ------------------------ 13 CONDITIONAL SALE INSURANCE REQUEST LETTER WILLIS CORROON - ------------------------------------------------------- (Agent) 7310 N. 16TH STREET, SUITE 300 - ------------------------------------------------------- (Street Address) PHOENIX, AZ 85020-5299 - ------------------------------------------------------- (City, State, Zip) (602) 870-7000 - ------------------------------------------------------- (Telephone Number) Dear Agent: Before our lease transaction can close, we need a properly executed Certificate of Insurance or binder covering the equipment we are leasing. Please send proof immediately of the following insurance requirements in the enclosed self-addressed envelope. 1. PHYSICAL DAMAGE: All risk equipment coverage for the replacement cost of the equipment being leased, which is estimated to be $357,010.51. Equipment Description: SEE SCHEDULE A-1 ATTACHED. 2. LOSS PAYEE: Banc One Leasing Corporation must be named as loss payee on the Physical Damage coverage as owners of the equipment during the term of the lease. "Mortgagee" will not be acceptable as this indicates a security interest rather than ownership as described above. 3. LIABILITY: Liability coverages must be provided in the following amounts: $500,000 for injury or death of one person $100,000 for property damage liability as a result of one accident $500,000 combined single limit of liability as a result of any one accident 4. NOTICE OF CANCELLATION: This policy shall not be canceled nor any restriction of coverage affected unless thirty (30) days prior written notice has been given by certified mail to Banc One Leasing Corporation at 1111 Polaris Parkway, Suite A3, Columbus, Ohio 43240, Attn: Insurance Dept. PLEASE REFERENCE THE COMPLETE LEASE NUMBER AS LISTED BELOW FOR TRACKING PURPOSES. THANK YOU. Sincerely, /s/ Alexander D. Wasserzug - ------------------------------------------------------- (By) COMPUROUTE, INC. - ------------------------------------------------------- (Lessee Name) 1000063309 - ------------------------------------------------------- (Lease Number) ================================================================================ Verified By: Date: ------------------------------------------- ----------------- (BOLC Employee) 14 CORPORATE GUARANTY Master Lease Agreement Date: NOVEMBER 17, 1997 Lessee Name: COMPUROUTE, INC. Equipment Cost: $357,010.51 1. For valuable consideration, the receipt of which is hereby acknowledged, the undersigned jointly and severally unconditionally guarantee to BANC ONE LEASING CORPORATION (hereinafter called "Lessor") the full and prompt performance by the lessee identified above (hereinafter called "Lessee"), of all obligations which Lessee now has or may hereafter have to Lessor, including but not limited to obligations under equipment leases and promissory notes executed in connection with anticipated equipment leases (including but not limited to all present and future lease schedules and promissory notes under the Master Lease identified above, with a total original equipment cost to the Lessor of no more than the amount of the Equipment Cost set forth above), and unconditionally guarantee the prompt payment when due (whether at scheduled maturity, upon acceleration or otherwise) of any and all sums, indebtedness and liabilities of whatsoever nature, due or to become due, direct or indirect, absolute or contingent, now or hereafter at any time owed or contracted by Lessee to Lessor, and all costs and expenses of and incidental to collection of any of the foregoing, including reasonable attorneys' fees (all of the foregoing hereinafter called "Obligations"). It is the undersigned's express intention that this guaranty in addition to covering all present Obligations of Lessee to Lessor, shall extend to all future Obligations of Lessee to Lessor, whether or not such Obligations are reduced or entirely extinguished and thereafter increased or are reincurred, whether or not such Obligations are related to the Master Lease identified above, whether or not such Obligations exceed the Equipment Cost identified above, and whether or not such Obligations are specifically contemplated by the undersigned, Lessee, and Lessor as of the date hereof. 2. This is an absolute and unconditional guarantee of payment and not of collection. Lessor shall not be required, as a condition of the liability of the undersigned, to resort to, enforce or exhaust any of its remedies against the Lessee or any other party who may be liable for payment on any Obligation or to resort to, marshall, enforce or exhaust any of its remedies against any leased property or any property given or held as security for this Guaranty or any Obligation. 3. The undersigned hereby waive and grant to Lessor, without notice to the undersigned and without in any way affecting the liability of the undersigned, the right at any time and from time to time, to extend other and additional credit, leases, loans or financial accommodations to Lessee apart from the Obligations, to deal in any manner as it shall see fit with any Obligation of Lessee to Lessor and with any leased property or security for such Obligation, including, but not limited to, (i) accepting partial payments on account of any Obligation, (ii) granting extensions or renewals of all or any part of any Obligation, (iii) releasing, surrendering, exchanging, dealing with, abstaining from taking, taking, abstaining from perfecting, perfecting, or accepting substitutes for any or all leased property or security which it holds or may hold 15 for any Obligation, (iv) modifying, waiving, supplementing or otherwise changing any of the terms, conditions or provisions contained in any Obligation and (v) the addition or release of any other party or person liable hereon, liable on the Obligations or liable on any other guaranty executed to guarantee any of Lessee's Obligations. The undersigned jointly and severally hereby agree that any and all settlements, compromises, compositions, accounts stated and agreed balances made in good faith between Lessor and Lessee shall be binding upon the undersigned. 4. Every right, power and discretion herein granted to Lessor shall be for the benefit of the successors or assigns of Lessor and of any transferee or assignee of any Obligation covered by this Guaranty, and in the event any such Obligation shall be transferred or assigned, every reference herein to Lessor shall be construed to mean, as to such Obligation, the transferee or assignee thereof. This Guaranty shall be binding upon each of the undersigned's executors, administrators, heirs, successors and assigns. 