-----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, F0lVsF11jA1+V4OoEX8n7xpyM7g8glG1tehXKsXvloqwDUfRydSymcbSXJ0RwwPW VcwzryiwpGwZ5R/Qwvq5EA== 0000950153-99-000386.txt : 19990402 0000950153-99-000386.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950153-99-000386 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582985 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, 1998 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 UNDER SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.05 PER SHARE PREFERRED SHARE PURCHASE RIGHTS (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 26, 1999, 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 $87,476,998 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 26, 1999, there were 7,658,726 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive Proxy Statement for the 1999 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, 1998 TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business.................................................... 1 Item 2. Properties.................................................. 17 Item 3. Legal Proceedings........................................... 18 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 Stockholder Matters......................................... 18 Item 6. Selected Consolidated Financial Data........................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 27 Item 8. Financial Statements and Supplementary Data................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 27 PART III Item 10. Directors and Executive Officers of the Registrant.......... 27 Item 11. Executive Compensation...................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 27 Item 13. Certain Relationships and Related Transactions.............. 27 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 28 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'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 through internal product development, strategic acquisitions, and joint ventures. The development of the Company's CerCard(TM) technology, in 1990, served as the foundation for the growth of the Company's core probe card business. The acquisition of Fresh Test Technology Corporation ("Fresh Test"), in April 1995, enabled the Company to expand its product line to include ATE interface assemblies. The acquisition of Cerprobe Interconnect Solutions, Inc. ("CIS"), formerly CompuRoute, Inc., in December 1996, enabled the Company to offer ATE test boards, the Company's first packaged IC testing product. The establishment, in May 1997, of a joint development agreement with Japan based Mitsubishi Materials Corporation, enabled the development of the next generation probe card technology based upon the Company's proprietary P4(TM) (Photolithographic Pattern Plated Probe) technology. The acquisition of France based Cerprobe Europe S.A.S., formerly SemiConducteur Services, S.A., a probe card company, enabled the Company to further service the European market. The signing of an agreement with Feinmetall GmbH, a German contact technology company, in November 1998, enabled Cerprobe to acquire an exclusive license to design, manufacture, and distribute Vertical integrated Probe (ViProbe(R)) products worldwide, except Europe. 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 maintains full service facilities in Scotland and France and a sales office in Germany to serve the European market. The Company also maintains full service facilities in Singapore and Taiwan to serve the Southeast Asian market. Additionally, the Company is in the process of establishing a full service facility in Japan. Each of the Company's facilities is located in proximity to major semiconductor manufacturing centers. Cerprobe's focus on high quality products and innovative technologies has enabled it to establish strong relationships with leading worldwide semiconductor manufacturers. In 1998, the Company's top five customers were Intel Corporation, IBM Corporation, LSI Logic Corporation, Motorola Inc., 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: - Provide comprehensive solutions for semiconductor test integration - Maintain strong customer relationships - Expand global presence - Focus on technological innovation - 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. 1 4 INDUSTRY OVERVIEW The semiconductor industry is characterized as cyclical, with capacity boom cycles followed by bust cycles that create tremendous pricing pressures. For the past several years the IC market has been 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 41 billion units in 1994 to nearly 60 billion units in 1998. Presently the industry is in a downturn driven by excess capacity, pricing pressures, and the economic crisis in Asia. Growing demand for ICs has driven the increased demand for semiconductor testing products, such as probe cards, ATE interface assemblies, and ATE test boards. Because probe cards, and to a lesser extent ATE test boards, are consumable products rather than capital equipment, the historically rapid unit growth of ICs and new IC designs have in particular fueled the demand for probe cards and ATE test boards. VLSI Research Inc. ("VLSI"), an independent semiconductor market research company, estimates the worldwide market for probe cards in 1999 to be approximately $500 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. In addition to the historically 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 ICs with shrinking geometries and 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. IC manufacturers are placing added emphasis on greater test accuracy, testing at higher speeds, testing multiple ICs simultaneously, and quicker turnaround times for probing devices and testing packaged 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. 2 5 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: - The ATE, which is capital equipment that transmits the electrical signals to the IC and evaluates the signals upon their return - 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 - 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 - 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 - 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 Corporation, IBM Corporation, LSI Logic Corporation, Motorola Inc., and Texas Instruments, as well as with emerging companies. Engineering, sales, and management personnel 3 6 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 approximately 130 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. - 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, France, Singapore, and Taiwan. In addition, the Company is in the process of establishing manufacturing operations in Japan and expects to begin manufacturing in 1999. 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 also has worked closely with SEMATECH, the U.S. semiconductor industry consortium that defines the standards for future semiconductor products, 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 November 1998, the Company signed a 10-year agreement with Feinmetall GmbH, a German contact technology company. The agreement gives Cerprobe the exclusive license to design, manufacture, and distribute Vertical integrated Probe (ViProbe(R)) products worldwide, except Europe. The technology is to be transferred to Cerprobe's Gilbert facility in the first quarter of 1999 with production beginning the second quarter of 1999. In addition, the Company established in May 1997 a joint development agreement with Japan based Mitsubishi Materials Corporation to develop next generation probe card technology based upon the Company's proprietary P4(TM) technology. The Company believes these new probe cards wil1 address chip manufacturers increasing demands for tighter test pad pitches, for testing at higher frequencies, and for testing multiple IC simultaneously. - 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, the Company is able to be a single source provider for its customers. 4 7 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 72%, 73%, and 82% of net sales in 1998, 1997, and 1996 respectively. Probe card sales continue to grow; however, as a result of the CIS acquisition in December 1996 and related new product and service offerings, the Company's probe card sales have accounted for a 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 3,000 probes. Because the type and complexity of ICs vary, the number and 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 four 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 frequency, 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 63%, 61%, and 70% of the Company's net sales for 1998, 1997, and 1996, respectively. 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 current and low density probing. With optional features, the ceramic blade can be used for high frequency probing. Vertical (buckling beam) probe 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 (area array) and is used generally for high density applications. In November 1998, the Company licensed the ViProbe(R) (Vertical integrated Probe) products from Feinmetall GmbH, a German contact technology company. The ViProbe(R) vertical products address customers' current requirements of probing area array and also testing multiple ICs simultaneously, meeting the needs of memory manufacturers. Photolithographic technology is a chemical plating process that uses photo masks to pattern unique flex circuit contact sets used on probe cards. The flex circuit contact sets are attached to probe cards using mechanical leaf springs. The Company has jointly developed and patented its P4(TM)(Photolithographic Pattern Plated Probe) technology for use in several probe card applications. The first application is for probe cards that are capable of fine pitch, ultra high frequency, and high accuracy probe tip placement on the decreasing size of 5 8 IC test pads. Another application using P4(TM) is a vertical contact product using a C-shaped probe. Its vertical contact set enables probing of ultra fine pitches and testing of multiple ICs simultaneously, which is a requirement for the memory market. The Company's probe cards generally range in price from $500 to over $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. 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 over $65,000. ATE Test Boards Through the acquisition of CIS in December 1996, the Company expanded its product offerings to include custom-designed ATE test boards. The CIS 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 over $30,000. 6 9 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, process engineering, and product development. Engineering and product development expenses were $3,101,082, $996,253, and $902,909 for the years ended December 31, 1998, 1997, and 1996, respectively, which represented 4.1%, 1.4%, and 2.4% of net sales, respectively. The Company employs approximately 130 engineers and designers. 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. In 1997, the Company 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. In 1998, the Company expanded the agreement with Mitsubishi Materials Corporation to apply P4(TM) technology to develop vertical probe cards to address customers' increasing interest in array testing, memory, and multiple IC testing. 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. In November 1998, the Company signed a 10-year agreement with Feinmetall GmbH, a German contact technology company. The agreement gives Cerprobe the exclusive license to design, manufacture, and distribute Vertical integrated Probe (ViProbe(R)) products worldwide, except Europe. The technology is to be transferred to Cerprobe's Gilbert facility in the first quarter of 1999 with production beginning in the second quarter of 1999. Cerprobe and Feinmetall will jointly enhance and extend the ViProbe(R) family of products. In June of 1998, Cerprobe introduced the StingRay(TM) flexible interface. This is a patent pending design that gives its customers the flexibility to easily reconfigure their interface system for a new test set-up or tester/prober test combination using the same interface assembly with interchangeable pogo towers and probe card trays. To address the final package test requirements of increased pin counts and increasing operating frequencies, CIS has furthered its technological advancements in microvia drilling capabilities, mixed dielectric board materials, and ever increasing board layer count. Microvia technology is the ability to drill holes smaller than 8 mils in diameter. Such holes are needed in high density DUT boards to test ball grid arrays and chip scale packages. CIS has developed seven different levels of board material offerings, including several proprietary mix dielectric materials to provide the customers with solutions targeted specifically for their high performance test application. CIS has also perfected their manufacturing process to be able to reliably produce printed circuit test boards in excess of 35 layers. 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, California, and Texas as well as in Scotland, France, Singapore, and Taiwan. The Company is in the process of establishing manufacturing operations in Japan and expects to begin manufacturing in 1999. The Company 7 10 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 eight 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 emphasizes quality and reliability in both the design and manufacture of its products. 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 Scotland facility is ISO 9001 certified. 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 accuracy of measurements becomes increasingly important with the advancements in technology driving smaller IC geometeries. 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 1998 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, consumers, 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 1998, two customers comprised more than 10% of the Company's business, Intel and Texas Instruments. Intel accounted for 17%, 17%, and 16% of net sales for the years ended December 31, 1998, 1997, and 1996, respectively. Texas Instruments accounted for 12%, 10%, and 2% of net sales for the years ended December 31, 1998, 1997, and 1996, respectively. The Company's top 15 customers in 1998, which together accounted for approximately 73% of net sales, were as follows: Advanced Micro Devices Intel Raytheon Dominion Semiconductor LSI Logic Symbios Logic (IBM/Toshiba J.V.) Lucent Technologies Tech Semiconductor Hewlett-Packard Motorola Teradyne Texas IBM National Semiconductor Instruments Integrated Device Technologies
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 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 8 11 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 four 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's international business represented approximately 18%, 18%, and 20% of net sales for 1998, 1997, and 1996, respectively. The Company believes the potential exists to increase sales in international markets, and the Company has positioned itself to initiate a more aggressive marketing and sales program in these markets in the future. In particular, the Company has expanded its sales efforts throughout Europe through its full service facility in Scotland and a new sales office in Germany. Additionally in September 1998, the Company acquired France based SemiConducteur Services, S.A. (renamed Cerprobe Europe S.A.S.) to further support its European probe card customers. 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. In addition, the Company is establishing manufacturing operations in Japan and expects to begin manufacturing in 1999. The Company augments its direct sales force with a network of independent distributors in Asia. 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. BACKLOG As of December 31, 1998, the Company had a backlog of orders of approximately $4.9 million. These orders are believed to be firm and all are expected to be filled during fiscal 1999. 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. 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. 9 12 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, 1998, the Company had 590 employees from continuing operations, consisting of 127 in engineering and product development, 285 in manufacturing, 67 in sales and marketing, and 111 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.......... 49 President, Chief Executive Officer, and Director Eswar Subramanian...... 41 Senior Vice President and Chief Operating Officer Michael K. Bonham...... 60 Senior Vice President -- Sales and Marketing Randal L. Buness....... 42 Senior Vice President, Chief Financial Officer, Secretary, and Treasurer Kevin Kurtz............ 37 Vice President, Operations Dennis Legal........... 58 Vice President, Research and Development Henry P. Scutoski...... 53 Vice President, Quality
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. Eswar Subramanian served as Senior Vice President and Chief Operating Officer of the Company from June 1996 until his resignation in March 1999. 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 10 13 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 Senior Vice President since January 1999, and served as Vice President from June 1996 to January 1999. He has also served as 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. Kevin Kurtz has served as Vice President, Operations of the Company since February 1999. From May 1997 to January 1999, Mr. Kurtz served as President of SVTR, Inc., a wholly owned subsidiary of Cerprobe Corporation. From January 1996 to April 1997, Mr. Kurtz served as Vice President, Manufacturing of the Company. Mr. Kurtz served as Regional Sales Manager, then as General Manager of the Company's San Jose facility from December 1990 to December 1995. From September 1985 to November 1990, Mr. Kurtz held various Sales and Sales Management positions with Probe Technology, a manufacturer of probing devices for the testing of integrated circuits. Dennis Legal has served as Vice President, Research and Development since February 1998. Mr. Legal was Vice President, Engineering at Aseco Corporation, a developer of semiconductor handling equipment, from 1996 to 1998. Mr. Legal held a number of engineering positions from 1986 through 1996 at Teradyne culminating as Division Manager of Engineering. Teradyne is a leading semiconductor test equipment manufacturer. Henry P. Scutoski has served as Vice President, Quality since April 1995. Mr. Scutoski served as Director of Quality of the Company from March 1994 to April 1995. From February 1991 to March 1994, Mr. Scutoski worked as a self-employed Quality consultant. Mr. Scutoski was a Quality Assurance Manager for Motorola's Government Electronics Group from January 1985 to February 1991. 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: - 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 - 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 - 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 - 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 - 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. 12 15 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 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 future 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 underwent a period of rapid growth through 1997, followed by a period of slowdown due to the severe industry downturn in 1998. Through these periods the Company adjusted the levels of management, manufacturing, and human resources and worked closely with material suppliers and other third parties to manage costs and delivery of goods and services on which the Company is dependent. The Company's operating results could be materially and adversely affected if it is unable to effectively manage resources in a similar manner through future periods of growth and contraction in its industry. There can be no assurance that the management systems and controls currently in place or any steps taken to expand or contract such management systems and controls will be adequate in the future to respond to changing industry conditions. 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 13 16 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 will not be reduced or lost as a result of technological advances by competitors or customers. RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS The Company's international business represented approximately 18%, 18%, and 20% of net sales for 1998, 1997, and 1996, respectively. In Asia a significant portion of sales are generated by independent distributors. A reduction in the sales efforts by the Company's Asian 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, France, Singapore, Taiwan, and recently in Japan, 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 1998, sales to the Company's largest customers, Intel and Texas Instruments, accounted for approximately 17% and 12% of net sales. The Company's top 15 customers in 1998 together accounted for approximately 73% 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, and ATE test board 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 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 restrict the discharge of hazardous substances could subject it to future liabilities. See "Business -- Environmental Regulations" contained in Item 1 of this Report. 15 18 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 16.91% 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, 1998, options to acquire a total of 1,199,566 shares were outstanding under the Company's stock option plans. An additional 375,334 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 37,275 shares of Common Stock in connection with the sale in 1996 of 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). The Company has also adopted a Rights Plan whereby, if and when the Rights become exercisable, holders of shares of Common Stock will be entitled to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $110 (subject to certain antidilution adjustments). The Rights will expire October 8, 2008 and will be exercisable only if a person or group becomes the beneficial owner of 15% or more of the Common Stock or commences a tender or exchange offer that would result in the offeror beneficially owning 15% or more of the Common Stock (the earlier of such dates being called the "Distribution Date"). If a Distribution Date has occurred, each Right, unless redeemed by the Company, entitles the holder to exercise a Right for $110 and receive an amount of Common Stock of the Company, or in certain circumstances a combination of securities and/or assets or the common stock of the acquirer, having a market value of two times the exercise price of the Right. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at $.01 per Right prior to the public announcement of a Distribution Date. 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 headquarters, Probe cards May 2012 53,000 Manufacturing, sales ATE interface July 2008 and service assemblies Dallas, Texas............. 35,000 CIS headquarters, ATE test boards Company owned Manufacturing, sales and service San Jose, California...... 34,000 Manufacturing, sales Probe cards July 2002 and service Hsin Chu, Taiwan.......... 10,600 Manufacturing and Probe cards April 2003 service Austin, Texas............. 7,000 Manufacturing, sales Probe cards March 2002 and service East Kilbride, Scotland... 11,700 Manufacturing, sales Probe cards November 2007 and service Singapore................. 2,900 Manufacturing and Probe cards August 2001 service
17 20
LEASE EXPIRATION FACILITY SQUARE FEET FUNCTION PRODUCTS DATE - -------- ----------- -------- -------- -------------- Meyreuil, France.......... 5,600 Manufacturing, sales Probe cards June 2012 and service Yokohama, Japan........... 13,900 Manufacturing, sales Probe cards April 2009 and service
In addition, the Company leases space in Colorado Springs, Colorado; Boca Raton, Florida; Westboro, Massachusetts; Beaverton, Oregon; Richardson, Texas; Dallas, Texas; Austin, Texas; Santa Clara, California; Tempe, Arizona; and Massy, France. The Company believes that its existing facilities are adequate to meet its current requirements. ITEM 3. LEGAL PROCEEDINGS In October 1998, the Company filed an action against the former President, Director, and shareholder of Silicon Valley Test & Repair, Inc., which was acquired by the Company by way of a merger into its wholly-owned subsidiary, SVTR, Inc., in January 1997. The suit seeks rescission of the acquisition and/or money damages arising from failure of the defendants to disclose material facts regarding the origins of certain software necessary for SVTR, Inc.'s business. In February 1999, after the date of the auditors' report, the defendants filed a counter claim against the Company, alleging conversion, interference with contractual relations, unfair business practices, breach of contract, and specific performance allegedly arising from the Company's actions to preclude the defendants from selling their Company stock received by the defendants as part of the purchase price of Silicon Valley Test & Repair, Inc., which the Company seeks to recover through rescission. In March 1999, the Company and SVTR filed an amended complaint. The defendants have not yet responded. While the Company intends to vigorously prosecute this action, it is impossible to predict the outcome of this or any litigation. It is not anticipated that this suit will have a material adverse impact on the Company's financial condition or results of operations. The Company is involved in other legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these actions would not have a material adverse effect on the Company. 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 1998. 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 26, 1998, the closing price for the Company's Common Stock was $14.00. 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.
HIGH LOW ---- --- 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
18 21
HIGH LOW ---- --- 1998: First Quarter............................................. 22 16 1/4 Second Quarter............................................ 20 9/16 11 5/8 Third Quarter............................................. 12 3/4 9 Fourth Quarter............................................ 15 5/8 9
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 26, 1999, there were approximately 3,000 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, 1998, 1997, and 1996 and the consolidated balance sheet data as of December 31, 1998 and 1997 are derived from, and are qualified by reference to, the consolidated financial statements included elsewhere in this Report, which have been audited by KPMG LLP. The consolidated statement of operations data for the year ended December 31, 1996, 1995, and 1994, and the consolidated balance sheet data as of December 31, 1995, and 1994, 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.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998(1) 1997 1996(2) 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales................................ $76,207 $69,012 $37,308 $26,099 $14,251 Cost of goods sold....................... 45,052 39,251 20,343 13,706 8,214 ------- ------- ------- ------- ------- Gross profit............................. 31,155 29,761 16,965 12,393 6,037 Expenses: Selling, general and administrative.... 18,778 16,605 10,725 7,503 3,693 Engineering and product development.... 3,101 996 903 707 417 Purchased research and development..... 1,568 -- 4,584 -- -- ------- ------- ------- ------- ------- Total expenses...................... 23,447 17,601 16,212 8,210 4,110 ------- ------- ------- ------- ------- Operating income......................... 7,708 12,160 753 4,183 1,927 Other income (expense): Interest income........................ 1,324 349 467 45 19 Interest expense....................... (269) (388) (222) (154) (115) Other, net............................. 543 323 247 140 92 ------- ------- ------- ------- ------- Total other income (expense)........ 1,598 284 492 31 (4) ------- ------- ------- ------- ------- Income from continuing operations before income taxes and minority interest..... 9,306 12,444 1,245 4,214 1,923 Income taxes............................. (3,685) (4,810) (2,701) (1,812) (710) Minority interest........................ (384) 30 95 -- -- ------- ------- ------- ------- ------- Income (loss) from continuing operations............................. 5,237 7,664 (1,361) 2,402 1,213
19 22
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998(1) 1997 1996(2) 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Discontinued operations: Loss from operations of SVTR, Inc., net of taxes............................ (1,925) (5,767) -- -- -- Loss on disposal of SVTR, Inc., net of taxes............................... (3,808) -- -- -- -- ------- ------- ------- ------- ------- Loss from discontinued operations...... (5,733) (5,767) -- -- -- ------- ------- ------- ------- ------- Net income (loss)........................ $ (496) $ 1,897 $(1,361) $ 2,402 $ 1,213 ======= ======= ======= ======= ======= Net income (loss) per share: Basic.................................. $ (0.06) $ 0.28 $ (0.30) $ 0.62 $ 0.38 ======= ======= ======= ======= ======= Diluted................................ $ (0.06) $ 0.27 $ (0.30) $ 0.53 $ 0.30 ======= ======= ======= ======= ======= Weighted average number of shares: Basic.................................. 7,964 6,690 4,580 3,874 3,213 Diluted................................ 8,251 6,982 4,580 4,666 4,007 BALANCE SHEET DATA: Working capital.......................... $30,519 $42,505 $10,004 $ 4,771 $ 3,572 Total assets............................. 63,686 68,108 31,512 14,967 7,015 Long-term debt........................... 3,204 1,275 1,741 981 791 Stockholders' equity..................... 53,474 59,344 23,130 10,656 4,923
- --------------- (1) Includes a one-time write-off of purchased research and development of $1.6 million in 1998, or $0.11 per diluted share, net of tax benefit, related to the acquisition of Cerprobe Europe S.A.S. (2) Includes a one-time write-off of purchased research and development of $4.6 million in 1996, or $1.00 per diluted share, related to the acquisition of CIS. 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. 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 address critical functions to assure IC quality, reduce manufacturing costs, improve the accuracy of manufacturing yield data, and identify repairable memory IC's. The semiconductor industry is characterized as cyclical, with capacity boom cycles followed by bust cycles that create tremendous pricing pressures. For the past several years, the IC market has been a high volume, high growth commodity market characterized by rapid technological change. Cerprobe has benefited from this and has grown substantially over the last five years as the Company has increased its market share. Net sales have increased from $14.3 million for 1994 to $76.2 million for 1998, representing an average annualized growth rate of approximately 52%. Similarly, the Company's net income has increased from $1.2 million for 1994 to $6.2 million for 1998 (before a one-time charge for purchased research and development of $1.6 million, resulting in a tax benefit of $627,000 and the loss from discontinued operations of SVTR of $5.7 million net of taxes, which together reduced net income from continuing operations by $6.7 million). Until 1995, substantially all of the Company's growth was from the existing probe card product line. 20 23 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 Cerprobe Interconnect Solutions ("CIS") in December 1996, which enabled the Company to offer ATE test boards. In May 1997, the Company established an international joint development agreement with Mitsubishi Materials Corporation to develop next generation probe card technology based upon the Company's proprietary P4(TM) technology. In September 1998, the Company acquired France based Cerprobe Europe S.A.S. which expanded the Company's presence in the European market. In November 1998, the Company acquired an exclusive license to design, manufacture, and distribute the Vertical integrated Probe (ViProbe(R)) products worldwide, except Europe. In June 1998, the Company terminated its distribution agreement with Upsys, and in connection therewith, Upsys' 45% interest in Upsys-Cerprobe L.L.C. was purchased. In the third quarter of 1998, the Company discontinued operations of SVTR, a wafer prober refurbishing and upgrading subsidiary acquired by the Company in January 1997. The Company disposed of SVTR's assets in early 1999. SVTR has been accounted for as a discontinued operation and, accordingly, its results of operations and financial position are segregated in the financial statements. 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 North America, Europe, and Asia. Presently the semiconductor industry is in a downturn driven by excess capacity pricing pressures and the economic crisis in Asia, therefore, there can be no assurance that the Company can continue the growth exhibited the past five years. 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 full service facilities in Scotland and France and a sales office in Germany to serve the European market. The Company also maintains full service facilities in Singapore and Taiwan to serve the Southeast Asian market. Additionally, the company is in the process of establishing a full service facility in Japan. 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.
YEAR ENDED DECEMBER 31, --------------------------- 1998(1) 1997 1996(2) ------- ----- ------- Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 59.1 56.9 54.5 ----- ----- ----- Gross profit................................................ 40.9 43.1 45.5 Expenses: Selling, general and administrative....................... 24.6 24.1 28.7 Engineering and product development....................... 4.1 1.4 2.4 Purchased research and development........................ 2.1 -- 12.3 ----- ----- ----- Total expenses......................................... 30.8 25.5 43.4 ----- ----- ----- Operating income............................................ 10.1 17.6 2.1
21 24
YEAR ENDED DECEMBER 31, --------------------------- 1998(1) 1997 1996(2) ------- ----- ------- Other income (expense): Interest income........................................... 1.7 0.5 1.3 Interest expense.......................................... (.3) (0.6) (0.6) Other, net................................................ .7 0.5 0.6 ----- ----- ----- Total other income..................................... 2.1 0.4 1.3 ----- ----- ----- Income from continuing operations before income taxes and minority interest......................................... 12.2 18.0 3.4 Income taxes................................................ (4.8) (7.0) (7.2) Minority interest........................................... (0.5) 0.1 0.2 ----- ----- ----- Income (loss) from continuing operations.................... 6.9 11.1 (3.6) Discontinued operations: Loss from operations of SVTR, net of taxes................ (2.5) (8.4) -- Loss on disposal of SVTR, net of taxes.................... (5.0) -- -- ----- ----- ----- Loss from discontinued operations......................... (7.5) (8.4) -- ----- ----- ----- Net income (loss)......................................... (0.6)% 2.7% (3.6)% ===== ===== =====
- --------------- (1) Includes a one-time write off of purchased research and development costs of $1.6 million related to the acquisition of Cerprobe Europe S.A.S. (2) Includes a one-time write-off of purchased research and development costs of $4.6 million related to the acquisition of CIS. YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 Net Sales. Net sales for 1998 were $76.2 million, an increase of 10.4% over net sales of $69.0 million for 1997. The majority of this increase occurred in the first quarter of 1998 as a result of higher order rates for the Company's probe card and interface products. However, during the remainder of 1998, slower sales resulted from the softness in the worldwide demand for semiconductors. Gross Profit. The gross profit for 1998 was $31.2 million, an increase of 4.7% from the gross profit of $29.8 million for 1997. Gross margin decreased from 43.1% in 1997 to 40.9% in 1998. The decrease in gross margin was a result of a change in product mix, which included a higher ratio of lower margin ATE interface product sales and a result of the Company's production infrastructure capable of higher production run rates, resulting in over capacity and under-absorption of overhead. Selling, General, and Administrative. Selling, general, and administrative expenses were $18.8 million, or 24.6% of net sales, for 1998, compared to $16.6 million, or 24.1% of net sales, for 1997, an increase of 13.1%. 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 occurring in the later part of 1997 and first quarter of 1998. Engineering and Product Development. Engineering and product development expenses were $3.1 million, or 4.1% of net sales, for 1998, an increase of 211.3% over $996,253, or 1.4% of net sales, for 1997. The Company has added substantial resources to its product development team to address emerging and next generation probing requirements for grid array, multi-chip testing, very high frequency ICs, and those that have pad pitch architecture of less than 60 microns. Purchased Research and Development. Purchased research and development costs from the September 1998 acquisition of Cerprobe Europe S.A.S. totaled $1.6 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 state of the research and development prod- 22 25 ucts/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 $1.3 million in 1998, compared to $348,000 for 1997. This increase is attributable to the interest earned on the net proceeds from the Company's 1997 secondary offering. Income Taxes. Income taxes decreased to $3.7 million, which represented an effective tax rate of 41.1% for 1998 (excluding the purchased research and development expenses of $1.6 million, which resulted in a tax benefit of $627,000), compared to $4.8 million, which represented an effective tax rate of 38.6% for 1997. The increased effective tax rate, as adjusted, was due primarily to the addition of foreign income taxes on foreign taxable income. In 1998, foreign subsidiaries' taxable income exceeded prior years foreign subsidiaries' accumulated losses. Minority Interest. The minority interest share of income of $383,637 for 1998 and share of loss of $29,715 for 1997 represented the Company's joint venture partners' share of income (loss) from the Company's Asian operations (40%, 30% prior to August 18, 1997) and the Upsys Joint Venture (45%). Discontinued Operations. The Company recorded $5.7 and $5.8 million in loss from discontinued operations from the disposal of its wafer prober refurbishing and upgrading subsidiary, SVTR, Inc. for 1998 and 1997, respectively. The Company disposed of the operations of SVTR through the sale of assets in 1999. Net Income (Loss). Net loss for 1998 was $495,908, compared to the income of $1.9 million for 1997. Excluding net purchased research and development and discontinued operations, net income for 1998 would have been $6.2 million, or 8.1% of net sales for 1998, compared to 11.1% of net sales, for 1997. This decrease is primarily a result of slower sales in the later part of 1998 due to the softness in the worldwide demand for semiconductors. The Company's production infrastructure was capable of higher production run rates, resulting in over capacity and under-absorption of overhead. YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 Net Sales. Net sales for 1997 were $69.0 million, an increase of 85.0% over net sales of $37.3 million for 1996. This increase in net sales of $31.7 million resulted from the acquisition of CIS ($12.7 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 $29.8 million, an increase of 75.3% from the gross profit of $17.0 million for 1996. Gross margin decreased from 45.5% in 1996 to 43.1% in 1997. The decrease in gross margin was primarily a result of a change in product mix due to acquisitions. Approximately 18% of net sales in the period were attributed to ATE test boards, which has lower gross margins than the Company's core products of probe cards and ATE interfaces. Selling, General, and Administrative. Selling, general, and administrative expenses were $16.6 million, or 24.1% of net sales, for 1997, compared to $10.7 million, or 28.7% of net sales, for 1996, an increase of $5.9 million. The increase in selling, general, and administrative expenses resulted primarily from the acquisition of CIS ($2.2 million), and the Company's continued domestic and international expansion ($3.7 million). Engineering and Product Development. Engineering and product development expenses were $996,253, or 1.4% of net sales, for 1997, an increase of 10.3% over $902,909, or 2.4% of net sales, for 1996. These increased expenses resulted from the Company's acquisition of CIS and continued emphasis on engineering and product development in an effort to anticipate and address 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. 23 26 Interest Income. Interest income was $348,816 in 1997, compared to $467,043 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 CIS and SVTR acquisitions in December 1996 and January 1997, respectively. Income Taxes. Income taxes increased to $4.8 million, which represented an effective tax rate of 38.6% for 1997, compared to $2.7 million, which represented an effective rate of 45.6% for 1996 (excluding the non-deductible purchased research and development costs of $4.6 million). The decreased effective tax rate, as adjusted for 1996, was due primarily to the benefit in 1997 from CIS'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. The minority interest of $29,715 for 1997 represented the Company's joint venture partners' share of the loss from the Company's Asian operations (40%, 30% prior to August 18, 1997) and the Upsys Joint Venture. Net Income (Loss). Net income for 1997 was $1.9 million, compared to the loss of $1.4 million for 1996. Excluding purchased research and development costs and discontinued operations, net income for 1997 would have been $7.7 million, or 11.1% of net sales, compared to $3.2 million, or 8.6% of net sales for 1996. 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, 1998. 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(2) ------------------------------------------------------------------------------- 1998 1997 --------------------------------------- ------------------------------------- DEC 31 SEP 30(1) JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31 ------- --------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............................ $15,008 $20,107 $18,139 $22,953 $19,879 $17,562 $17,047 $14,525 Gross profit......................... 5,430 8,593 7,253 9,879 8,122 7,572 7,815 6,253 Operating income..................... 223 2,922 1,686 4,445 2,854 3,353 3,589 2,366 Net income (loss).................... 251 1,977 1,203 2,748 2,120 1,932 2,227 1,385 Diluted net income per share......... $ 0.03 $ 0.25 $ 0.14 $ 0.32 $ 0.25 $ 0.29 $ 0.34 $ 0.22 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......................... 36.2 42.7 40.0 43.7 40.9 43.1 45.8 43.0 Operating income..................... 1.5 14.5 9.3 19.7 14.4 19.1 21.1 16.3 Net income (loss).................... 1.7% 9.8% 6.6% 12.0% 10.7% 11.0% 13.1% 9.5%
- --------------- (1) Excludes a one-time write-off of purchased research and development costs of $1.6 million or $0.11 per diluted share, net of tax benefit, related to the acquisition of Cerprobe Europe S.A.S. (2) Excludes discontinued operations of SVTR, Inc. 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 September 1997, the Company completed a secondary offering, which raised net proceeds of approximately $31.1 million. In 24 27 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 for repaying existing Company debt, acquisitions, and purchase of Treasury Stock. The remainder, approximately $19.0 million, will be used for general corporate purposes, including working capital, and for possible future acquisitions. At December 31, 1998, cash and short-term investments were $19.1 million compared to $29.7 million at December 31, 1997. Cerprobe generated $9.5 million in cash from operating activities for the year ended December 31, 1998. Accounts receivable increased by $721,502, or 8.8%, to $9.0 million at December 31, 1998. Inventories increased $333,827, or 6.7%, over December 31, 1997, to $5.3 million at December 31, 1998. Accounts payable and accrued expenses decreased $723,429, or 11.4%, to $5.6 million at December 31, 1998. Working capital decreased $12.0 million, or 28.2%, to $30.5 million at December 31, 1998, primarily as a result of the acquisition of Cerprobe Europe S.A.S. and the stock repurchase program. The current ratio decreased from 7.0 at December 31, 1997, to 5.8 at December 31, 1998. This decrease was due primarily to the purchase of Treasury Stock and the acquisition of Cerprobe Europe S.A.S. Cerprobe increased its investment in property, plant, and equipment during the year ended December 31, 1998, by $8.3 million, or 57.2%, to $22.7 million. This increase was attributable to the Company's efforts, in the first quarter, to expand capacity to meet customer demand for its products, the purchase of Cerprobe Europe S.A.S., and the purchase of its Oracle Enterprise Resource Planning ("ERP") System, as further discussed under Year 2000 costs below. These capital expenditures were funded primarily from capital leases, cash flow from operations, and net proceeds from the secondary offering. In December 1998, the Company entered into a $10,000,000 revolving line of credit agreement, which matures June 30, 2000, with Bank of America for general corporate purposes. Interest on the outstanding balance is at either the Reference Rate, determined by Bank of America in San Francisco, California, the Offshore Rate plus 1.50 percentage points calculated by dividing the Grand Caymen Rate by 1 minus the reserve percentage determined by the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, or the LIBOR Rate plus 1.50 percentage points. The non-use fee under the line of credit is 0.125 % of the unused balance. The line of credit contains certain restrictive covenants that include, among other things, restrictions on the declaration or payment of dividends, the incurrance or assumption of other indebtedness, and the making of loans to or investments in others. The credit 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, 1998. There were no amounts outstanding under this agreement as of December 31, 1998. In February 1999, the Company financed $3,000,000 of its Oracle ERP System. Monthly payments, under this loan, are made of principle of $83,333 plus interest of 6.95% per annum for 36 months. In February 1998, the Company entered into a $5,000,000 lease line of credit agreement, which matured in February 1999, with Banc One Leasing Corporation. The maximum term for each lease schedule may not exceed 60 months. Pricing was indexed to like term treasuries plus 150 basis points. Advances are collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware. As of December 31, 1998, there was $1,349,730 outstanding under all lease schedules with Banc One Leasing Corporation. On August 5, 1998, the Company announced a stock repurchase program whereby up to 500,000 shares, or approximately 6% of the Company's Common Stock, may be purchased from time to time in the open market. This repurchase program was completed early in December 1998. The Company intends to utilize a portion of the reacquired shares for reissuance in connection with its Employee Stock Purchase Plan. As of December 31, 1998, the Company had purchased 500,000 shares at an average price of $11.37 per share. On September 30, 1998, the Company acquired France-based Cerprobe Europe S.A.S. for $3.0 million in cash and approximately $250,000 in acquisition related expenses. Cerprobe Europe S.A.S. designs, manufactures, and distributes probe cards at its manufacturing plant near Marseilles. 25 28 The Company 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. The Company anticipates that any additional cash requirements for operations or capital expenditures will be financed through cash flow from operations, by borrowing from the Company'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 in the process of performing a comprehensive review of its Year 2000 issues and has completed its review of internal systems (information technology ("IT") and non-IT). The majority of the Company's application software programs have been replaced with Oracle ERP applications that are Year 2000 compliant. The Oracle project budget, including software, hardware, and implementation was approximately $3.5 million. The Company estimates the status of progress on these internal systems as of December 31, 1998 was as follows: IT Systems 100% Non-IT Systems 75%