5. This Guaranty shall continue in force for so long as Lessee shall be obligated to Lessor, and thereafter until Lessor shall have actually received written notice of the termination hereof from the undersigned, it being contemplated that Lessee may borrow, lease, repay and subsequently borrow money from or lease property from, or become obligated to, Lessor from time to time, and the undersigned, not having given notice of the termination hereof as herein provided for, shall be deemed to have permitted this Guaranty to remain in full force and effect for the purpose of inducing Lessor to make further leases or loans to Lessee; provided, however, no notice of termination of this Guaranty shall affect in any manner the rights of Lessor arising under this Guaranty with respect to the following: (a) any Obligation incurred by Lessee in connection with the Master Lease identified above with a total equipment cost of no more than the amount of the Total Equipment Cost set forth above, whether such obligation is in the form of a lease or a promissory notice; or (b) any Obligation incurred by Lessee prior to receipt by Lessor of written notice of termination or any Obligation incurred after receipt of such written notice pursuant to a written agreement entered into by Lessor prior to receipt of such notice. The undersigned expressly waive notice of the incurring by Lessee of any Obligation to Lessor. The undersigned also waive presentment, demand of payment, protest, notice of dishonor or nonpayment of or nonperformance of any Obligation. 6. The undersigned hereby waive any claims or rights which they might now have or hereafter acquire against Lessee or any other person primarily or contingently liable on any Obligation of Lessee, which claims or rights arise from the existence or performance of the undersigned's obligations under this Guaranty or any other guaranty or under any instrument or agreement with respect to any leased property or any property constituting collateral or security for this Guaranty or any other guaranty, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, or any right to participate in any claim or remedy of Lessor or any other creditor which the undersigned now has or hereafter acquires, whether such claim or right arises in equity, under contract or statute, at common law, or otherwise. 7. Lessor's rights hereunder shall be reinstated and revived, and this Guaranty shall be fully enforceable, with respect to any amount at any time paid on account of the Obligations which thereafter shall be required to be restored or returned by Lessor upon the bankruptcy, insolvency or reorganization of the Lessee, the undersigned, or any other person, or as a result of any other fact 16 or circumstance, all as though such amount had not been paid. 8. The undersigned jointly and severally agree to pay to Lessor all costs and expenses, including reasonable attorneys' fees, incurred by Lessor in the enforcement or attempted enforcement of this Guaranty, whether or not suit is filed in connection therewith, or in the exercise by Lessor of any right, privilege, power or remedy conferred by this Guaranty. 9. The undersigned represent and warrant that they have relied exclusively on their own independent investigation of Lessee, the leased property and the collateral for their decision to guarantee Lessee's Obligations now existing or thereafter arising. The undersigned agree that they have sufficient knowledge of the Lessee, the leased property, and the collateral to make an informed decision about this Guaranty, and that Lessor has no duty or obligation to disclose any information in its possession or control about Lessee, the leased property, and the collateral to the undersigned. The undersigned warrant to Lessor that they have adequate means to obtain from the Lessee on a continuing basis information concerning the financial condition of the Lessee and that they are not relying on Lessor to provide such information either now or in the future. 10. As long as any indebtedness under any of the Obligations remains unpaid or any credit is available to Lessee under any of the Obligations, the undersigned agree to furnish to Lessor: (a) annual financial statements setting forth the financial condition and results of operation of the undersigned (financial statements shall include balance sheet, income statement, changes in financial position and all notes thereto) within 120 days of the end of each fiscal year of the undersigned; (b) quarterly financial statements setting forth the financial condition and results of operation of the undersigned within 60 days of the end of each of the first three fiscal quarters of the undersigned; and (c) such other financial information as Lessor may from time to time request including, without limitation, financial reports filed by the undersigned with federal or state regulatory agencies. 11. No postponement or delay on the part of Lessor in the enforcement of any right hereunder shall constitute a waiver of such right. The failure of any person or entity to sign this Guaranty shall not discharge the liability of any of the undersigned. 12. This Guaranty remains fully enforceable irrespective of any claim, defense or counterclaim which the Lessee may or could assert on any of the Obligations including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, fraud, bankruptcy, accord and satisfaction, and usury, same of which the undersigned hereby waive along with any standing by the undersigned to assert any said claim, defense or counterclaim. 13. This Guaranty contains the entire agreement of the parties and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof. This Guaranty is not intended to replace or supersede any other guaranty which the undersigned have entered into or may enter into in the future. The undersigned may enter into additional guaranties in the future which may or may not refer to the Master Lease identified above and such guaranties are not intended to replace or supersede this Guaranty unless 17 specifically provided in that additional guaranty. The interpretation, construction and validity of this guaranty shall be governed by the laws of the State of Ohio. With respect to any action brought by Lessor against Guarantor to enforce any term of this guaranty, Guarantor hereby irrevocably consents to the jurisdiction and venue of any state or federal court in Franklin County, Ohio, where Lessor has its principal place of business and where payments are to be made by Lessee and Guarantor. ALL PARTIES TO THIS GUARANTY, INCLUDING GUARANTOR AND LESSOR, WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS GUARANTY. Guarantor: CERPROBE CORPORATION - -------------------- By: /s/ Randal L. Buness --------------------------------------------------- Title: V.P. & CFO ------------------------------------------------ Witness: /s/ Laura M. Back ---------------------------------------------- Date: 11/17/97 ----------------- EX-10.BBB 3 EX-10.BBB 1 10 (bbb) Ex 10(bbb) MASTER LEASE AGREEMENT [BANK1ONE Logo] Banc One Leasing Corporation THIS MASTER LEASE AGREEMENT is made, entered and dated as of February 16, 1998, by and between: LESSOR: LESSEE: BANC ONE LEASING CORPORATION CERPROBE CORPORATION 1111 Polaris Parkway, Suite A-3 1150 N. FIESTA DRIVE Columbus, Ohio 43240 GILBERT, AZ 85233 1. LEASE OF EQUIPMENT: Lessor leases to Lessee, and Lessee leases from Lessor, all the property described in the Lease Schedules which are signed from time to time by Lessor and Lessee. 2. CERTAIN DEFINITIONS: "Schedule" means each Lease Schedule signed by Lessee and Lessor which incorporates the terms of this Master Lease Agreement, together with all exhibits, riders, attachments and addenda thereto. "Equipment" means the property described in each Schedule, together with all attachments, additions, possessions, parts, repairs, improvements, replacements and substitutions thereto. "Lease", "herein", "hereunder", "hereof" and similar words mean this Master Lease Agreement and all Schedules, together with all exhibits, riders, attachments and addenda to any of the foregoing, as the same may from time to time be amended, modified or supplemented. "Prime Rate" means the prime rate of interest announced from time to time as the prime rate by Bank One, Columbus, NA; provided, that the parties acknowledge that the Prime Rate is not intended to be the lowest rate of interest charged by said bank in connection with extensions of credit. "Lien" means any security interest, lien, mortgage, pledge, encumbrance, judgment, execution, attachment, warrant, writ, levy, other judicial process or claim of any nature whatsoever by or of any person. "Fair Market Value" means the amount which would be paid for an item of Equipment by an informed and willing buyer (other than a used equipment or scrap dealer) and an informed and willing seller neither under a compulsion to buy or sell. "Lessor's Cost" means the invoiced price of any item of Equipment plus any other cost to Lessor of acquiring an item of Equipment. All items defined in the Lease are equally applicable to both the singular and plural form of such terms. 3. LEASE TERM AND RENT: The term of the lease of the Equipment described in each Schedule ("Lease Term") commences on the date stated in the Schedule and continues for the term stated therein. As rent for the Equipment described in each Schedule, Lessee shall pay Lessor the rent payments and all other amounts stated in such Schedule, payable on the dates specified therein. All payments due under the Lease shall be made in United States dollars at Lessor's office stated in the opening paragraph or as otherwise directed by Lessor in writing. 4. ORDERING, DELIVERY, REMOVAL AND INSPECTION OF EQUIPMENT: If an event of default occurs or if for any reason Lessee does not accept, or revokes its acceptance of, equipment covered by a purchase order or purchase contract or if any commitment or agreement of Lessor to lease equipment to Lessee expires, terminates or is otherwise canceled, then automatically upon notice from Lessor, any purchase order or purchase contract and all obligations thereunder shall be assigned to Lessee and Lessee shall pay and perform all obligations thereunder. Lessee agrees to pay, defend, indemnify and hold Lessor harmless from any liabilities, obligations, claims, costs and expenses (including reasonable attorney fees and expenses) of whatever kind imposed on or asserted against Lessor in any way related to any purchase orders or purchase contracts. Lessee shall make all arrangements for, and Lessee shall pay all costs of, transportation, delivery, installation and testing of Equipment. The equipment shall be delivered to Lessee's premises stated in the applicable Schedule and shall not be removed without Lessor's prior written consent. Lessor has the right upon reasonable notice to Lessee to inspect the Equipment wherever located. Lessor may enter upon any premises where Equipment is located and remove it immediately, without notice or liability to Lessee, upon the expiration or other termination of the Lease Term. 5. MAINTENANCE AND USE: Lessee agrees it will, at its sole expense: (a) repair and maintain the Equipment in good condition and working order and supply and install all replacement parts of other devices when required to so maintain the Equipment or when required by applicable law or regulation, which parts or devices shall automatically become part of the Equipment; (b) use and operate the Equipment in a careful manner in the normal course of its business and only for the purposes for which it was designed in accordance with the manufacturer's warranty requirements, and comply with all laws and regulations relating to the Equipment, and obtain all permits or licenses necessary to install, use or operate the Equipment; and (c) make no alterations, additions, subtractions, upgrades or improvements to the Equipment without Lessor's prior written consent, but any such alterations, additions, upgrades or improvements shall automatically become part of the Equipment. The Equipment will not be used or located outside the United States. 6. NET LEASE; NO EARLY TERMINATION: The Lease is a net lease. Lessee's obligation to pay all rent and all other amounts payable under the Lease is absolute and unconditional under any and all circumstances and shall not be affected by any circumstances of any character including, without limitation, (a) any setoff, claim, counterclaim, defense or reduction which Lessee may have at any time against Lessor or any other party for any reason, or (b) any defect in the condition, design or operation of, any lack of fitness for use of, any damage to or loss of, or any lack of maintenance or service for any of the Equipment. Each Schedule is a noncancelable lease of the Equipment described therein and Lessee's obligation to pay rent and perform all other obligations thereunder and under the Lease are not subject to cancellation or termination by Lessee for any reason. 7. NO WARRANTIES BY LESSOR: LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS, AND WITH ALL FAULTS. LESSOR MAKES NO WARRANTIES OR REPRESENTATION, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATIONS: ITS MERCHANTABILITY; ITS FITNESS FOR ANY PARTICULAR PURPOSE; ITS DESIGN, CONDITION, QUALITY, CAPACITY, DURABILITY, CAPABILITY, SUITABILITY OR WORKMANSHIP; ITS NON-INTERFERENCE WITH OR NON-INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHT; OR ITS COMPLIANCE WITH ANY LAW, RULE, SPECIFICATION, PURCHASE ORDER OR CONTRACT PERTAINING THERETO. Lessor hereby assigns to Lessee the benefit of any assignable manufacturer's or supplier's warranties, but Lessor, at Lessee's written request, will cooperate with Lessee in pursuing any remedies Lessee may have under such warranties. Any action taken with regard to warranty claims against any manufacturer or supplier by Lessee will be at Lessee's sole expense. LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE FINANCIAL CONDITION OR FINANCIAL STATEMENTS OF ANY PARTY OF ANY PARTY OR AS TO THE TAX OR ACCOUNTING TREATMENT OR CONSEQUENCES OF THE LEASE, THE EQUIPMENT OR THE RENTAL PAYMENTS. 8. INSURANCE: Lessee at its sole expense shall at all times keep each item of Equipment insured against all risks of loss or damage from every cause whatsoever for an amount not less than the greater of the full replacement value or the Lessor's Cost of such item of Equipment. Lessee at its sole expense shall at all times carry public liability and property damage insurance in amounts satisfactory to Lessor protecting Lessee and Lessor from liabilities for injuries to persons and damage to property of others relating in any way to the Equipment. All insurers shall be reasonably satisfactory to Lessor, Lessee shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any insurance covering damage or loss of the Equipment shall be payable to Lessor as loss Payee and shall, at Lessor's option, be applied toward (a) the replacement, restoration or repair of the Equipment, or (b) payment of the obligations of Lessee under the Lease. Proceeds of any public liability or property insurance shall be payable first to Lessor as additional insured to the extent of its liability, then to Lessee. If an event of default occurs and is continuing, or if Lessee fails to make timely payments due under Section 9 hereof, then Lessee automatically appoints Lessor as Lessee's attorney-in-fact with full power and authority in the place of Lessee and in the name of Lessee or Lessor to make claim for, receive payment of, and sign and endorse all documents, checks or drafts for loss or damage under any such policy. Each insurance policy will require that the insurer give Lessor at least 30 days prior written notice of any cancellation of such policy and will require that Lessor's interests remain insured regardless of any act, error, omission, neglect or misrepresentation of Lessee. The insurance maintained by Lessee shall be primary without any right of contribution from insurance which may be maintained by Lessor. 