The Company presently believes that with modifications and updates to existing software and the recent implementation of the Oracle applications, the Year 2000 problem will not pose significant operational problems for the Company's internal systems. The Company also believes that remediation costs to become Year 2000 compliant, excluding the costs associated with the replacement Oracle applications, are not material. The Company is also continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Company has material relationships. The Company is not able to determine the effect on the Company's results of operations, liquidity, and financial condition in the event the Company's material vendors and customers are not Year 2000 compliant. The Company will continue to monitor the progress of its material vendors and customers and formulate a contingency plan at the point in time when the Company believes a material vendor or customer will not be compliant. INFLATION AND CHANGING PRICES The Company is impacted by inflationary trends and business trends within the semiconductor industry and by the general condition of the 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 the Company and other suppliers. Accordingly, the price structure for the Company's products must be competitive. Changes in the Company's supplier prices did not have a significant impact on cost of sales during 1998 or 1997. As a result of the Company's operation of the manufacturing, repair, and sales facilities in Scotland, France, Singapore, and Taiwan, the Company's foreign transactions may be denominated in currencies other than the U.S. dollar. Such transactions may expose the Company to exchange rate fluctuations for the period of time from inception of the transaction until it is settled. There can be no assurance that fluctuations in the currency exchange rate in the future will not have an adverse impact on the Company's foreign operations. In addition, the Company may purchase a substantial portion of its raw materials and equipment from foreign suppliers and will incur labor costs in a foreign currency. The foreign manufacture and sale of products and the purchase of raw 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 the Company's ability to manufacture or sell its products in foreign markets and purchase materials or 26 29 equipment from foreign suppliers. In countries in which Cerprobe conducts business in local currency, currency exchange rate fluctuations could adversely affect the Company's net sales or costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A portion of the Company's foreign sales are denominated in currencies other than the U.S. dollar. The Company may also purchase a portion of its raw materials and equipment from foreign suppliers and will incur labor costs in a foreign currency. 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 monitors its foreign currency exposure and from time to time enters into hedging transactions to manage this exposure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Report and Consolidated Financial Statements of the Company are set forth on pages F-1 to F-23 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders and is incorporated herein by reference. 27 30 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, 1998 and 1997..... F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996.......................... F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1998, 1997 and 1996....................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... 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) Second Restated Certificate of Incorporation of Cerprobe Corporation, filed with the Secretary of State on June 23, 1998, as exhibit 3(c) to the Company's Form 10-Q for the period ended June 30, 1998. 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. 3(c) Rights Agreement, dated September 28, 1998, between Cerprobe Corporation and American Securities Transfer & Trust, Incorporated, as Rights Agent, filed as an exhibit to the Company's Form 8-A filed on or about October 2, 1998 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.
28 31
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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(r) Employment Contract dated July 16, 1990 between the Company and Carl Zane Close filed as Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(s) Employment Contract dated July 17, 1990 between the Company and Michael K. Bonham filed as Exhibit 10(q) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(t) Employment Contract dated July 16, 1990 between the Company and Eswar Subramanian filed as Exhibit 10(r) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(u) Employment Contract dated July 16, 1990 between the Company and Henry Wong filed as Exhibit 10(s) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10(v) Manufacturing Licensing Agreement between the Company and Intertrade Scientific, Inc. dated August 30, 1993 filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(w) Manufacturing Licensing Agreement between the Company and ESJ Corporation dated January 21, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10(x) Loan Agreement between the Company and First Interstate Bank of Arizona, N.A. dated June 6, 1994 and related Promissory Note filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(y) Master Lease Agreement between the Company and First Interstate Bank of Arizona, N.A. dated as of June 6, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(z) Master Lease Agreement between the Company and PFC, Inc. dated August 9, 1994 filed as Exhibit 10(z) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10(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.
29 32
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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(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. 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. 10(zz) Revolving Line of Credit Note between the Company and Wells Fargo Bank, National Associated dated February 28, 1997. 10(aaa) Lease agreement between CompuRoute and Banc 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 Banc 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.
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10(ccc) Lease agreement between CompuRoute and Banc One Leasing Corporation, dated May 7, 1998, filed as exhibit 10(ccc) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10(ddd) Lease agreement between CompuRoute and Banc One Leasing Corporation, dated June 17, 1998, filed as exhibit 10(ddd) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10(eee) Lease agreement between Cerprobe Corporation and Jackson-Shaw El Dorado Tech I Limited Partnerships, dated May 15, 1998, filed as exhibit 10(eee) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10(fff) Lease agreement between Cerprobe Corporation and Banc One Leasing Corporation, dated October 22, 1998, filed as exhibit 10(fff) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10(ggg) Business Loan agreement between Cerprobe Corporation and Bank of America, dated December 22, 1998. 10(hhh) Lease agreement between Cerprobe Corporation and Bank of America, dated February 26, 1999. 11 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, 1998. 27.2 Restated Financial Data Schedule for twelve months ended December 31, 1997.
(b) REPORTS ON FORM 8-K Form 8-K, filed on October 2, 1998, to report the approval of the declaration of a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Cerprobe's Common Stock. 31 34 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 31, 1999 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 31, 1999 - ------------------------------------------------ and Director Ross J. Mangano /s/ C. ZANE CLOSE President, Chief Executive Officer, March 31, 1999 - ------------------------------------------------ and Director (Principal Executive C. Zane Close Officer /s/ RANDAL L. BUNESS Senior Vice President, Chief March 31, 1999 - ------------------------------------------------ Financial Officer, Secretary, and Randal L. Buness Treasurer (Principal Financial and Accounting Officer) /s/ WILLIAM A. FRESH Director March 31, 1999 - ------------------------------------------------ William A. Fresh /s/ KENNETH W. MILLER Director March 31, 1999 - ------------------------------------------------ Kenneth W. Miller /s/ DONALD F. WALTER Director March 31, 1999 - ------------------------------------------------ Donald F. Walter
32 35 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Cerprobe Corporation: We have audited the accompanying consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Phoenix, Arizona February 2, 1999 F-1 36 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- ASSETS Current assets: Cash...................................................... $ 4,753,696 $ 2,715,490 Short-term investment securities.......................... 14,305,400 27,000,698 Accounts receivable, net of allowance of $333,364 in 1998 and $215,179 in 1997................................... 8,951,680 8,230,178 Inventories, net.......................................... 5,303,631 4,969,804 Accrued interest receivable............................... 102,093 202,939 Prepaid expenses.......................................... 869,382 377,799 Income taxes receivable................................... 714,811 471,046 Deferred tax asset........................................ 446,092 411,177 Net assets of discontinued operations..................... 1,481,903 5,220,343 ----------- ----------- Total current assets.............................. 36,928,688 49,599,474 Property, plant and equipment, net.......................... 22,698,509 14,439,254 Intangible assets, net...................................... 3,050,460 2,279,347 Other assets................................................ 1,007,917 957,175 Net assets of discontinued operations....................... -- 832,653 ----------- ----------- Total assets...................................... $63,685,574 $68,107,903 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,534,997 $ 3,502,561 Accrued expenses.......................................... 3,075,894 2,831,759 Current portion of notes payable.......................... 138,985 139,661 Current portion of capital lease obligations.............. 660,192 620,570 ----------- ----------- Total current liabilities......................... 6,410,068 7,094,551 Notes payable, less current portion......................... 731,555 138,985 Capital lease obligations, less current portion............. 2,472,563 1,136,032 Deferred tax liability...................................... -- 245,160 Other liabilities........................................... 7,073 16,700 ----------- ----------- Total liabilities................................. 9,621,259 8,631,428 ----------- ----------- Minority interest........................................... 590,465 132,437 Commitments and contingencies Stockholders' equity: Preferred stock, $.05 par value; authorized 10,000,000 shares; issued and outstanding none.................... -- -- Common stock, $.05 par value; authorized 25,000,000 shares; issued 8,131,279 and outstanding 7,645,126 shares at December 31, 1998 and issued and outstanding 8,097,979 shares at December 31, 1997.................. 406,564 404,899 Additional paid-in capital................................ 55,271,200 55,136,307 Retained earnings......................................... 3,505,734 4,001,642 Accumulated other comprehensive income: Foreign currency translation........................... (188,131) (198,810) ----------- ----------- 58,995,367 59,344,038 Treasury stock, at cost, 486,153 shares at December 31, 1998................................................... (5,521,517) -- ----------- ----------- Total stockholders' equity........................ 53,473,850 59,344,038 ----------- ----------- Total liabilities and stockholders' equity........ $63,685,574 $68,107,903 =========== ===========
See accompanying notes to consolidated financial statements. F-2 37 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Net sales........................................... $76,207,477 $69,012,395 $37,308,199 Costs of goods sold................................. 45,052,300 39,251,446 20,343,516 ----------- ----------- ----------- Gross profit.............................. 31,155,177 29,760,949 16,964,683 ----------- ----------- ----------- Expenses: Selling, general and administrative............... 18,778,140 16,605,176 10,725,075 Engineering and product development............... 3,101,082 996,253 902,909 Purchased research and development................ 1,568,000 -- 4,584,000 ----------- ----------- ----------- Total expenses............................ 23,447,222 17,601,429 16,211,984 ----------- ----------- ----------- Operating income.................................... 7,707,955 12,159,520 752,699 ----------- ----------- ----------- Other income (expense): Interest income................................... 1,323,918 348,816 467,043 Interest expense.................................. (269,115) (388,025) (221,248) Other, net........................................ 542,839 323,065 246,862 ----------- ----------- ----------- Total other income........................ 1,597,642 283,856 492,657 ----------- ----------- ----------- Income from continuing operations before minority interest and income taxes......................... 9,305,597 12,443,376 1,245,356 Minority interest................................... (383,637) 29,715 94,854 ----------- ----------- ----------- Income from continuing operations before income taxes............................................. 8,921,960 12,473,091 1,340,210 Income taxes........................................ (3,685,308) (4,810,167) (2,701,000) ----------- ----------- ----------- Income (loss) from continuing operations............ 5,236,652 7,662,924 (1,360,790) Discontinued operations: Loss from operations of SVTR, Inc., net of taxes.......................................... (1,924,820) (5,766,956) -- Loss on disposal of SVTR, Inc., net of taxes...... (3,807,740) -- -- ----------- ----------- ----------- Loss from discontinued operations.............. (5,732,560) (5,766,956) -- ----------- ----------- ----------- Net income (loss)................................... $ (495,908) $ 1,895,968 $(1,360,790) =========== =========== =========== Net income (loss) per common share: Basic: From continuing operations........................ $ 0.66 $ 1.14 $ (0.30) From discontinued operations...................... (0.72) (0.86) -- ----------- ----------- ----------- Net income (loss) per common share................ $ (0.06) $ 0.28 $ (0.30) =========== =========== =========== Weighted average number of common shares outstanding.................................... 7,963,747 6,690,265 4,579,598 =========== =========== =========== Diluted: From continuing operations........................ $ 0.63 $ 1.10 $ (0.30) From discontinued operations...................... (0.69) (0.83) -- ----------- ----------- ----------- Net income (loss) per common share................ $ (0.06) $ 0.27 $ (0.30) =========== =========== =========== Weighted average number of common and common equivalent shares outstanding.................. 8,251,373 6,982,368 4,579,598 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 38 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
NUMBER OF NUMBER OF PREFERRED NUMBER COMMON SHARES OF ADDITIONAL SHARES ISSUED AND TREASURY COMMON PREFERRED TREASURY PAID-IN ISSUED OUTSTANDING SHARES STOCK STOCK STOCK CAPITAL --------- ----------- -------- -------- --------- ----------- ----------- Balance, December 31, 1995........ 4,095,851 -- -- $204,792 $ -- $ -- $ 7,239,410 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) Exercise of stock options......... 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 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- -- Total comprehensive loss.......... -- -- -- -- -- -- -- --------- ----- -------- -------- ---- ----------- ----------- Balance, December 31, 1996........ 6,027,714 330 -- $301,386 $ 16 $ -- $20,652,290 Exercise of stock options......... 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 Redemption of Preferred Stock..... -- (330) -- -- (16) -- (5,249,984) Tax benefit from exercise of nonqualified stock options....... -- -- -- -- -- -- 245,000 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- -- -- -- -- -- Net income....................... -- -- -- -- -- -- -- Total comprehensive income........ -- -- -- -- -- -- -- --------- ----- -------- -------- ---- ----------- ----------- Balance, December 31, 1997........ 8,097,979 -- -- $404,899 $ -- $ -- $55,136,307 Exercise of stock options......... 31,300 -- -- 1,565 -- -- 204,048 Expenses from issuance of common stock............................ -- -- -- -- -- -- (178,650) Issuance of common stock for employee stock purchase plan..... 37,198 -- -- 480,454 (74,519) Exercise of warrants.............. 2,000 (1,551) 100 -- (33,114) 33,014 Purchase of treasury stock........ -- -- (521,800) -- -- (5,968,857) -- Tax benefit from exercise of nonqualified stock options....... -- -- -- -- -- -- 151,000 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- -- -- -- -- -- Net loss......................... -- -- -- -- -- -- -- Total comprehensive loss.......... -- -- -- -- -- -- -- --------- ----- -------- -------- ---- ----------- ----------- Balance, December 31, 1998........ 8,131,279 -- (486,153) $406,564 $ -- $(5,521,517) $55,271,200 ========= ===== ======== ======== ==== =========== =========== ACCUMULATED OTHER TOTAL RETAINED UNEARNED COMPREHENSIVE STOCKHOLDERS' EARNINGS COMPENSATION INCOME EQUITY ----------- ------------ ------------- ------------- Balance, December 31, 1995........ $ 3,466,464 $(241,872) $ (7,532) $10,661,262 Issuance of preferred stock....... -- -- -- 9,400,000 Conversion of subordinated debentures....................... -- -- -- 595,000 Compensation expense related to stock options.................... -- 241,872 -- 49,383 Exercise of stock options......... -- -- -- 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 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- 50,128 50,128 Net loss......................... (1,360,790) -- -- (1,360,790) ----------- Total comprehensive loss.......... -- (1,310,662) ----------- --------- --------- ----------- Balance, December 31, 1996........ $ 2,105,674 $ -- $ 42,596 $23,101,962 Exercise of stock options......... -- -- -- 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 Redemption of Preferred Stock..... -- -- -- (5,250,000) Tax benefit from exercise of nonqualified stock options....... -- -- -- 245,000 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- (241,406) (241,406) Net income....................... 1,895,968 -- -- 1,895,968 ----------- Total comprehensive income........ -- 1,654,562 ----------- --------- --------- ----------- Balance, December 31, 1997........ $ 4,001,642 $ -- $(198,810) $59,344,038 Exercise of stock options......... -- -- -- 205,613 Expenses from issuance of common stock............................ -- -- -- (178,650) Issuance of common stock for employee stock purchase plan..... -- -- -- 405,935 Exercise of warrants.............. -- -- -- -- Purchase of treasury stock........ -- -- -- (5,968,857) Tax benefit from exercise of nonqualified stock options....... -- -- -- 151,000 Comprehensive income (loss): Foreign currency translation, net of taxes....................... -- -- 10,679 10,679 Net loss......................... (495,908) -- -- (495,908) ----------- Total comprehensive loss.......... -- (485,229) ----------- --------- --------- ----------- Balance, December 31, 1998........ $ 3,505,734 $ -- $(188,131) $53,473,850 =========== ========= ========= ===========
See accompanying notes to consolidated financial statements. F-4 39 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) from continuing operations....... $ 5,236,652 $ 7,662,924 $ (1,360,790) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by continuing operations: Depreciation and amortization................... 4,676,110 3,546,154 1,930,341 Purchased research and development.............. 1,568,000 -- 4,584,000 Loss on sale of equipment....................... 373,245 12,583 -- Tax benefit from exercise of nonqualified stock options....................................... 151,000 245,000 542,000 Deferred income taxes........................... (509,174) 8,062 35,419 Provision for losses on accounts receivable..... 186,585 24,000 12,000 Provision for obsolete inventory................ 534,000 621,000 75,000 Compensation expense............................ -- (33,536) 49,383 Income (loss) applicable to minority interest... 383,637 (29,715) (94,854) Changes in working capital of continuing operations, net of acquisitions: Accounts receivable........................... 571,725 (2,689,975) (194,293) Inventories................................... (736,703) (1,728,051) (812,904) Prepaid expenses and other assets............. (72,967) (236,085) (562,590) Income taxes receivable....................... (243,765) (256,949) (50,633) Accounts payable and accrued expenses......... (1,359,857) 2,075,238 1,229,408 Accrued income taxes.......................... (108,648) -- -- Other liabilities............................. (9,627) -- 311,947 ------------ ------------ ------------ Net cash provided by continuing operations............................... 10,640,213 9,220,650 5,693,434 ------------ ------------ ------------ Net cash used in discontinued operations... (1,161,467) (7,558,443) -- ------------ ------------ ------------ Net cash provided by operating activities............................... 9,478,746 1,662,207 5,693,434 ------------ ------------ ------------ Cash flows from investing activities: Purchase of property, plant and equipment.......... (11,900,133) (6,302,918) (4,922,960) Proceeds from sale (purchase) of investment securities...................................... 12,695,298 (24,019,378) (2,981,320) Investment in CRPB Investors, L.L.C. .............. 88,455 107,293 (659,233) Purchase of Upsys-Cerprobe, L.L.C. ................ (376,366) -- -- Purchase of Cerprobe Europe S.A.S., net of cash acquired........................................ (3,230,230) -- -- Purchase of Cerprobe Interconnect Solutions, Inc., net of cash acquired............................ -- (80,102) (4,327,162) Purchase of SVTR, net of cash acquired............. -- (2,590,697) -- Proceeds from sale of equipment.................... 15,267 74,683 -- Payment (issuance) of notes receivable............. -- 250,000 (250,000) ------------ ------------ ------------ Net cash used in investing activities...... (2,707,709) (32,561,119) (13,140,675) ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-5 40 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Cash flows from financing activities: Issuance of (payments on) notes payable and capital leases................................. 893,200 (1,499,131) (356,015) Net proceeds from issuance of preferred stock..... -- -- 9,400,000 Net proceeds from issuance of common stock........ -- 37,105,237 -- Redemption of convertible preferred stock......... -- (5,250,000) -- Expenses from issuance of common stock............ (178,650) -- -- Purchase of treasury stock........................ (5,968,857) -- -- Net proceeds from employee stock purchase plan.... 405,935 -- -- Net proceeds from exercise of stock options....... 205,613 816,465 564,979 Capital contribution by minority interest partners....................................... -- 100,000 107,705 ----------- ----------- ----------- Net cash provided by (used in) financing activities.............................. (4,642,759) 31,272,571 9,716,669 ----------- ----------- ----------- Effect of exchange rates on cash.................... (90,072) (241,406) 50,128 ----------- ----------- ----------- Net increase in cash................................ 2,038,206 132,253 2,319,556 Cash, beginning of period........................... 2,715,490 2,583,237 263,681 ----------- ----------- ----------- Cash, end of period................................. $ 4,753,696 $ 2,715,490 $ 2,583,237 =========== =========== =========== Supplemental schedule of non-cash financing activities from continuing operations: Equipment acquired under capital leases........... $ 1,126,084 $ 357,010 $ 1,553,968 ----------- ----------- ----------- Cash-less exercise of warrants.................... $ 33,114 $ -- $ -- ----------- ----------- ----------- Supplemental disclosures of cash flow information from continuing operations: Interest paid..................................... $ 269,115 $ 388,025 $ 221,248 ----------- ----------- ----------- Income taxes paid................................. $ 2,184,182 $ 3,937,456 $ 2,060,000 ----------- ----------- ----------- Supplemental disclosures of non-cash investing activities: The Company made acquisitions for $3.6 million, $4.5 million and $7.4 million in the years ended December 31, 1998, 1997 and 1996, 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.................................... $ 3,626,366 $ 4,546,825 $ 7,432,543 Less cash acquired................................ (19,770) (285,316) (505,381) Common stock issued............................... -- (1,670,812) (2,600,000) ----------- ----------- ----------- Cash invested....................................... $ 3,606,596 $ 2,590,697 $ 4,327,162 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 41 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (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's products address critical functions to assure IC quality, reduce manufacturing costs, improve the accuracy of manufacturing yield data, and identify repairable memory ICs. 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 Corporation and its subsidiaries: Cerprobe Europe Limited, Cerprobe Europe S.A.S. (formerly SemiConducteur Services, S.A.), Cerprobe Asia Holdings Pte Ltd, Cerprobe Interconnect Solutions, Inc. ("CIS") (formerly CompuRoute, Inc.), SVTR, Inc. ("SVTR"), Upsys-Cerprobe, L.L.C., and Cobra Venture Management, Inc. All significant inter-company transactions have been eliminated in consolidation. Cerprobe Asia Holdings Pte Ltd is a 60% (70% before August 18, 1997) owner of Cerprobe Asia Pte Ltd; the balance is owned by Asian investors. Cerprobe Asia Pte Ltd's wholly owned subsidiaries, Cerprobe Singapore Pte Ltd and Cerprobe Taiwan Co., Ltd., operate full service sales and manufacturing plants. On December 27, 1996 the Company acquired all of the outstanding stock of Cerprobe Interconnect Solutions, Inc., a manufacturer of printed circuit boards. Accordingly, the consolidated financial statements include CIS's activities since the date of acquisition. See Note 17. On January 15, 1997, the Company acquired all of the outstanding stock of SVTR, Inc., a company that refurbishes, reconfigures, and services wafer probing equipment. In the third quarter of 1998, the Company discontinued operations of SVTR. See Note 16. On May 30, 1997, the Company entered into a joint venture with Upsys Reseau Eurisys ("Upsys"), a French company owned by IBM and GAME COGEMA Group, a French testing and engineering company. The joint venture, called Upsys-Cerprobe, L.L.C., assembled and repaired Upsys's vertical probe card that had been distributed by Cerprobe throughout the United States and Asia. Cerprobe owned 55% of the joint venture and Upsys owned 45%. On June 25, 1998, the Company terminated its distribution agreement with Upsys, and in connection therewith, Upsys's 45% interest in Upsys-Cerprobe, L.L.C. was purchased. Accordingly, the consolidated financial statements as of and for the years ended December 31, 1998 and 1997 include the activities of Upsys-Cerprobe, L.L.C. since the formation of the venture and until the termination of the venture. See Note 17. On September 30, 1998, the Company acquired France based Cerprobe Europe S.A.S. The Company designs, manufactures and distributes probe cards at its manufacturing plant near Marseilles. Accordingly, the consolidated financial statements as of and for the year ended December 31, 1998 include Cerprobe Europe S.A.S.'s activities since the date of acquisition. See Note 17. F-7 42 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. SHORT-TERM INVESTMENT SECURITIES The Company's investment securities have original maturities of six months or less, are classified as held to maturity, and are carried at amortized cost as the Company has the ability and intent to hold these securities until maturity. A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new carrying value for the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. 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 using 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 consist of goodwill, assembled workforce, 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 to ten years using the straight-line method. Assembled workforce represents the amount allocated to an acquired company's existing personnel infrastructure and is being amortized over four 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. F-8 43 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The Company uses 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. 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, France, and Asia subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". Assets and liabilities of the subsidiaries are translated into U.S. 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 and minority interest. 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 The Company calculates basic and diluted net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share". See Note 20. STOCK BASED COMPENSATION In accordance with the provisions of Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees," the Company measures stock-based compensation expense as the excess of the market price at the grant date over the amount the employee must pay for the stock. The Company's policy is to grant stock options at fair market value at the date of grant; accordingly, no compensation expense is recognized. As permitted, the Company has elected to adopt the pro forma disclosure provisions only of SFAS No. 123, "Accounting for Stock-Based Compensation." ("SFAS No. 123"). COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and foreign currency translations, net of taxes and is presented in the consolidated statements of stockholders' equity and comprehensive income; it does not affect the Company's financial position or results of operations. SEGMENT REPORTING On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance, as the source of the Company's reportable segments. SFAS No. 131 also requires disclosure about products and services, geographical areas, and major customers. The adoption of F-9 44 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 131 does not affect results of operations or financial position but did affect the disclosure of segment information. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of cash, investment securities, forward currency contracts, and accounts receivable. The Company invests primarily in U.S. Treasury and government agency securities and corporate debt securities rated A1 or higher which have minimal credit risk. The Company places forward currency contracts with high credit-quality financial instruments in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large semiconductor industry customer base. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform with the 1998 presentation. (2) INVENTORIES Inventories consist of the following:
1998 1997 ---------- ---------- Raw materials....................................... $5,147,311 $4,557,848 Work-in-process..................................... 416,409 528,320 Finished goods...................................... 4,567 127,636 ---------- ---------- 5,568,287 5,213,804 Reserve for obsolete inventories.................... (264,656) (244,000) ---------- ---------- $5,303,631 $4,969,804 ========== ==========
(3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1998 1997 ------------ ----------- Land............................................. $ 589,950 $ 364,017 Building......................................... 2,394,679 1,973,704 Manufacturing tools and equipment................ 15,385,727 10,969,906 Office furniture and equipment................... 2,489,523 2,052,070 Leasehold improvements........................... 2,380,259 1,738,792 Computer hardware and software................... 4,675,543 3,685,699 Construction in progress......................... 5,345,132 719,875 ------------ ----------- 33,260,813 21,504,063 Accumulated depreciation and amortization........ (10,562,304) (7,064,809) ------------ ----------- $ 22,698,509 $14,439,254 ============ ===========
F-10 45 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) INTANGIBLE ASSETS Intangible assets consist of the following:
1998 1997 ----------- ---------- Goodwill........................................... $ 3,974,156 $3,089,740 Assembled workforce................................ 98,000 -- Patents and technology............................. 340,840 90,840 ----------- ---------- 4,412,996 3,180,580 Accumulated amortization........................... (1,362,536) (901,233) ----------- ---------- $ 3,050,460 $2,279,347 =========== ==========
(5) OTHER ASSETS Other assets consist of the following:
1998 1997 ---------- -------- Investment in CRPB Investors, L.L.C. ................ $ 463,845 $551,941 Other assets and deposits............................ 544,072 405,234 ---------- -------- $1,007,917 $957,175 ========== ========
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 1998 and 1997, $100,721 and $0, respectively, was recorded by Cerprobe as income from CRPB Investors, L.L.C. (6) ACCRUED EXPENSES Accrued expenses consist of the following:
1998 1997 ---------- ---------- Accrued payroll and related taxes................... $2,390,522 $2,119,373 Other accrued expenses.............................. 685,372 712,386 ---------- ---------- $3,075,894 $2,831,759 ========== ==========
(7) NOTES PAYABLE AND LINE OF CREDIT In December 1998, the Company entered into a $10,000,000 revolving line of credit agreement, which matures June 30, 2000, with Bank of America for general corporate purposes. Interest on the outstanding balance is at either the Reference Rate, announced by Bank of America in San Francisco, California; the Offshore Rate plus 1.50 percentage points calculated by dividing the Grand Caymen Rate by 1 minus the reserve percentage determined by the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities; or the LIBOR Rate plus 1.50 percentage points. The non-use fee under the line of credit is 0.125 % of the unused balance. The line of credit contains certain restrictive covenants that include, among other things, restrictions on 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 F-11 46 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) maintain certain other financial ratios. The Company was in compliance with all covenants as of December 31, 1998. There were no amounts outstanding under this agreement as of December 31, 1998. In addition, in February 1999, after the date of the auditors' report, the Company entered into a $3,000,000 term loan with Bank of America for the purchase of computer equipment, software, and associated consulting fees. Monthly payments, under this loan, are made of principle of $83,333 plus interest of 6.95% per annum for 36 months. The Company also has various demand loans outstanding with minority shareholders of Cerprobe Asia Holdings Pte Ltd. Interest is accrued at the five year Treasury Rate plus 1.50% per anum. These loans are not expected to be paid within the next 12 months, and accordingly, are classified as long-term debt. The outstanding balances, including interest at December 31, 1998 totaled $713,030. Long-term debt consists of the following:
1998 1997 --------- --------- Notes payable........................................ $ 870,540 $ 278,646 Less current portion................................. (138,985) (139,661) --------- --------- Notes payable, less current portion.................. $ 731,555 $ 138,985 ========= =========
Annual maturities of long-term debt are as follows: 1999.............................................. $138,985 2000.............................................. 731,555 -------- $870,540 ========
(8) LEASES In February 1998, the Company entered into a $5,000,000 lease line of credit agreement, which matures in February 1999, 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 150 basis points. Advances are collateralized by the underlying leased manufacturing equipment, furniture, fixtures, software, and/or hardware. As of December 31, 1998, there was $1,349,730 outstanding under all lease schedules with Banc One Leasing Corporation. 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 $4,710,745 and $2,925,320 with related accumulated amortization of $1,454,205 and $1,177,474 as of December 31, 1998 and 1997, 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. In May 1998, Cerprobe entered into a long-term commercial operating lease on a 53,000 square foot building located in Gilbert, Arizona near the Company's worldwide headquarters. The lease commenced August 1, 1998 with an initial lease term of 10 years with an option to extend the lease for 5 years. Rental expense under this lease for 1998 was $100,280. F-12 47 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule of the future minimum lease payments for the years ending December 31:
RENTALS RECEIVABLE CAPITAL OPERATING UNDER LEASES LEASES SUBLEASES ---------- ----------- ---------- 1999........................................... $1,251,528 $ 1,747,967 $ 78,900 2000........................................... 1,140,389 1,658,982 47,600 2001........................................... 652,949 1,606,137 -- 2002........................................... 337,960 1,515,780 -- 2003........................................... 172,631 1,279,027 -- Thereafter..................................... -- 10,449,662 -- ---------- ----------- -------- Total future minimum lease payments............ $3,555,457 $18,257,555 $126,500 =========== ======== Less amounts representing interest (at rates ranging from 4.5% to 10.5%).................. (422,702) ---------- Present value of net minimum capital lease payments..................................... $3,132,755 Less current portion........................... (660,192) ---------- Capital lease obligations, less current portion...................................... $2,472,563 ==========
Depreciation expense for assets under capital leases is charged to depreciation and amortization expense. Rental expense for the years ended December 31, 1998, 1997, and 1996 was $1,663,829, $1,640,272, and $1,002,856, respectively. (9) INCOME TAXES Income tax expense (benefit) consists of the following:
1998 1997 1996 ---------- ---------- ---------- Foreign........................................ $ 549,245 $ 115,763 $ -- Federal........................................ 2,488,841 3,643,959 2,093,000 State.......................................... 647,222 1,050,445 608,000 ---------- ---------- ---------- $3,685,308 $4,810,167 $2,701,000 ========== ========== ========== Current........................................ $4,194,482 $4,802,105 $2,665,581 Deferred....................................... (509,174) 8,062 35,419 ---------- ---------- ---------- $3,685,308 $4,810,167 $2,701,000 ========== ========== ==========
F-13 48 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of actual income taxes to income taxes at the "expected" United States federal corporate income tax rate of 34% is as follows:
1998 1997 1996 ---------- ---------- ---------- Income tax expense at "expected" federal corporate rate............................... $3,033,466 $4,240,851 $ 456,000 State income taxes, net of federal tax benefit...................................... 427,167 693,294 362,700 Purchased research and development expense not benefited.................................... -- -- 1,558,560 Foreign losses not benefited (income taxed at lower than U.S federal rate)................. (3,326) (79,408) 167,450 Amortization of intangibles.................... 156,843 131,406 90,200 Foreign sales corporation benefit.............. (106,236) (82,501) -- Nontaxable income.............................. -- (79,013) Utilization of net operating loss carryforwards................................ -- (47,706) -- Other.......................................... 177,394 33,244 66,090 ---------- ---------- ---------- $3,685,308 $4,810,167 $2,701,000 ========== ========== ==========