9. LOSS AND DAMAGE: (a) Lessee bears the entire risk of loss, theft, damage or destruction of Equipment in whole or in part from any reason whatsoever ("Casualty Loss"). No Casualty Loss to Equipment shall relieve Lessee from the obligation to pay rent or from any other obligation under the Lease. Page 1 of 4 2 9. LOSS AND DAMAGE (CONTINUED): In the event of Casualty Loss to any item of Equipment, Lessee shall immediately notify Lessor of the same and Lessee shall, if so directed by Lessor, immediately repair the same. If Lessor determines that any item of Equipment has suffered a Casualty Loss beyond repair ("Lost Equipment"), then Lessee, at the option of Lessor, shall: (1) immediately replace the Lost Equipment with similar equipment in good repair, condition and working order free and clear of any Liens and deliver to Lessor a bill of sale covering the replacement equipment, in which event such replacement equipment shall automatically be Equipment under the Lease; or (2) On the rent payment date which is at least 30 but no more than 60 days after the date of the Casualty Loss, pay to Lessor all amounts then due and payable by Lessee under the Lease for the Lost Equipment plus the Stipulated Loss Value for such Lost Equipment as of the date of the Casualty Loss. Upon payment by Lessee of all amounts due under the above clause (2), the lease of the Lost Equipment will terminate and Lessor shall transfer to Lessee all of Lessor's right, title and interest in such Equipment on an "as-is, where-is" basis with all faults, without recourse and without representation of warranty of any kind, express or implied. (b) "Stipulated Loss Value" of any item of Equipment during its Lease term equals the present value discounted in arrears to the applicable date of the applicable SLV Discount Rate of (1) the remaining rents and all other amounts (including, without limitation, any balloon payment and, as to a terminal rental adjustment clause ("TRAC") lease, the TRAC value stated in the Schedule, and any other payments required to be paid by Lessee at the end of the applicable Lease Term] payable under the Lease for such item on and after such date to the end at the applicable Lease Term and (2) an amount equal to the Economic Value of the Equipment. For any item of Equipment, "Economic Value" means the Fair Market Value of the Equipment at the end of the applicable Lease Term as originally anticipated by Lessor at the Commencement Date of the applicable Schedule; provided, that Lessee agrees that such value shall be determined by the books of Lessor as of the Commencement Date of the applicable Schedule. After the payment of all rent due under the applicable Schedule and the expiration of the Lease Term of any item of Equipment, the Stipulated Loss Value of such item equals the Economic Value of such item. Stipulated Loss Value shall also include any Taxes payable by Lessor in connection with its receipt thereof. For any item of Equipment, "SLV Discount Rate" means an interest rate equal to the Prime Rate in effect on the Commencement Date of the Schedule for such item minus two percentage points. 10. TAX BENEFITS INDEMNITY. (a) The Lease has been entered into on the basis that Lessor shall be entitled to such deductions, credits and other tax benefits as are provided by federal, state and local income tax law to an owner of the Equipment (the "Tax Benefits") including, with limitation: (1) modified accelerated cost recovery deductions on each item of Equipment under Section 168 of the Code (as defined below) in an amount determined commencing with the taxable year in which the Commencement Date of this applicable Schedule occurs, using the maximum allowable depreciation method available under Section 168 of the Code, using a recovery period (as defined in Section 168 of the Code) reasonably determined by Lessor, and using an initial adjusted basis which is equal to the Lessor's Cost of such item; (2) amortization of the expenses paid by Lessor in connection with the Lease on a straight-line basis over the term of the applicable Schedule; and (3) Lessor's federal taxable income will be subject to the maximum rate on corporations in effect under the Code as of the Commencement Date of the applicable Schedule. (b) If on any one or more occasions (1) Lessor shall lose, shall not have or shall lose the right to claim all or any part of the Tax Benefits, (2) there shall be reduced, disallowed, recalculated or recaptured all or any part of the Tax Benefits, or (3) all or any part of the Tax Benefits is reduced by a change in law or regulation (each of these events described in subparagraphs 1, 2 or 3 of this paragraph (b) will be referred to as a "Tax Loss"), then, upon 30 days written notice by Lessor to Lessee that a Tax Loss has occurred, Lessee shall pay Lessor an amount which, in the reasonable opinion of Lessor and after the deduction of all taxes required to be paid by Lessor with respect to the receipt of such amount, will provide Lessor with the same after-tax net economic yield which was originally anticipated by Lessor as of the Commencement Date of the applicable Schedule. (c) A Tax Loss shall occur upon the earliest of: (1) the happening of any event (such as disposition or change in use of an item of Equipment) which may cause such Tax Loss; (2) Lessor's payment to the applicable taxing authority of the tax increase resulting from such Tax Loss; or (3) the adjustment of Lessor's tax return to reflect such Tax Loss. (d) Lessor shall not be entitled to payment under this section for any Tax Loss caused solely by one or more of the following events: (1) a disqualifying sale or disposition of an item of Equipment by Lessor prior to any default by Lessee; (2) Lessor's failure to timely or properly claim the Tax Benefits in Lessor's tax return; (3) a disqualifying change in the nature of Lessor's business or liquidation thereof; (4) a foreclosure by any person holding through Lessor a security interest on an item of Equipment which foreclosure results solely from an act of Lessor; or (5) Lessor's failure to have sufficient taxable income or tax liability to utilize the Tax Benefits. (e) "Code" shall mean the Internal Revenue Code of 1966, as amended. For the purposes of this Section 10, the term "Lessor" shall include any affiliate group (within the meaning of Section 1504 of the Code) of which Lessor is a member for any year in which a consolidated income tax return in filed for such affiliated group. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 11. GENERAL TAX INDEMNITY: Lessee will pay, and will defend, indemnify and hold harmless on an after-tax basis from, any and all Taxes (as defined below) and related audit and contest expenses on or relating to (a) any of the Equipment, (b) the Lease, (c) purchase, acceptance, ownership, lease, possession, use, operation, transportation, return or other disposition of any of the Equipment, and (d) rentals or earnings relating to any of the Equipment or the Lease. "Taxes" means present and future taxes or other governmental charges that are not based on the net income of Lessor, whether they are assessed to or payable by Lessee or Lessor, including, with limitation (l) sales, use, excise, licensing, registration, titling, franchise, business and occupation, gross receipts, stamp and personal property taxes, (ii) levies, imposts, duties, assessments, charges and withholdings, (iii) penalties, fines, and additions to tax and (iv) interest on any of the foregoing. Unless Lessor elects otherwise, Lessor will prepare and file all reports and returns relating to any Taxes and will pay all Taxes to the appropriate taxing authority. Lessee will reimburse Lessor for all such payments promptly on request. On or after any applicable assessment/levy/lien date for any personal property Taxes relating to any Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to Lessor the personal property Taxes which Lessor reasonably anticipates will be due, assessed, levied or otherwise imposed on any Equipment during its Lease Term. If Lessor elects in writing, Lessee will itself prepare and file all such reports and returns, pay all such Taxes directly to the taxing authority, and send Lessor evidence thereof. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 12. GENERAL INDEMNITY: Lessee assumes all risk and liability for, and shall defend, indemnify and keep Lessor harmless on an after-tax basis from, any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, costs and expenses, including reasonable attorney fees and expenses, of whatsoever kind and nature imposed on, incurred by or asserted against Lessor, in any way relating to or arising out of the manufacture, purchase, acceptance, rejection, ownership, possession, use, selection, delivery, lease, operation, condition, sale, return or other disposition of the Equipment or any part thereof (including, without limitation, any claim for latent or other defects, whether or not discoverable by Lessee or any other person, any claim for negligence, tort or strict liability, any claim under any environmental protection or hazardous waste law and any claim for patent, trademark or copyright infringement). Lessee will not indemnify Lessor under this section for loss or liability arising from the events which occur after the Equipment has been returned to Lessor or for loss or liability caused directly and solely by the gross negligence of willful misconduct of Lessor. In this section, "Lessor" also includes any director, officer, employee, agent, successor or assign of Lessor. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 13. PERSONAL PROPERTY: Lessee represents and agrees that the Equipment is, and shall at all times remain, separately identifiable personal property. Upon Lessor's request, Lessee shall furnish Lessor a landlord's and/or mortgagee's waiver and consent to remove all Equipment. Lessor may display notice of its interest in the Equipment by any reasonable identification. Lessee shall not alter or deface any such indicia of Lessor interest. 14. DEFAULT: Each of the following events shall constitute an event of default under the Lease: (a) Lessee fails to pay any rent or other amount due under the Lease within ten days of its due date; or (b) Lessee fails to perform or observe any of its obligations in Section 8, 18, or 22 hereof; or (c) Lessee fails to perform or observe any of its other obligations in the Lease for more than 30 days after Lessor notifies Lessee of such failure; or (d) Lessee or any Lessee affiliate defaults in the payment, performance or observance of any obligation under any loan, credit agreement or other lease in which Lessor or any subsidiary (direct or indirect) of Banc One Corporation (which is Lessor's ultimate parent corporation) is the creditor or lessor; or (e) any settlement, representation or warranty made by Lessee in the Lease, in any Schedule or in any document, certificate or financial statement in connection with the Lease proves at any time to have been untrue or misleading in any material respect as of the time when made; or (f) Lessee becomes insolvent or bankrupt, or Lessee admits its inability to pay its debts as they mature, or Lessee makes an assignment for the benefit of creditors, or Lessee applies for, institutes or consents to the appointment of a receiver, trustee or similar official for Lessee or any substantial part of its property or any such official is appointed without Lessee's consent, or Lessee applies for, institutes or consents to any bankruptcy, insolvency, reorganization, debt moratorium, liquidation, or similar proceeding relating to Lessee or any substantial part of its property under the laws of any jurisdiction or any such proceeding is instituted against Lessee without stay or dismissal for more than 30 days, or Lessee commences any act amounting to a business failure or a winding up of its affairs, or Lessee ceases to do business as a going concern; or (g) with respect to any guaranty, letter of credit, pledge agreement, security agreement, mortgage, deed of trust, debt subordination agreement or other credit enhancement or credit support agreement (whether now existing or hereafter arising) signed or issued by any party in connection with all or any part of Lessee's obligations under the Lease, the party signing or issuing any such agreement defaults in its obligations thereunder or any such agreement shall cease to be in full force and effect or shall be declared to be null, void, invalid or unenforceable by the party signing or issuing it; or (h) there shall occur in Lessor's reasonable opinion any material adverse change in the financial condition, business or operations of Lessee. Page 2 of 4 3 14. DEFAULT: (CONTINUED): As used in this section 14, the term "Lessee" also includes any guarantor (whether now existing or hereafter arising) of all or any part of Lessee's obligations under the Lease and/or any issuer of a letter of credit (whether no existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease, and the term "Lease" also includes any guaranty or letter of credit (whether now existing or hereafter arising) relating to all or any part of Lessee's obligations under the Lease. 