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
1998 1997 ---------- --------- Deferred tax assets: Foreign tax loss carryforward............................. $ 349,364 $ 177,554 Acquisition costs not currently deductible................ 616,747 -- Amortization not currently deductible..................... 1,693 -- Currency translation not currently deductible............. 192,589 132,541 Reserves and accruals not currently deductible............ 446,092 411,177 ---------- --------- Deferred tax assets....................................... $1,606,485 $ 721,272 Less valuation allowance.................................. (349,364) (177,554) ---------- --------- Deferred tax assets....................................... $1,257,121 $ 543,718 Deferred tax liabilities: Difference between book and tax depreciation of property, plant and equipment.................................... (581,930) (377,701) ---------- --------- Net deferred tax asset (liability)........................ $ 675,191 $ 166,017 ========== =========
The net non-current deferred tax asset of $229,099 is included in other assets on the balance sheet. The valuation allowance increased by $171,810 in 1998 and decreased by $367,446 in 1997, 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. (10) STOCKHOLDER'S EQUITY SHAREHOLDER RIGHTS PLAN On October 8, 1998, each shareholder of record received one Preferred Share Purchase Right ("Right") on each outstanding share of Common Stock owned. Each Right entitled shareholders to buy one one-thousandth of a share of newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $110. The Rights will be exercisable if a person or group hereafter acquires 15% or more of F-14 49 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Common Stock of the Company or announces a tender offer for 15% or more of the Common Stock. Should this occur, the Right will entitle its holder to purchase, at the Right's exercise price, a number of shares of Common Stock having a market value at the time of twice the Right's exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company's Common Stock, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. TREASURY STOCK On August 5, 1998, the Company announced a stock repurchase program whereby up to 500,000 shares, or approximately 6%, of the Company's common stock could be purchased from time to time in the open market. As of December 31, 1998, the Company had purchased 500,000 shares at an approximate price of $11.37 per share. The Company intends to utilize a portion of the reacquired shares for reissuance in connection with its Employee Stock Purchase Plan. 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. (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 2,585,000 shares of the Company's common stock, of which 375,334 were available for grant as of December 31, 1998. 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 under the nonqualified stock option plan in 1995. Compensation expense related to these options for 1996 was $49,383. 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 1998, 1997, and 1996 was estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997, and 1996, respectively; risk-free interest rates of 5.1%, 5.6%, and 6.1%; dividend yields of zero for all years; F-15 50 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) volatility factors of the expected market price of the Company's common stock of 52%, 52%, and 53%, 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 that 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 years 1995 through 1998. 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 before January 1, 1995 is not considered. The Company's pro forma information follows:
1998 1997 1996 --------- ---------- ----------- UNAUDITED -------------------------------------- Net income (loss)............... As reported $(495,908) $1,895,968 $(1,360,790) Pro forma $(708,146) $1,784,019 $(1,470,158) Basic net income (loss) per share......................... As reported $ (0.06) $ 0.28 $ (0.30) Pro forma $ (0.09) $ 0.27 $ (0.32) Diluted net income (loss) per share......................... As reported $ (0.06) $ 0.27 $ (0.30) Pro forma $ (0.09) $ 0.26 $ (0.32)
A summary of the Company's employee stock option activity and related information for the years ended December 31 follows:
1998 1997 1996 -------------------- ------------------ ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- ------- -------- -------- -------- Outstanding at beginning of year...................... 639,866 $ 8.81 593,631 $ 8.46 598,333 $ 6.44 Granted................... 984,000 $13.44 153,000 $10.38 160,000 $10.86 Exercised................. (31,300) $ 6.57 (95,265) $ 8.57 (164,702) $ 3.43 Expired/canceled.......... (393,000) $16.37 (11,500) $12.88 -- -- --------- ------- -------- Outstanding at end of year................... 1,199,566 $10.19 639,866 $ 8.81 593,631 $ 8.46 ========= ======= ======== Exercisable at end of year................... 569,898 $ 9.01 367,320 $ 7.45 360,233 $ 6.94 ========= ======= ======== Weighted average fair value of options granted during the year................... $ 5.35 $ 4.16 $ 4.45 ========= ======= ========
F-16 51 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ------------------------- OPTIONS EXERCISABLE WEIGHTED- ----------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT CONTRACTUAL EXERCISE AT EXERCISE 12/31/98 LIFE PRICE 12/31/98 PRICE ----------- ----------- --------- ----------- --------- $5.500 to $5.742........ 218,366 0.4 $ 5.742 218,366 $ 5.742 $8.250.................. 8,000 6.5 $ 8.250 8,000 $ 8.250 $10.250 to $10.500...... 289,000 7.8 $10.336 156,832 $10.346 $11.000 to $11.875...... 430,000 9.3 $11.104 112,132 $11.239 $12.250 to $13.125...... 254,200 9.6 $12.367 74,568 $12.559 --------- ------- 1,199,566 7.1 $10.190 569,898 $ 9.010 ========= =======
(12) COMPREHENSIVE INCOME The Company recognized comprehensive income (loss) for the years ended December 31, as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 --------- ---------- ----------- Net income (loss)............................. $(495,908) $1,895,968 $(1,360,790) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment....... 17,798 (402,344) 83,547 Tax benefit (expense) from foreign currency translation................................. (7,119) 160,938 (33,419) --------- ---------- ----------- Net other comprehensive income (loss)......... 10,679 (241,406) 50,128 --------- ---------- ----------- Comprehensive income (loss)................... $(485,229) $1,654,562 $(1,310,662) ========= ========== ===========
(13) SEGMENT INFORMATION The Company operates principally in one industry segment; the design, development, manufacture and market of semiconductor integrated circuit test products and services. The Company's principal customers are North American, European, and Asian based semiconductor manufacturing companies. Two of the Company's customers exceeded 10% of net sales. The first customer accounted for 17%, 17%, and 16% of net sales for the years ended December 31, 1998, 1997, and 1996, respectively. The accounts receivable from that customer were $586,318, $1,081,424, and $449,380 at December 31, 1998, 1997, and 1996, respectively. The second customer accounted for 12%, 10%, and 2% of net sales for the years ended December 31, 1998, 1997, and 1996, respectively, with accounts receivable of $451,766, $654,015, and $512,867 at December 31, 1998, 1997, and 1996, respectively. International sales represented 18%, 18%, and 20% of the Company's net sales in 1998, 1997, and 1996, respectively. F-17 52 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the Company's geographic operations:
NORTH EUROPE AMERICA AND ASIA ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ 1998 - -------------------------------------- Customer sales........................ $62,412,140 $13,795,337 $ -- $76,207,477 Intercompany sales.................... 494,987 3,304,021 (3,799,008) -- ----------- ----------- ----------- ----------- Total sales...................... $62,907,127 $17,099,358 $(3,799,008) $76,207,477 =========== =========== =========== =========== Long-lived assets..................... $28,134,572 $ 4,375,940 $(5,753,626) $26,756,886 =========== =========== =========== =========== 1997 - -------------------------------------- Customer sales........................ $56,670,599 $12,341,796 $ -- $69,012,395 Intercompany sales.................... 864,575 2,110,599 (2,975,174) -- ----------- ----------- ----------- ----------- Total sales...................... $57,535,174 $14,452,395 $(2,975,174) $69,012,395 =========== =========== =========== =========== Long-lived assets..................... $18,514,131 $ 1,967,317 $(2,805,672) $17,675,776 =========== =========== =========== =========== 1996 - -------------------------------------- Customer sales........................ $29,973,727 $ 7,334,472 $ -- $37,308,199 Intercompany sales.................... -- 1,206,441 (1,206,441) -- ----------- ----------- ----------- ----------- Total sales...................... $29,973,727 $ 8,540,913 $ 1,206,441 $37,308,199 =========== =========== =========== =========== Long-lived assets..................... $16,010,845 $ 1,942,106 $(2,577,257) $15,375,694 =========== =========== =========== ===========
Although the Company has been impacted by the international economic climate, management does not believe significant credit risk existed at December 31, 1998. The Company monitors its customers' financial condition and does not require collateral. Historically, the Company has not experienced significant losses related to receivables from any individual or groups of customers. (14) COMMITMENTS AND CONTINGENCIES In October 1998, the Company filed an action against the former President, Director, and shareholders of Silicon Valley Test & Repair, Inc., which was acquired by the Company by way of a merger into its wholly-owned subsidiary, SVTR, Inc., in January 1997. The suit seeks rescission of the acquisition and/or monetary damages arising from failure of the defendants to disclose material facts regarding the origins of certain software necessary for SVTR, Inc.'s business. In February 1999, after the date of the auditors' report, the defendants filed a counter claim against the Company alleging conversion, interference with contractual relations, unfair business practices, breach of contract, and specific performance allegedly arising from the Company's actions to preclude the defendants from selling the Company stock received by defendants as part of the purchase price of Silicon Valley Test & Repair, Inc.; the Company seeks to recover this stock and the balance of the purchase price through its claims for rescission. In March 1999, the Company and SVTR filed an amended complaint. The defendants have not yet responded. While the Company intends to vigorously prosecute this action, it is impossible to predict the outcome of this or any litigation. It is not anticipated that this suit will have a material adverse impact on the Company's financial condition or results of operations. The Company is involved in other legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these actions would not have a material adverse effect on the Company. F-18 53 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) EMPLOYEE BENEFIT PLANS In December 1997, the Board of Directors approved the Employee Stock Purchase Plan (the "ESPP") which provides employees the means to acquire an equity interest in the Company. Eligible employees of the Company can purchase Common Stock through payroll deductions at the lower of 85% of the closing price of the Common Stock on the offering commencement date or the offering termination date. Payroll deductions for the purchase of the stock may not exceed 10% of an employee's base compensation or $25,000. As of December 31, 1998, 37,198 shares had been purchased under this plan. The maximum number of shares that may be issued under this plan is 150,000. 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 in the approximate amounts of $324,000, $241,000, and $91,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The participants are fully vested in their and the Company's contributions. (16) DISCONTINUED OPERATIONS In the third quarter of 1998, the Company discontinued operations of SVTR, a wafer prober refurbishing and upgrading subsidiary acquired by the Company in January 1997. The discontinuance resulted from questions regarding the origins of certain software necessary for SVTR's business. In March 1999, after the date of the auditors' report, Cerprobe sold certain SVTR assets for $500,000. No gain or loss was recognized on the sale. SVTR has been accounted for as a discontinued operation and accordingly, its results of operations and financial position are segregated for all periods presented in the accompanying consolidated financial statements. Net sales, related losses, and income taxes associated with the discontinued operations are as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- Net sales................................................. $ 3,871,292 $ 8,097,809 ----------- ----------- Loss from operations...................................... $(3,550,636) $(6,865,376) Income tax benefit........................................ 1,625,816 1,098,420 ----------- ----------- Loss from operations, net................................. $(1,924,820) $(5,766,956) =========== =========== Loss on disposal.......................................... $(6,346,233) $ -- Income tax benefit........................................ 2,538,493 -- ----------- ----------- Loss on disposal, net..................................... $(3,807,740) $ -- =========== ===========
The effective tax rate used in calculating the income tax benefit from discontinued operations is approximately the same as the Company's effective tax rate for continuing operations. The Company recorded a pretax charge of $4,597,034 to write down its assets to estimated net realizable value and to record additional liabilities in the shut down period. A charge of $1,749,199 was also recorded to reflect the estimated phase out costs and losses from operations associated with SVTR. The tax benefit associated with these charges was $2,538,493. F-19 54 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net assets of SVTR, as reclassified in the accompanying consolidated balance sheets, include the following:
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- Current assets............................................ $ 3,445,737 $ 6,527,594 Property, plant and equipment, net........................ -- 702,648 Intangibles, net.......................................... -- 116,954 Other assets.............................................. 46,865 52,741 Current liabilities....................................... (1,990,852) (1,307,251) Long term debt............................................ (19,847) (39,690) ----------- ----------- $ 1,481,903 $ 6,052,996 =========== ===========
(17) ACQUISITIONS CERPROBE INTERCONNECT SOLUTIONS, INC. (FORMERLY COMPUROUTE, INC.) On December 27, 1996, the Company acquired all of the outstanding stock of CIS, 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: 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 state. 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. F-20 55 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CERPROBE EUROPE S.A.S. (FORMERLY SEMICONDUCTEUR SERVICES S.A.) On September 30, 1998, the Company acquired France based Cerprobe Europe S.A.S. for $3.0 million in cash and $250,000 in acquisition related expenses. Cerprobe Europe S.A.S. designs, manufactures and distributes probe cards. The acquisition resulted in $1,568,000 in purchased research and development, which was charged to operations upon acquisition, and $508,051 in goodwill, which is being amortized on a straight-line basis over 10 years, and $98,000 in assembled workforce, which is being amortized on a straight line basis over 4 years. The acquisition was accounted for as a purchase and, accordingly, the accompanying consolidated balance sheet includes the assets purchased and liabilities assumed of Cerprobe Europe S.A.S. at December 31, 1998 and the accompanying consolidated statements of operations include the results of Cerprobe Europe S.A.S. since the date of acquisition. UPSYS-CERPROBE L.L.C. On June 25, 1998, the Company purchased Upsys's 45% interest in Upsys-Cerprobe L.L.C. The acquisition resulted in $376,366 of goodwill, which is being amortized on a straight-line basis over eight years. (18) 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 the amounts. The carrying amount of investment securities, receivables, accounts payable, and accrued expenses approximates fair value because of the short term nature of these items. The fair value of notes payable and capital lease 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. (19) SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1998, 1997, and 1996 follows:
BALANCE AT BALANCE BEGINNING AT END OF YEAR ADDITIONS ACQUISITIONS DEDUCTIONS OF YEAR ---------- --------- ------------ ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1998.................. $215,179 $186,585 $ -- $ 68,400 $333,364 Year ended December 31, 1997.................. $223,000 $ 24,000 $ -- $ 31,821 $215,179 Year ended December 31, 1996.................. $173,000 $ 12,000 $44,000 $ 6,000 $223,000 Allowance for obsolescence of inventories: Year ended December 31, 1998.................. $244,000 $534,000 $ -- $513,344 $264,656 Year ended December 31, 1997.................. $129,000 $621,000 $ -- $506,000 $244,000 Year ended December 31, 1996.................. $ 83,000 $ 75,000 $ -- $ 29,000 $129,000
F-21 56 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (20) NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
1998 1997 1996 ---------- ---------- ----------- Net income (loss)............................. $ (495,908) $1,895,968 $(1,360,790) ========== ========== =========== Weighted average outstanding common shares.... 7,963,747 6,690,265 4,579,598 Effect of dilutive securities: Stock options............................... 287,626 292,103 194,883 Convertible preferred stock................. -- -- 553,858 Antidilutive effect of dilutive securities............................... -- -- (748,741) ---------- ---------- ----------- Weighted average and common equivalent shares outstanding....................... 8,251,373 6,982,368 4,579,598 ========== ========== =========== Basic net income (loss) per share........... $ (0.06) $ 0.28 $ (0.30) ========== ========== =========== Diluted net income (loss) per share......... $ (0.06) $ 0.27 $ (0.30) ========== ========== ===========
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER(1) QUARTER ------- ------- ---------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1998 - ------------------------------------------- Net sales.................................. $22,953 $18,139 $20,107 $15,008 Gross profit............................... 9,879 7,253 8,593 5,430 Operating income........................... 4,445 1,686 1,354 223 Income from continuing operations.......... 2,748 1,202 1,036 251 Net income (loss).......................... 2,345 467 (3,557) 249 Basic net income (loss) per share.......... 0.29 0.06 (0.46) 0.03 Diluted net income (loss) per share........ 0.28 0.06 (0.45) 0.03 YEAR ENDED DECEMBER 31, 1997 - ------------------------------------------- Net sales.................................. $14,525 $17,047 $17,562 $19,879 Gross profit............................... 6,253 7,815 7,572 8,122 Operating income........................... 2,366 3,589 3,353 2,854 Income from continuing operations.......... 1,385 2,227 1,932 2,120 Net income (loss).......................... (4,895) 1,590 2,962 2,240 Basic net income (loss) per share.......... (0.79) 0.26 0.47 0.28 Diluted net income (loss) per share........ (0.78) 0.24 0.45 0.27
- --------------- (1) Includes a one-time write-off of purchased research and development of $1.6 million, or $0.11 per diluted share, not of tax benefit, related to the acquisition of Cerprobe Europe S.A.S. F-22 57 INDEX TO 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) Second Restated Certificate of Incorporation of Cerprobe Corporation, filed with the Secretary of State on June 23, 1998, as exhibit 3(e) to the Company's Form 10-Q for the period ended June 30, 1998 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. 3 (c) Rights Agreement, dated September 28, 1998, between Cerprobe Corporation and American Securities Transfer & Trust, Incorporated, as Rights Agent, filed as an exhibit to the Company's Form 8-A filed on or about October 2, 1998 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 (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 (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.