15. REMEDIES. If any event of default exists, Lessor may exercise in any order one or more of the remedies described in the lettered subparagraphs of this section, and Lessee shall perform its obligations imposed thereby: (a) Lessor may require Lessee to return any or all Equipment as provided in the Lease. (b) Lessor or its agent may repossess any or all Equipment wherever found, may enter the premises where the Equipment is located and disconnect, render unusable and remove it, and may use such premises without charge to store or show the Equipment for sale. (c) Lessor may sell any or all Equipment at public or private sale, with or without advertisement or publication, may re-lease or otherwise dispose of it or may use, hold or keep it. (d) Lessor may require Lessee to pay to Lessor on a date specified by Lessor with respect to any or all Equipment (i) all accrued and unpaid rent, late charges and other amounts due under the Lease on or before such date, plus (ii) as liquidated damages for loss of a bargain and not as a penalty, and in lieu of any further payments of rent, the Stipulated Loss Value of the Equipment on such date, plus (iii) interest at the Overdue Rate on the total of the foregoing ("Overdue Rate" means an interest rate per annum equal to the higher of 18% or 2% over the Prime Rate, but not to exceed the highest rate permitted by applicable law). The parties acknowledge that the foregoing money damage calculation reasonably reflects Lessor's anticipated loss with respect to the Equipment and the related Lease resulting from the event of default. If an event of default under section 14(f) of this Master Lease Agreement exists, then Lessee will be automatically liable to pay Lessor the foregoing amounts as of the next rent payment date unless Lessor otherwise elects in writing. (e) Lessee shall pay all costs, expenses and damages incurred by Lessor because of the event of default or its actions under this section, including, without limitation any collection agency and/or attorney fees and expenses, any costs related to the repossession, safekeeping, storage, repair, reconditioning or disposition of the Equipment and any incidental and consequential damages. (f) Lessor may terminate the Lease and/or any or all Schedules, may sue to enforce Lessee's performance of the obligations under the Lessee an/or may exercise any other right or remedy then available to Lessor at law or in equity. Lessor is not required to take any legal process or give Lessee any notice before exercising any of the above remedies. None of the above remedies is exclusive, but each is cumulative and in addition to any other remedy available to Lessor. Lessor's exercise of one or more remedies shall not preclude its exercise of any other remedy. No action taken by Lessor shall release Lessee from any of its obligations to Lessor. No delay or failure on the part of Lessor to exercise any right hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise of any right preclude any other exercise thereof or the exercise of any other right. After any default, Lessor's acceptance of any payment by Lessee under the Lease shall not constitute a waiver by Lessor of such default, regardless of Lessor's knowledge or lack of knowledge at the time of such payment, and shall not constitute a reinstatement of the Lease if the Lease has been declared in default by Lessor, unless Lessor has agreed in writing to reinstate the Lease and to waive the default. If Lessor actually repossesses any Equipment, then it will use commercially reasonable efforts under the then current circumstances to attempt to mitigate its damages; provided, that Lessor shall not be required to sell, re-lease or otherwise dispose of any Equipment prior to Lessor enforcing any of the remedies described above. Lessor may sell or re-lease the Equipment in any manner it chooses, free and clear of any claims or rights of Lessee and without any duty to account to Lessee with respect therein except as provided below. If Lessor actually sells or re-leases the Equipment, it will credit the net proceeds of any sale of the Equipment, or the net present value (discounted at the then current Prime Rate) of the rents payable under any new lease of the Equipment, against and up to (but not exceeding) the Stipulated Loss Value of the Equipment and any other amounts Lessee owes Lessor, or will reimburse Lessee for and up to (but not exceeding) Lessee's payment thereof. The term "net" as used above shall mean such amount after deducting the costs and expenses described in clause (a) above of this section. If Lessor elects in writing not to sell or re-lease any Equipment, it will similarly credit or reimburse Lessee for Lessor's reasonable estimate of such Equipment's Fair Market Value. 16. LESSOR'S RIGHT TO PERFORM: If Lessee fails to make any payment under the Lease or fails to perform any of the other agreements in the Lease (including, without limitation, its agreement to provide insurance coverage as stated in the Lease), Lessor may itself make such payment or perform such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or performance shall be deemed to be additional rent, payable by Lessee on demand. 17. FINANCIAL REPORTS: Lessee agrees to furnish to Lessor: (a) annual financial statements setting forth the financial condition and results of operation of Lessee (financial statements shall include the balance sheet, income statement and changes in financial position and all notes thereto) within 120 days of the end of each fiscal year of Lessee; (b) quarterly financial statements setting forth the financial condition and results of operation of Lessee within 60 days of the end of each of the first three fiscal quarters of Lessee; and (c) such other financial information as Lessor may from time to time reasonably request including, without limitation, financial reports filed by Lessee with federal or state regulatory agencies. All such financial information shall be prepared in accordance with generally accepted accounting principles. If Lessee fails to furnish the annual financial statements to Lessor within 30 days of Lessor's written request, then Lessor may, at its option, charge Lessee a non-performance fee equal to all of the rentals due under the Lease for the then current month (unless otherwise prohibited by law) and such fees shall be deemed to be additional rent, payable by Lessee on demand. 18. NO CHANGES IN LESSEE: Lessee shall not: (a) liquidate, dissolve or suspend business; (b) sell, transfer or otherwise dispose of all or a majority of its assets, except that Lessee may sell its inventory in the ordinary course of its business; (c) enter into any merger, consolidation or similar reorganization unless it is the surviving corporation; (d) transfer all or any substantial part of its operations or assets outside of the United States of America; or (e) without 30 days advance written notice to Lessor, change its name or chief place of business. Lessee shall at all times maintain a tangible net worth which is no less than the greater of 75% of its tangible net worth as of the date of the Master Lease Agreement or 75% of its highest tangible net worth thereafter. 19. LATE CHARGES: If any rent or other amount payable under the Lease is not paid when due, then as compensation for the administration and enforcement of Lessee's obligation to make timely payments, Lessee shall pay with respect to each overdue payment on demand an amount equal to the greater of fifteen dollars ($15.00) or five percent (5%) of each overdue payment (but not to exceed the highest late charge permitted by applicable law) plus any collection agency and fees and expenses. 