58
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10 (s) Employment Contract dated July 17, 1990 between the Company and Michael K. Bonham filed as Exhibit 10(q) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10 (t) Employment Contract dated July 16, 1990 between the Company and Eswar Subramanian filed as Exhibit 10(r) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10 (u) Employment Contract dated July 16, 1990 between the Company and Henry Wong filed as Exhibit 10(s) to the Company's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10 (v) Manufacturing Licensing Agreement between the Company and Intertrade Scientific, Inc. dated August 30, 1993 filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10 (w) Manufacturing Licensing Agreement between the Company and ESJ Corporation dated January 21, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1993 and incorporated herein by reference. 10 (x) Loan Agreement between the Company and First Interstate Bank of Arizona, N.A. dated June 6, 1994 and related Promissory Note filed as Exhibit 10(x) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10 (y) Master Lease Agreement between the Company and First Interstate Bank of Arizona, N.A. dated as of June 6, 1994 filed as Exhibit 10(y) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10 (z) Master Lease Agreement between the Company and PFC, Inc. dated August 9, 1994 filed as Exhibit 10(z) to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10 (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 (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 (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.
59
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 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. 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. 10 (zz) Revolving Line of Credit Note between the Company and Wells Fargo Bank, National Associated dated February 28, 1997. 10 (aaa) Lease agreement between CompuRoute and Banc 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.
60
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10 (bbb) Master Lease Agreement between Company and Banc 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. 10 (ccc) Lease agreement between CompuRoute and Banc One Leasing Corporation, dated May 7, 1998, filed as exhibit 10(ccc) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10 (ddd) Lease agreement between CompuRoute and Banc One Leasing Corporation, dated June 17, 1998, filed as exhibit 10(ddd) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10 (eee) Lease agreement between Cerprobe Corporation and Jackson-Shaw El Dorado Tech I Limited Partnerships, dated May 15, 1998, filed as exhibit 10(eee) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10 (fff) Lease agreement between Cerprobe Corporation and Banc One Leasing Corporation, dated October 22, 1998, filed as exhibit 10(fff) to the Company's Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference. 10 (ggg) Business Loan agreement between Cerprobe Corporation and Bank of America, dated December 31, 1998. 10 (hhh) Lease agreement between Cerprobe Corporation and Bank of America, dated February 26, 1999. 11 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, 1998 27.2 Restated Financial Data Schedule for twelve months ended December 31, 1997
EX-10.GGG 2 EX-10.GGG 1 Exhibit: 10(ggg) Business Loan Agreement [Bank of America Logo] - -------------------------------------------------------------------------------- This Agreement dated as of December 22, 1998 is between Bank of America National Trust and Savings Association (the "Bank") and Cerprobe Corporation (the "Borrower"). 1. LINE OF CREDIT AMOUNT AND TERMS 1.1 Line of Credit Amount. (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Commitment") is Ten Million and no/100 Dollars ($10,000,000.00). (b) This is a revolving line of credit. During the availability period, the Borrower may repay principal amounts and reborrow them. (c) The Borrower agrees not to permit the outstanding principal balance of the line of credit to exceed the Commitment. 1.2 Availability Period. The line of credit is available between the date of this Agreement and June 30, 2000 (the "Expiration Date") unless the Borrower is in default. 1.3 Interest Rate. (a) Unless the Borrower elects an optional interest rate as described below, the interest rate is the Reference Rate. (b) The "Reference Rate" is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 1.4 Repayment Terms. (a) The Borrower will pay interest on January 1, 1998 and on the 1st day of each month thereafter until payment in full of any principal outstanding under this line of credit. (b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. (c) Any amount bearing interest at an optional interest rate (as described below) may be repaid at the end of the applicable interest period, which shall be no later than the Expiration Date. 1.5 Optional Interest Rates. Instead of the interest rate based on the Reference Rate, the Borrower may elect to have all or portions of the line of credit (during the availability period) bear interest at the rate(s) described below in Sections 1.6 and 1.7 during an interest period agreed to by the Bank and the Borrower. Each interest rate is a rate per year. Interest will be paid on the last day of each interest period, and on the first day of each month during the interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the portion. 1.6 Offshore Rate. The Borrower may elect to have all or portions of the principal balance of the line of credit or of the Term Loan (as defined below) bear interest at the Offshore Rate plus 1.50 percentage points. Designation of an Offshore Rate portion is subject to the following requirements: 1 2 (a) The interest period during which the Offshore Rate will be in effect will be one year or less. The last day of the interest period will be determined by the Bank using the practices of the offshore dollar inter-bank market. (b) Each Offshore Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000) for interest periods of 30 days or longer. For shorter maturities, each Offshore Rate portion will be for an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million (15,000,000) dollar-days. As an example of the foregoing, if the Borrower were to request an Offshore Rate portion for a period of 20 days, the amount of such Offshore Rate portion would have to be at least $750,000 (20 days times $750,000 equals 15,000,000 dollar-days). (c) The "Offshore Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) Offshore Rate = Grand Cayman Rate ----------------------------- (1.00 - Reserve Percentage) Where, (i) "Grand Cayman Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank markets. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower may not elect an Offshore Rate with respect to any portion of the principal balance of the line of credit or of the Term Loan which is scheduled to be repaid before the last day of the applicable interest period. (e) Any portion of the principal balance of the line of credit or the Term Loan already bearing interest at the Offshore Rate will not be converted to a different rate during its interest period. (f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid; and a prepayment fee equal to the amount (if any) by which: (i) the additional interest which would have been payable, at the Offshore Rate, on the amount prepaid had it not been paid until the last day of the interest period, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the offshore dollar market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion, plus interest on such portion from the date of prepayment to the last day of the interest period for such portion at the rate of 1.50% per annum. (g) The Bank will have no obligation to accept an election for an Offshore Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of an Offshore Rate portion are not available in the offshore Dollar inter-bank markets; or (ii) the Offshore Rate does not accurately reflect the cost of an Offshore Rate portion. 2 3 1.7 LIBOR RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit or of the Term Loan bear interest at the LIBOR Rate plus 1.50 percentage points. Designation of a LIBOR Rate portion is subject to the following requirements: (a) The interest period during which the LIBOR Rate will be in effect will be one year or less. The last day of the interest period and the actual number of days during the interest period will be determined by the Bank using the practices of the London inter-bank market. (b) Each LIBOR Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000) for interest periods of one month or longer. For shorter maturities, each LIBOR Rate portion will be for an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million (15,000,000) dollar-days. As an example of the foregoing, if the Borrower were to request a LIBOR Rate portion for a period of 20 days, the amount of such LIBOR Rate portion would have to be at least $750,000 (20 days times $750,000 equals 15,000,000 dollar-days). (c) The "LIBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) London Inter-Bank Offered Rate LIBOR Rate = ------------------------------ (1.00 - Reserve Percentage) Where, (i) "London Inter-Bank Offered Rate" means the interest rate at which the Bank's London Branch, London, Great Britain, would offer U.S. dollar deposits for the applicable interest period to other major banks in the London inter-bank market at approximately 11:00 a.m. London time two (2) London Banking Days before the commencement of the interest period. A "London Banking Day" is a day on which the Bank's London Branch is open for business and dealing in offshore dollars. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in the Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower shall irrevocably request a LIBOR Rate portion no later than 9:00 a.m. Phoenix time three (3) banking days before the commencement of the interest period. (e) The Borrower may not elect a LIBOR Rate with respect to any portion of the principal balance of the line of credit or the Term Loan which is scheduled to be repaid before the last day of the applicable interest period. (f) Any portion of the principal balance of the line of credit already bearing interest at the LIBOR Rate will not be converted to a different rate during its interest period. (g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment", for the purposes of this section, is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable, at the LIBOR Rate, during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was 3 4 prepaid and ending on the last day of the interest period for such portion, plus interest on such portion from the date of prepayment to the last day of the interest period for such portion at the rate of 1.50% per annum. (h) The Bank will have no obligation to accept an election for a LIBOR Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period of a LIBOR Rate portion are not available in the London inter-bank market; or (ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate portion. 1.8 GUARANTY OF OBLIGATIONS. The obligations of the Borrower to the Bank shall at all times by guarantied by CompuRoute, Inc. and SVTR, Inc. ("SVTR") and each other wholly-owned subsidiary of the Borrower which is organized under the laws of a jurisdiction in the United States of America (each a "Wholly-Owned Domestic Subsidiary"; CompuRoute, Inc. and SVTR, Inc., together with all Wholly-Owned Domestic Subsidiaries and any other person or entity who may now or hereafter guarantee any portion of the obligations of the Borrower under this Agreement, are referred to herein collectively as the "Guarantors", and each individually as a "Guarantor") on the Bank's standard form in an amount as may be reasonably acceptable to the Bank. The obligations of the Borrower to the Bank shall, at all times, also be guarantied by each entity which is presently or later becomes a Wholly-Owned Domestic Subsidiary of the Borrower, pursuant to a payment guaranty in form and substance reasonably satisfactory to the Bank, which payment guaranty shall be executed within 15 days of the time any such entity becomes a Wholly-Owned Domestic Subsidiary. 2. TERM LOAN AMOUNT AND TERMS 2.1 THE TERM LOAN. The Bank agrees to make a term loan (the "Term Loan") to the Borrower, in a single disbursement, to be made on or before February 28, 1999, in an amount not exceeding Three Million and no/100 Dollars ($3,000,000.00), as requested by the Borrower (the actual amount of such disbursement is referred to herein as the "Disbursement Amount"). The proceeds of the Term Loan shall be used by the Borrower solely for the purchase of computer equipment, software, and associated consulting fees, or to finance equipment already purchased by the Borrower, or to reimburse the Borrower for the cost of the Borrower's prior purchase of computer equipment, software, and associated consulting fees. 2.2 INTEREST RATE. The outstanding principal balance of the Term Loan shall bear interest at the Reference Rate, unless the Borrower has elected to have all or a portion of the outstanding balance of the Term Loan bear interest at the Long Term Rate (defined below), the Average Life Treasuries Rate (defined below), the LIBOR Rate plus 1.50% per annum (the "Term Loan LIBOR Rate"), or the Offshore Rate plus 1.50% per annum (the "Term Loan Offshore Rate"; each of the Long Term Rate, Average Life Treasuries Rate, the Term Loan Offshore Rate, and the Term Loan LIBOR Rate is referred to herein as an "Term Loan Optional Rate"; a portion of the Term Loan bearing interest at a Term Loan Optional Rate is referred to herein as a "Term Loan Optional Rate Portion") for all or portions of the outstanding principal balance of the Term Loan in accordance with the provisions of Sections 1.6, 1.7, and 2.3 of this Agreement. No interest period for a portion of the Term Loan Optional Rate Portion may extend beyond the Term Loan Maturity Date (defined below). At the end of any interest period for a Term Loan Optional Rate Portion, the interest rate for that Term Loan Optional Rate Portion will revert to the Reference Rate, unless the Borrower has elected another Term Loan Optional Rate in accordance with the terms of this Agreement. 2.3 LONG TERM RATE. The Borrower may elect to have all or portions of the principal balance of the Term Loan bear interest at the Long Term Rate, subject to the following requirements (each such portion bearing interest at a Long Term Rate is referred to herein as a "Long Term Rate Portion"): (a) The interest period for a Long Term Rate Portion will be one year or more, as elected by the Borrower. (b) The "Long Term Rate" means the fixed interest rate the Bank and the Borrower agree will apply to a Long Term Rate Portion during the applicable interest period, as provided in this Section 2.3. 4 5 (c) Each Long Term Rate Portion will be for an amount not less than One Hundred Thousand Dollars ($100,000). (d) No Long Term Rate Portion may be converted to a different Long Term Rate Portion or another Term Loan Optional Rate Portion during its Long Term Rate interest period. (e) The Borrower may prepay a Long Term Rate Portion in whole or in part in the minimum amount of One Hundred Thousand Dollars ($100,000). The Borrower will give the Bank irrevocable written notice of the Borrower's intention to make the prepayment, specifying the date and amount of the prepayment. The notice must be received by the Bank at least 5 banking days in advance of the prepayment. All prepayments of principal on a Long Term Rate Portion will be applied on the most remote principal installments of that Long Term Rate Portion which are then unpaid. (f) Each prepayment of a Long Term Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by payment of all accrued interest on the amount of the prepayment and the Prepayment Fee described below. (g) The "Prepayment Fee" will be the sum (over each Prepaid Installment related to such prepayment) of the amounts calculated below, where the amount calculated below is for a single Prepaid Installment, as follows: (i) The Bank will first determine the amount of interest which would have accrued each month for the Prepaid Installment had it remained outstanding until the applicable Original Payment Date, using the Long Term Rate in effect for the Long Term Rate Portion being prepaid; (ii) The Bank will then subtract from each monthly interest amount determined in (i), above, the amount of interest which would accrue for that Prepaid Installment if it were reinvested the entire applicable interest period, using the Long Term Rate which the Bank would quote to the Borrower if the Borrower had requested a Long Term Rate portion in the amount of such Prepaid Installment for the period from the date of prepayment to the Original Payment Date (or, in the event that the Bank would not offer a Long Term Rate for the period from the date of prepayment to the Original Payment Date, such other rate as the Bank would quote as a fixed rate for such period, as determined by the Bank in its reasonable discretion). (iii) If (i) minus (ii) for the Prepaid Installment is greater than zero, the Bank will discount the monthly differences to the date of prepayment by the rate used in (ii) above. The sum of the discounted monthly differences is the Prepayment Fee for that Prepaid Installment. (h) The following terms have the meanings given to them below for the purposes of this Section 1.4: "Applicable Interest Period" means the interest period in effect for the Long Term Rate Portion which is being prepaid. "Money Market" means the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank. "Money Market Rate" means the fixed interest rate per annum which the Bank determines could be obtained by reinvesting a specified Prepaid Installment in the Money Market from the date of prepayment through the Original Payment Date. "Original Payment Dates" mean, collectively and, as applicable, to any amount prepaid, (1) the dates on which payments are due under Section 2.5 of this Agreement, and (2) the last day of the applicable interest period. If a portion of the outstanding principal of the Term Loan would have been paid later than the end of the applicable interest period in effect at the time of such prepayment, then the Original Payment Date for that portion will be the last day of the applicable interest period. 5 6 "Prepaid Installment" means the amount of the prepayment which would have been paid on a single Original Payment Date. The Bank may adjust the Money Market Rate to reflect the compounding, accrual basis, or other related costs. Each of the rates shall be the Bank's estimate only and the Bank is under no obligation actually to reinvest any prepayment. The rates will be based on information from either the Telerate or Reuters information services. The Wall Street Journal, or other information sources the Bank deems reasonably appropriate. 