20. NOTICES; POWER OF ATTORNEY: (a) Service of all notices under the Lease shall be sufficient if given personally or couriered or mailed to the party involved at its respective address set forth herein or at such other address as such party may provide in writing from time to time. Any such notice mailed to such address shall be effective three days after deposit in the United States mail with postage prepaid. (b) With respect to any power of attorney covered by the Lease, the powers conferred on Lessor thereby; are powers coupled with an interest; are irrevocable; are solely to protect Lessor's interests under the Lease; and do not impose any duty on Lessor to exercise such powers. Lessor shall be accountable solely for amounts it actually receives as a result of its exercise of such powers. 21. ASSIGNMENT BY LESSOR: Lessor and any assignee of Lessor, with or without notice to or consent of Lessee, may sell, assign, transfer or grant a security interest in all or any part of Lessor's rights, obligations, title or interest in the Equipment, the Lease, any Schedule of the amounts payable under the Lease or any Schedule to any entity ("transferee"). the transferee shall succeed to all of Lessor's rights in respect to the Lease (including, without limitation, all rights to insurance and indemnity protection described in the Lease). Lessee agrees to sign any acknowledgement and other documents reasonably requested by Lessor or the transferee in connection with any such transfer transaction. Lessee, upon receiving notice of any such transfer transaction, shall comply with the terms and conditions thereof. Lessee agrees that it shall not assert against any transferee any claim, defense, setoff, deduction or counterclaim which Lessee may now or hereafter be entitled to assert against lessor. Unless otherwise agreed in writing, the transfer transaction shall not relieve Lessor of any of its obligations to Lessee under the Lease and Lessee agrees that the transfer transaction shall not be construed as being an assumption of such obligations by the transferee. 22. NO ASSIGNMENT, SUBLEASE OR LIEN BY LESSEE: LESSEE SHALL NOT, DIRECTLY OR INDIRECTLY, (a) MORTGAGE, ASSIGN, SELL, TRANSFER, OR OTHERWISE DISPOSE OF THE LEASE OR ANY INTEREST THEREIN OR THE EQUIPMENT OR ANY PART THEREOF, OR (b) SUBLEASE, RENT, LEND OR TRANSFER POSSESSION OR USE OF THE EQUIPMENT OR ANY PART THEREFOR TO ANY PARTY, OR (c) CREATE, INCUR GRANT, ASSUME OR ALLOW TO EXIST ANY LIEN ON THE LEASE, ANY SCHEDULE, THE EQUIPMENT OR ANY PART THEREOF. Page 3 of 4 4 23. EXPIRATION OF LEASE TERM: (a) At least 90 days (or earlier if otherwise specified), but no more than 270 days prior to expiration of the Lease Term of each Schedule, Lessee shall give Lessor written notice of its electing one of the following options for all (but not less than all) of the Equipment covered by such Schedule; return the Equipment under clause (b) below, or purchase the Equipment under clause (c) below. The election of an option shall be irrevocable. If Lessee fails to give timely notice of its election, it shall be deemed to have elected to return the Equipment. (b) If Lessee elects or is deemed to have elected to return the Equipment at the expiration of the Lease Term of a Schedule or if Lessee is obligated at any time to return the Equipment, then Lessee shall, at its sole expense and risk, deinstall, disassemble, pack, crate, insure and return the Equipment to Lessor (all in accordance with applicable industry standards) at any location in the continental United States of America selected by Lessor. The Equipment shall be in the same condition as when received by Lessee, reasonable wear, tear and depreciation resulting from normal and proper use excepted (or, if applicable, in the condition set forth in the Lease or the Schedule), shall be in good operating order and maintenance as required by the Lease, shall be certified as being eligible for any available manufacturer's maintenance program, shall be free and clear of any Liens as required by the Lease, shall comply with all applicable laws and regulations and shall include all manuals, specifications, repair and maintenance records and similar documents. Until Equipment is returned as required above, all terms of the Lease shall remain in full force and effect including, without limitation, obligations to pay rent and insure the Equipment; provided, that after the expiration of any Schedule and before Lessee has completed its return of the Equipment or its purchase option (if elected), the term of the lease of the Equipment covered by such Schedule shall be month-to-month or such shorter period as may be specified by Lessor. (c) If Lessee gives Lessor timely notice of its election to purchase Equipment, then on the expiration date of the applicable Schedule Lessee shall purchase all (but not less than all) of the Equipment and shall pay to Lessor the Fair Market Value of the Equipment plus all Taxes (other than income taxes on Lessor's gains on such sale), costs and expenses incurred or paid by Lessor in connection with such sale plus all accrued but unpaid amounts due with respect to the Equipment and/or the Schedule. The Stipulated Loss Value or Economic Value of any item of Equipment shall have no bearing or influence on the determination of Fair Market Value under this clause (c). Upon payment in full of the above amounts, and if no default has occurred and is continuing under the Lease, Lessor shall transfer title to such Equipment to Lessee "as-is, where-is" with all faults and without recourse to Lessor and without any representation or warranty of any kind whatsoever by Lessor, express or implied. (d) For purposes of the purchase option of the Lease, the determination of the Fair Market Value of any Equipment shall be determined (1) without deducting any costs of dismantling or removal from the location of use, (2) on the assumption that the Equipment is in the condition required by the applicable return and maintenance provisions of the Lease and is free and clear of any Liens as required by the Lease, and (3) shall be determined by mutual agreement of Lessee and Lessor or, if Lessor and Lessee are not able to agree on such value, by the Appraisal Procedure. "Appraisal Procedure" means the determination of Fair Market Value by an independent appraiser acceptable to Lessor and Lessee, or, if the parties are unable to agree on an acceptable appraiser, by averaging the valuation (disregarding the one which differs the most from the other two) of three independent appraisers, the first appointed by Lessor, the second appointed by Lessee and the third appointed by the first two appraisers. For purposes of the "Remedies" section of the Lease, the Fair Market Value shall be determined by Lessor in good faith and any such valuation shall be on an "as-is, where-is" basis without regard to the first sentence of this clause (d). Lessee, at its sole expense, shall pay all fees, costs and expenses of the above described appraisers. 24. GOVERNING LAW: THE INTERPRETATION, CONSTRUCTION AND VALIDITY OF THE LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OHIO. WITH RESPECT TO ANY ACTION BROUGHT BY LESSOR AGAINST LESSEE TO ENFORCE ANY TERM OF THE LEASE, LESSEE HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT IN THE FRANKLIN COUNTY, OHIO, WHERE LESSOR HAS ITS PRINCIPAL PLACE OF BUSINESS AND WHERE PAYMENTS ARE TO BE MADE BY LESSEE. 25. MISCELLANEOUS: (a) Subject to the limitations herein, the Lease shall be binding upon and inure to the benefit of the partes hereto and their respective heirs, administrators, successors and assigns. (b) This Master Lease Agreement and each Schedule may be executed in any number of counterparts, which together shall constitute a single instrument. Only one counterpart of each Schedule shall be marked "Lessor's Original" and all other counterparts shall be marked "Duplicate". A security interest in any Schedule may be created through transfer and possession only of the counterpart marked "Lessor's Original". (c) Section and paragraph headings in this Master Lease Agreement and the Schedules are for convenience only and have no independent meaning. (d) The terms of the Lease shall be severable and if any term thereof is declared unconscionable, invalid, illegal or void, in whole or in part, the decision so holding shall not be construed as impairing the other terms of the Lease and the Lease shall continue in full force and effect as if such invalid, illegal, void or unconscionable term were not originally included herein. (e) All indemnity obligations of Lessee under the Lease and all rights, benefits and protections provided by Lessor by warranty disclaimers shall survive the cancellation, expiration or termination of the Lease. (f) Lessor shall not be liable to Lessee for any indirect, consequential or special damages for any reason whatsoever. (g) Each payment made by Lessee shall be applied by Lessor in such manner as Lessor determines in its discretion which may include, without limitation, application as follows: first, to accrued late charges; second, to accrued rent; and third, the balance to any other amounts then due and payable by Lessee under the Lease. (h) If the Lease is signed by more than one Lessee, each of such Lessees shall be jointly and severally liable for payment and performance of all of Lessee's obligations under the Lease. 26. ENTIRE AGREEMENT: THE LEASE REPRESENTS THE FINAL, COMPLETE AND ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO. THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS OR UNDERSTANDINGS AFFECTING THE LEASE OR THE EQUIPMENT. Lessee agrees that Lessor is not the agent of any manufacturer or supplier, that no manufacturer or supplier is an agent of Lessor, and that any representation, warranty or agreement made by a manufacturer, supplier or their employees, sales representatives or agents shall not be binding on Lessor. 27. JURY WAIVER: ALL PARTIES TO THIS MASTER LEASE AGREEMENT WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ON ANY MATTER WHATSOEVER ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS MASTER LEASE AGREEMENT. BANC ONE LEASING CORPORATION CERPROBE CORPORATION --------------------------------- (Name of Lessee) Lessor By: /s/ Clive R. Camlin By: /s/ Randal L. Buness ------------------------ ---------------------------- Title: Funding Authority Title: Vice President and Chief Financial Officer --------------------- ------------------------- Lease Witness: /s/ Laura M. Back ----------------- (SEAL) OFFICIAL SEAL LAURA M. BACK Notary Public-State of Arizona MARICOPA COUNTY My Comm. Expires July 14, 2001 Regardless of any prior, present or future oral agreement or course of dealing, no term or condition of the Lease may be amended, modified, waived, discharged, cancelled or terminated except by a written instrument signed by the party to be bound; except Lessee authorizes Lessor to complete the Acceptance Date of each Schedule and the serial numbers of any Equipment. CERPROBE CORPORATION - ------------------------------- (Name of Lessee) By: /s/ Randal L. Buness ---------------------------- Title: Vice President and Chief Financial Officer ------------------------- Page 4 of 4 EX-11 4 EX-11 1 EXHIBIT 11 COMPUTATION OF NET INCOME (LOSS) PER SHARE
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 ---------- ----------- ---------- Net income (loss)..................................... $1,895,968 $(1,360,790) $2,402,247 Convertible debenture interest after tax effect....... -- -- 53,291 ---------- ----------- ---------- Income (loss) available to common stockholders........ $1,895,968 $(1,360,790) $2,455,538 ========== =========== ========== Weighted average common shares outstanding............ 6,690,265 4,579,598 3,874,459 ---------- ----------- ---------- Common equivalent shares representing shares issuable upon exercise of stock options...................... 292,103 194,883 196,773 Convertible Preferred Stock........................... -- 553,858 -- Convertible Debentures................................ -- -- 595,000 Antidilutive nature of dilutive securities............ -- (748,741) -- Dilutive adjusted weighted average shares and assumed conversions:........................................ 6,982,368 4,579,598 4,666,232 ---------- ----------- ---------- Basic net income (loss) per share..................... $ 0.28 $ (0.30) $ 0.62 ========== =========== ========== Diluted net income (loss) per share................... $ 0.27 $ (0.30) $ 0.53 ========== =========== ==========
EX-21 5 EX-21 1 EXHIBIT 21 LIST OF SUBSIDIARIES SUBSIDIARIES OF CERPROBE CORPORATION: CompuRoute, Inc. SVTR, Inc. Cerprobe Europe Limited Cerprobe Asia Holdings PTE LTD. Cobra Venture Management, Inc. Cerprobe-Upsys L.L.C. SUBSIDIARIES OF CERPROBE ASIA HOLDINGS PTE LTD.: Cerprobe Asia PTE LTD.* SUBSIDIARIES OF CERPROBE ASIA PTE LTD.: Cerprobe Singapore PTE LTD. Cerprobe Taiwan Co. LTD. * 70% owned by Cerprobe Corporation until August 18, 1997, at which time Cerprobe's ownership was reduced to 60%. EX-23 6 EX-23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Cerprobe Corporation: We consent to incorporation by reference in the registration statements (No. 33-8348, No. 33-65200 and No. 333-03015) filed on Form S-8 of Cerprobe Corporation of our report dated February 6, 1998, relating to the consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Cerprobe Corporation. KPMG PEAT MARWICK L.L.P. Phoenix, Arizona March 27, 1998 EX-27.1 7 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000725259 CERPROBE CORPORATION 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 30,347,173 0 10,633,428 292,000 8,483,141 50,906,725 22,341,915 7,200,013 69,454,844 8,401,802 0 0 0 404,899 0 69,454,844 77,110,204 77,110,204 45,477,486 26,240,432 0 112,000 486,069 5,607,715 3,711,747 0 0 0 0 1,895,968 .28 .27
EX-27.2 8 EX-27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000725259 CERPROBE CORPORATION 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 5,564,557 0 5,787,203 223,000 3,862,753 16,135,878 16,158,535 4,712,244 31,511,573 6,132,119 0 0 16 301,386 0 31,511,573 37,308,199 37,308,199 20,343,516 16,211,984 0 12,000 221,248 1,340,210 2,701,000 0 0 0 0 (1,360,790) (.30) (.30) EPS - PRIMARY AND EPS - DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL ACCOUNTING STANDARDS' BOARD STATEMENT NO. 128.
EX-27.3 9 EX-27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000725259 CERPROBE CORPORATION 1 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 263,681 0 4,550,041 173,000 2,802,081 7,988,539 7,746,492 3,078,706 14,967,450 3,217,080 0 0 0 204,792 0 14,967,450 26,098,637 26,098,637 13,706,435 8,209,278 0 12,000 153,758 4,213,974 1,811,727 0 0 0 0 2,402,247 .62 .53 EPS - PRIMARY AND EPS - DILUTED ARE RESTATED TO INCLUDE THE IMPACT OF FINANCIAL ACCOUNTING STANDARDS' BOARD STATEMENT NO. 128.
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