2.4 AVERAGE LIFE TREASURIES RATE. The Borrower may elect to have all or portions of the outstanding principal balance of the Term Loan bear interest at the Average Life Treasuries Rate (each portion which the Borrowers so elect is referred to herein as a "Average Life Treasuries Rate Portion"), subject to the following requirements: (a) The interest period during which the Average Life Treasuries Rate will be in effect with respect to an Average Life Treasuries Rate Portion will be three months, six months, one year, or two years, as requested by the Borrower and agreed to by the Bank, but shall not extend beyond the Term Loan Maturity Date. The interest period must begin on or after the last day of the availability period specified above. (b) The "Average Life Treasuries Rate" is, at a time, the sum of (a) 1.85% per annum and (b) the weekly average yield on United States Treasury Securities Constant Maturities Series issued by the United States Government for a term corresponding to the term of the requested interest period, as most recently published by the Board of Governors of the Federal Reserve System and Federal Reserve Statistical Release H.15(519) (or any similar or successor publication selected by the Bank). (c) Each Average Life Treasuries Rate Portion will be for an amount not less than One Hundred Thousand Dollars ($100,000). (d) Any portion of the outstanding principal balance of the Term Loan already bearing interest at a Term Loan Optional Rate will not be converted to a different rate during its interest period. (e) The Borrower may prepay an Average Life Treasuries Rate Portion in whole or in part, but in a minimum amount of One Hundred Thousand and No/100 Dollars ($100,000.00). The Borrower will give the Bank irrevocable written notice of the Borrower's intention to make the prepayment, specifying the date and amount of the prepayment. The notice must be received by the Bank at least 5 banking days in advance of the prepayment. All prepayments of principal on an Average Life Treasuries Rate Portion will be applied to the most remote principal installment or installments then unpaid. (f) Each prepayment of an Average Life Treasuries Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by payment of all accrued interest on the amount of the prepayment and the prepayment fee (the "ALT Prepayment Fee") described below. (g) The "ALT Prepayment Fee" will be the sum (over each ALT Prepaid Installment related to such prepayment) of the amounts calculated below, where the amount calculated below is for a single ALT Prepaid Installment, as follows: (i) The Bank will first determine the amount of interest which would have accrued each month for the ALT Prepaid Installment had it remained outstanding until the applicable ALT Original Payment Date, using the Average Life Treasuries Rate in effect for the Average Life Treasuries Rate Portion being prepaid; (ii) The Bank will then subtract from each monthly interest amount determined in (i), above, the amount of interest which would accrue for that ALT Prepaid Installment if it were reinvested the entire applicable interest period at the Average Life Treasuries Rate in effect at the time of prepayment. (iii) If (i) minus (ii) for the ALT Prepaid Installment is greater than zero, the Bank will discount the monthly differences to the date of prepayment by the rate used in (ii) above. 6 7 The sum of the discounted monthly differences is the ALT Prepayment Fee for that ALT Prepaid Installment. (h) The following definitions will also apply to the calculation of the ALT Prepayment Fee: "ALT Original Payment Date" mean, with respect to an ALT Prepaid Installment, the date on which principal of the related Average Life Treasuries Rate Portion would have been paid if there had been no prepayment. If a portion of the principal would have been paid later than the end of the interest period in effect at the time of prepayment, then the ALT Original Payment Date for that portion will be the last day of the interest period. "ALT Prepaid Installment" means the amount of the prepaid principal of an Average Life Treasuries Rate Portion which would have been paid on a single ALT Original Payment Date. 2.5 REPAYMENT TERMS. The Borrower will pay all accrued but unpaid interest on the first day of each month, beginning on the first such day to occur after disbursement of the proceeds of the Term Loan, and upon payment in full of the principal of the Term Loan. The Borrower will repay principal in successive monthly installments, due and payable on the first day of each month, beginning on the first such day to occur after disbursement of the proceeds of the Term Loan (such day is referred to herein as the "First Principal Payment Date"). Each such monthly principal installment shall be in the amount of $83,333.34 multiplied by the Disbursement Ratio. As used in this Agreement, "Disbursement Ratio" means the Disbursement Amount divided by $3,000,000. All payments hereunder shall be applied first to accrued and unpaid interest, and then to principal. On the date which is the earlier of (a) the date which is 35 months after the First Principal Payment Date, and (b) April 30, 2002 (the earlier of such dates is referred to herein as the "Term Loan Maturity Date"), all accrued and unpaid interest and all remaining principal shall then be due and payable in full. 2.6 PREPAYMENTS. (a) The Borrower may prepay the Term Loan in full or in part at any time, provided, however, that any partial prepayment shall be in an amount not less than One Hundred Thousand Dollars ($100,000). The Borrower will give the Bank irrevocable written notice of the Borrower's intention to make the prepayment, specifying the date and amount of the prepayment. The notice must be received by the Bank at least 5 banking days in advance of the prepayment. The prepayment will be applied to the most remote installment of principal due under this Agreement. (b) Each prepayment of a Term Loan Optional Rate Portion, whether voluntary, by reason of acceleration or otherwise, which occurs on a date which is not the end of the interest period for such Term Loan Optional Rate Portion will be accompanied by the amount of accrued interest on the amount prepaid, and the Prepayment Fee, ALT Prepayment Fee, or other prepayment fee or premium described in Sections 1.6, 1.7, 2.3, and 2.4 of this Agreement. 2.7 COLLATERAL FOR THE TERM LOAN. The Borrower's obligations to the Bank with respect to the Term Loan shall be secured, at all times, by a first priority security interest in favor of the Bank on the equipment purchased with the proceeds of the Term Loan and on the equipment financed by the Bank with proceeds of the Term Loan. Prior to the disbursement of the proceeds of the Term Loan, and as a condition precedent to the Bank's obligation to make the Term Loan, the Borrower shall execute and deliver to the Bank a security agreement, in the form attached as Exhibit A hereto, granting to the Bank a security interest in the equipment purchased or to be purchased with the proceeds of the Term Loan, and shall execute such other documents and instruments as the Bank may reasonably require in order to perfect the Bank's security interest in such equipment. Also, as a condition precedent to the Bank's obligation to make the Term Loan, prior to the disbursement of the Term Loan, the Borrower shall furnish the Bank with all receipts and invoices related to the purchase of computer equipment and software and the payment of the related consulting fees associated with such purchase. 3. FEES 3.1 UNUSED COMMITMENT FEE. Subject to the termination of this Agreement by the Borrower pursuant to the provisions of section 10.13 below, the Borrower agrees to pay a fee on any difference between the Commitment 7 8 and the amount of credit it actually uses, determined by the weighted average loan balance maintained during the specified period. The fee will be calculated at 1/8% per year. This fee is due on January 1, 1999, and on the first day of each following quarter, until the expiration of the availability period. 3.2 REIMBURSEMENT COSTS. The Borrower agrees to reimburse the Bank for any reasonable expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. 4. DISBURSEMENTS, PAYMENTS AND COSTS 4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment by the Borrower will be: (a) made at the Bank's branch (or other location) selected by the Bank from time to time; (b) made for the account of the Bank's branch selected by the Bank from time to time; (c) made in immediately available funds, or such other type of funds selected by the Bank; (d) evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes. 4.3 TELEPHONE AND TELEFAX AUTHORIZATION. (a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates given by any one of the individual signer(s) of this Agreement or a person or persons authorized in writing by any one of the signer(s) of this Agreement. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 252-352-661, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions it reasonably believes are made by any individual authorized by the Borrower to give such instructions, provided, however, that this indemnification shall not extend to the gross negligence or willful misconduct of the Bank. This indemnity and excuse will survive this Agreement's termination. 4.4 DIRECT DEBIT. (a) The Borrower agrees that interest and principal payments and any fees will be deducted automatically on the due date from Borrower's account number 252-352-661, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower (the "Designated Account"). (b) The Bank will debit the account on the dates the payments become due. If a due date does not fall on a banking day, the Bank will debit the account on the first banking day following the due date. (c) The Borrower will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds in the account on the date the Bank enters any debt authorized by this Agreement, the debit will be reversed. (d) The Borrower may terminate this direct debit arrangement at any time by sending written notice to the Bank at the address specified at the end of this Agreement. 4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in Arizona. For amounts bearing interest at the 8 9 Offshore Rate or the LIBOR Rate (if any), a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California and is dealing in offshore dollars. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 4.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to the Bank. If any government authority imposes any taxes on any payments made by the Borrower, the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. Upon request by the Bank, the Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. However, the Borrower will not pay the Bank's net income taxes. 4.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's reasonable costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency. The costs and losses will be allocated to the credit facilities extended under this Agreement in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 4.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360 day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. 4.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any amount not paid when due under this Agreement (including interest) shall bear interest from the due date at the Reference Rate plus 2.00 percentage points. This may result in compounding of interest. 4.10 DEFAULT RATE. Upon the occurrence and during the continuation of any default under this Agreement, advances under this Agreement will at the option of the Bank bear interest at a rate per annum which is 2.00 percentage points higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 5. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: 5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower and any Guarantor of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. 5.2 GOVERNING DOCUMENTS. A copy of the Borrower and each Guarantor's articles of incorporation. 5.3 INSURANCE. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 5.4 GUARANTIES. Guaranties signed by CompuRoute, Inc. and SVTR, Inc. on the Bank's standard form in an amount as may be reasonably acceptable to the Bank. 5.5 PAYMENT OF FEES. Payment of all accrued and unpaid reasonable expenses incurred by the Bank as required by the paragraph entitled "Reimbursement Costs". 6. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation. 9 10 6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's or Guarantor's powers, have been duly authorized, and do not conflict with any of their respective organizational papers. 6.3 ENFORCEABLE AGREEMENT. This Agreement, and each other agreement or document executed and delivered to the Bank in connection with this Agreement, is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable, except as such enforceability may be subject to or impaired by bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance, or other similar laws relating to or affecting the rights of creditors generally. 6.4 GOOD STANDING. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes. 6.5 NO CONFLICTS. This Agreement does not conflict with any law, material agreement, or material obligation by which the Borrower is bound. 6.6 FINANCIAL INFORMATION. All financial and other information that has been or will be supplied to the Bank is: (a) sufficiently complete to give the Bank accurate knowledge of the Borrower's and any Guarantor's financial condition in all material respects. (b) in form and content reasonably required by the Bank. (c) in compliance with all government regulations that apply. 6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or, to the Borrower's knowledge, threatened against the Borrower, which, if lost, would materially impair the Borrower's financial condition or ability to repay the credit facilities extended under this Agreement, except as have been disclosed in writing to the Bank prior to the date of this Agreement. 6.8 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged and where the failure to do so would cause a material adverse effect on the financial condition of the Borrower and its subsidiaries, taken as a whole, or would materially affect the ability of the Borrower to repay its obligations to the Bank. 6.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for borrowed money (where such default would allow the creditor of Borrower to accelerate the payment of the obligation or to foreclose on any material security for such obligations), any purchase money obligation (where such default would allow the creditor of Borrower to accelerate the payment of the obligation or to foreclose on any material security for such obligation) or any other material lease, commitment, contract, instrument or obligation. 6.10 INCOME TAX RETURNS. The Borrower has no knowledge of any material pending assessments or adjustments of its income tax for any year, except as have been disclosed in writing to the Bank. 6.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 6.12 ERISA PLANS. (a) To the Borrower's knowledge, the Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any material liability with respect to any Plan under Title IV of ERISA. 10 11 (b) To the Borrower's knowledge, no reportable event has occurred under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. (c) To the Borrower's knowledge, no action by the Borrower to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (d) No proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and, to the Borrower's knowledge, no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (e) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. (iv) "Plan" means any employee pension benefit plan maintained or contributed to by the Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. 6.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. 6.14 REPRESENTATIONS CONCERNING THE YEAR 2000. The Borrower is in the process of performing a comprehensive review of its Year 2000 issues and has completed its review of internal systems (information technology ("IT") and non-IT). The majority of the Borrower's application software programs are currently being replaced with Oracle applications which are Year 2000 compliant. The Borrower estimates the status of progress on these internal systems as follows: (a) 50% for IT systems, and (b) 50% for non-IT systems. The Borrower presently believes that with modifications and updates to existing software and the implementation of the Oracle applications, the Year 2000 problem will not pose significant operational problems for the Borrower's internal systems. The Borrower also believes that remediation costs to become Year 2000 compliant, excluding the costs associated with the replacement Oracle applications, are not material. The Borrower is also continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Borrower has material relationships. The Borrower is not able to determine the effect on the Borrower's rules of operations, liquidity, and financial condition in the event the Borrower's material vendors and customers are not Year 2000 compliant. The Borrower will continue to monitor the progress of its material vendors and customers and formulate a contingency plan at that point in time when the Borrower believes a material vendor or customer will not be compliant. 7. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 7.1 USE OF PROCEEDS. To use the proceeds of the credit only for working capital and general corporate purposes, including capital expenditures and acquisitions. 7.2 FINANCIAL INFORMATION. To provide the following financial information and statements and such additional information as reasonably requested by the Bank from time to time: (a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements, including a compliance certificate. These financial statements must be audited (with an unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to the Bank. The statements shall be prepared on a consolidated basis. (b) Copies of the Borrower's Form 10-K Annual Report within 90 days of fiscal year end. 11 12 (c) Copies of the Borrower's Form 10-Q Quarterly Report within 45 days of quarter end. (d) Within 45 days of the end of each fiscal year and within 30 days after the end of each of the first three fiscal quarters, a Quarterly Compliance Certificate, in form and content reasonably satisfactory to the Bank, (i) certifying that during such quarter and as of the end of such quarter, no defaults exist or existed under this Agreement, or if such defaults exist or existed, specifying such defaults, and (ii) certifying the value of the ratios described in sections 7.3, 7.4, and 7.5 of this Agreement and showing the calculation of such ratios as of the end of such fiscal quarter, in such detail as the Bank may request. 7.3 QUICK RATIO. To maintain on a consolidated basis a ratio of quick assets to current liabilities of at least 1.25:1.00, measured quarterly (outstandings under the revolving line of credit to be including as current liabilities). "Quick assets" means cash, short-term cash investments, net trade receivables and marketable securities. 7.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a consolidated basis a ratio of Total Liabilities to Tangible Net Worth not exceeding 1.00:1.00, measured quarterly. "Total Liabilities" means the sum of current liabilities plus long term liabilities (including, without limitation, liabilities of the type described in section 7.7(f). "Tangible net worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred research and development costs, deferred marketing expenses, and other like intangibles and monies due from affiliates, officers, directors or shareholders of the Borrower) less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. 7.5 DEBT COVERAGE RATIO. To maintain on a consolidated basis a debt coverage ratio of at least 2.00:1.00, measured quarterly. "Debt Coverage ratio" means the ratio of cash flow to total interest expense and the current portion of long term debt. "Cash flow" is defined as net income from operations and investments, after taxes, plus total interest expense, depreciation, amortization, any non-recurring charges which are write-offs of any research and development assets purchased as a part of a business acquisition, and other non-cash charges. This ratio will be calculated at the end of each fiscal quarter, using the results of that quarter and each of the 3 immediately preceding quarters. The current portion of long term debt will be measured as of the last day of the preceding fiscal year. 7.6 NET LOSSES. Borrower is not to incur a net loss (on a consolidated basis) in any two consecutive quarters or on a fiscal year end basis (excluding any non-recurring charges which are write-offs of any research and development assets purchased as a part of a business acquisition, and excluding the losses for the fiscal year 1998, in the approximate amount of $4,593,000, attributable to the discontinued operations of SVTR). 7.7 OTHER DEBTS. Not to have outstanding or incur, or permit any of its consolidated subsidiaries to have outstanding or incur, any direct or contingent debts or lease obligations (other than those to the Bank), or become liable for the debts of others without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Debts, guarantees, and lines of credit and leases in existence on the date of this Agreement disclosed in writing to the Bank, including, without limitation, those described in Exhibit B, and any refinancings or refundings thereof. 12 13 (e) Additional debts secured in full by purchase money security interests or arising pursuant to capital leases or secured by real property, to the extent permitted by section 7.8 below. (f) Additional unsecured debts, including contingent obligations, of the Borrower which arise from acquisitions of other business permitted under this Agreement, to the extent that the aggregate of the Borrower's and its consolidated subsidiaries' unsecured debt (including contingent obligations) does not exceed Three Million and no/100 Dollars ($3,000,000.00) outstanding at any one time. (g) Prepaid expenses accrued in the ordinary course of business. (h) Direct or contingent debts or lease obligations consented to by the Bank in writing, in the Bank's sole discretion. (i) Indebtedness or obligations to any of the wholly-owned domestic subsidiaries of the Borrower. (j) Guaranties of any of the obligations which are permitted by this Section 7.7. 7.8 OTHER LIENS. Not to create, assume, or allow, and not to permit any of its consolidated or other wholly-owned subsidiaries to create, assume, or allow, any security interest or lien (including, without limitation, liens on any accounts receivable or inventory and any judicial liens) on property the Borrower or any of its consolidated and other wholly-owned subsidiaries now or later owns, except, on a consolidated basis for the Borrower and its consolidated subsidiaries: (a) Deeds of trust and security agreements in favor of the Bank. (b) Liens for taxes, assessments, or governmental charges and levies not yet due (as to which the period of grace, if any, related thereto has not yet expired) or which are being contested in good faith. (c) Liens outstanding on the date of this Agreement disclosed in writing to the Bank, including, without limitation, those described on Exhibit C. (d) Additional liens which are purchase money security interests or liens arising pursuant to capital lease obligations or which are liens on real property and lease obligations, to the extent that the aggregate of the Borrower's and its consolidated subsidiaries' secured debt does not exceed Eight Million and no/100 Dollars ($8,000,000.00). (e) Liens of materialmen, mechanics, carriers, warehousemen, processors, or landlords for labor, materials, supplies, or rentals incurred in the ordinary course of business. (f) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers compensation, unemployment insurance, or similar legislation and utility deposits. (g) Liens securing the performance of bids, tenders, statutory obligations, surety and appeal bonds, and other obligations of like nature, incurred in the ordinary course of business. (h) Liens constituting encumbrances in the nature of zoning restrictions, easements, and rights of restriction of record on the use of real property, which in the aggregate do not materially detract from the value of such property. (i) Liens consented to by the Bank in writing, in the Bank's sole discretion. 7.9 DIVIDENDS. Not to declare or pay any dividends or distributions on any of its shares except dividends payable in capital stock of the Borrower, and not to purchase, redeem or otherwise acquire for value any of its shares, or create any sinking fund in relation thereto; provided, however, that the foregoing shall not restrict the ability of the Borrower to purchase, redeem, or otherwise acquire for value its shares of stock in connection with (1) the warrant to purchase 39,275 shares of common stock issued to Swartz Investments, Inc., (2) any resolution of the case styled Cerprobe Corporation v. William E. Mayer and Carol Mayer, C. 98-4034, filed in the United States 13 14 District Court in and for the Northern District of California, to the extent that such resolution does not require the Borrower to purchase, redeem, or otherwise acquire more than 150,000 shares of the Borrower's capital stock, (3) any employee stock purchase plan, employee stock option plan, or 401(k) plan, or (4) an effort to avoid dilution of the stock of the Borrower as the result of any stock option plan, as long as, after giving effect to such purchase, redemption, or other acquisition for value, the Borrower remains in compliance with the financial covenants set forth in this Agreement. 7.10 NOTICES TO BANK. To promptly notify the Bank in writing of: (a) any lawsuit over Five Hundred Thousand and no/100 Dollars ($500,000.00) against the Borrower not adequately covered by insurance; (b) any substantial dispute between the Borrower or any Guarantor and any government authority; (c) any failure to comply with this Agreement; (d) any material adverse change in the Borrower's or any Guarantor's financial condition or operations taken as a whole; (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business; (f) any investment made, after the date hereof, in any subsidiaries, affiliates, or joint ventures, within 15 days of the date of such investment; (g) any acquisition of any business (or a substantial portion thereof), whether by purchase of assets or acquisition of stock or otherwise, within 15 days of the date of such acquisition; (h) any termination of the business of any Guarantor, other than SVTR. 7.11 BOOKS AND RECORDS. To maintain adequate books and records. 7.12 AUDITS. Upon reasonable prior notice, to allow the Bank and its agents to inspect the Borrower's properties and examine, audit, and make copies of books and records at any reasonable time during normal business hours. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. 7.13 COMPLIANCE WITH LAWS. To comply with all material requirements and to comply with the laws, (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's business. 7.14 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges, and franchises the Borrower now has, the loss of which would have a material adverse effect upon the Borrower and its subsidiaries taken as a whole. 7.15 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements reasonably necessary to keep the Borrower's properties in good working condition, consistent with past practices of the Borrower. 7.16 COOPERATION. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 7.17 INSURANCE. To maintain insurance as is usual for the business it is in. 7.18 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent: (a) engage in any business activities substantially different from the Borrower's present business. 14 15 (b) liquidate or dissolve the Borrower's business. (c) enter into any consolidation or merger or other combination, unless both (i) the Borrower is the surviving entity and (ii) no other default under this Agreement would result therefrom. (d) lease or dispose of all or a substantial part of the Borrower's business or the Borrower's assets, except in the ordinary course of business. (e) acquire or purchase a business or substantially all of its assets whether by acquisition or merger, unless (i) the entity being acquired is in a similar or related business or industry; (ii) the acquisition is not considered hostile; (iii) no event of default exists prior to or as a result of the acquisition, and (iv) within 30 days after such acquisition, the Borrower provides the Bank such financial information as the Bank may reasonably request regarding the proposed acquisition. (f) sell or otherwise dispose of any assets for less than fair market value or enter into any sale and leaseback agreement covering any of its fixed or capital assets, except for the proposed sale and leaseback agreement related to (i) Borrower's Dallas, Texas, facility, or (ii) the Borrower's headquarters located in Gilbert, Arizona. 7.19 ERISA PLANS. To give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) Any notice of noncompliance made with respect to a Plan under Section 4041(b) of ERISA. (d) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 7.20 DEPOSITS. The Borrower shall maintain investments and cash deposits at the Bank or at an affiliate of the Bank in an amount equal to or exceeding the outstanding principal balance of the Term Loan; provided, however, that the Bank or such affiliate of the Bank, as applicable, shall pay the Borrower a reasonable amount of interest with respect to such investments and cash deposits. 7.21 INVESTMENTS IN SUBSIDIARIES. The aggregate investments of the Borrower made after the date hereof in entities which are subsidiaries, affiliates, or joint ventures, but which are not Guarantors, shall not at any time exceed $10,000,000. 7.22 OUT OF DEBT PERIOD. During each period of 12 consecutive calendar months, the aggregate outstanding principal amount of the line of credit described in Article 1 of this Agreement shall be $0.00 for each of 30 consecutive days in such period of 12 calendar months. 8. HAZARDOUS WASTE The Borrower will indemnify and hold harmless the Bank from any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower's property or operations or property leased to the Borrower. The indemnity includes but is not limited to reasonable attorney's fees (including the reasonable estimate of the allocated cost of in-house counsel and staff). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns. For these purposes, the term "hazardous substances" means any substance which is or becomes designated as "hazardous" or "toxic" under any federal, state or local law. This indemnity will survive repayment of the Borrower's obligations to the Bank. 15 16 9. DEFAULT If any of the following events occur, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled "Bankruptcy" below with respect to the Borrower, the entire debt outstanding under this Agreement will automatically be due immediately. 9.1 FAILURE TO PAY. The Borrower fails to make any payment of principal or interest due under this Agreement within two (2) days of the date when due; or the Borrower fails to make any other payment under this Agreement within five (5) days of the date when due. 9.2 FALSE INFORMATION. The Borrower or any Guarantor has given the Bank information or representations that are false or misleading in any material respects. 9.3 BANKRUPTCY. The Borrower or any Guarantor files a bankruptcy petition, a bankruptcy petition is filed against the Borrower or any Guarantor, or the Borrower or any Guarantor makes a general assignment for the benefit of creditors and, in the case of an involuntary bankruptcy, such filing is not dismissed within 60 days of such filing. 9.4 RECEIVERS. A receiver or similar official is appointed for the Borrower's or any Guarantor's business, or the business of the Borrower is terminated. 9.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade creditors against the Borrower in an aggregate amount of Five Hundred Thousand and no/100 Dollars ($500,000.00) or more in excess of any insurance coverage. 9.6 JUDGMENTS. Any judgments or arbitration awards are entered against the Borrower or any Guarantor, or the Borrower or any Guarantor enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of Five Hundred Thousand and no/100 Dollars ($500,000.00) or more in excess of any insurance coverage, and any such judgment or award shall continue undischarged, unstayed, or unbonded for a period of 60 days. 9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank believes materially adversely affects the Borrower's and the Guarantors', taken as a whole, financial condition or ability to repay its obligations to the Bank under this Agreement or any guarantee of obligations under this Agreement. 9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's and the Guarantors', taken as a whole, financial condition, properties or prospects, or ability to repay the extensions of credit under this Agreement. 9.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with any credit the Borrower or any Guarantor has obtained from anyone else or which the Borrower or any Guarantor has guaranteed, and such creditor has the right to accelerate such credit or to foreclose on any material collateral therefor. 9.10 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty or other document required by this Agreement is violated or no longer in effect, as the result of any action by any party other than the Bank. 9.11 OTHER BANK AGREEMENTS. The Borrower or any Guarantor fails to meet the conditions of, or fails to perform any material obligation under any other material agreement the Borrower or Guarantor has with the Bank or any affiliate of the Bank. 9.12 ERISA PLANS. The occurrence of any one or more of the following events with respect to the Borrower, provided such event or events could reasonably be expected, in the reasonable judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower and its subsidiaries, taken as a whole, with respect to a Plan: (a) A reportable event shall occur with respect to a Plan which is, in the reasonable judgment of the Bank, likely to result in the termination of such Plan for purposes of Title IV or ERISA. 16 17 (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the Borrower's full or partial withdrawal from a Plan. 9.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article, and, if such failure is susceptible of being cured, such failure is not cured within 30 days of the earlier of (a) the earliest date on which the Borrower knew or reasonably should have known of such failure, and (b) the date on which the Bank notifies the Borrower of such failure. 10. ENFORCING THIS AGREEMENT; MISCELLANEOUS 10.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied. 10.2 ARIZONA LAW. This Agreement is governed by Arizona law. 10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower. 10.4 ARBITRATION. (a) This section concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interests (torts). (b) At the request of the Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by Arizona law. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this section is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this section is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. (f) The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. (g) This provision does not limit the right of the Borrower or the Bank to: (i) exercise self-help remedies such as setoff; 17 18 (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law, before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (h) The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party to submit the controversy or claim to arbitration if the other party contests the lawsuit. (i) If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. 10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 10.6 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable costs and reasonable attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and including any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover reasonable costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. As used in this section, "attorneys' fees" includes the allocated costs of in-house counsel. 10.7 ONE AGREEMENT. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 10.8 EXCHANGE OF INFORMATION. The Borrower agrees that the Bank may exchange financial information about the Borrower with BankAmerica Corporation affiliates and other related entities. 10.9 USURY LAWS. This section covers the transactions described in this Agreement and any other agreements with the Bank or its affiliates executed in connection with this Agreement, to the extent they are subject to the Arizona usury laws (the "Transactions"). The Borrower understands and believes that the Transactions comply with the Arizona usury laws. However, if any interest or other charges paid or payable in connection with the Transactions are ever determined to exceed the maximum amount permitted by law, the Borrower agrees that: (a) the amount of interest or other charges payable by the Borrower pursuant to the Transactions shall be reduced to the maximum amount permitted by law; and (b) any excess amount previously collected from the Borrower in connection with the Transactions which exceeded the maximum amount permitted by law will be credited against the then outstanding principal balance. If the outstanding principal balance has been repaid in full, the excess amount paid will be refunded to the Borrower. 18 19 All fees, charges, goods, things in action or any other sums or things of value, other than interest at the interest rate described in this Agreement, paid or payable by the Borrower (collectively the "Additional Sums"), that may be deemed to be interest with respect to the Transactions, shall, for the purpose of any laws of the State of Arizona that may limit the maximum amount of interest to be charged with respect to the Transactions, be payable by Borrower as, and shall be deemed to be, additional interest. For such purposes only, the agreed upon and "contracted for rate of interest" of the Transactions shall be deemed to be increased by the rate of interest resulting from the Additional Sums. 10.10 NOTICES. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. 10.11 HEADINGS. Article and section headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 10.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 10.13 TERMINATION. Notwithstanding any provision of this Agreement, this Agreement may be terminated by the Borrower provided that the Borrower pays all principal, interest, and other sums and fees then outstanding under this Agreement. This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA NATIONAL TRUST AND CERPROBE CORPORATION SAVINGS ASSOCIATION /s/Kathleen Sowa /s/Randal L. Buness - -------------------- ------------------------ Name: RANDAL L. BUNESS Title: VICE PRESIDENT & CFO By: Kathleen Sowa, Vice President ------------------------ Name: Title: Address where notices to the Bank Address where notices to the are to be sent: Borrower are to be sent: Phoenix Commercial & Industrial, #8211 1150 North Fiesta Blvd. 101 North First Avenue Gilbert, Arizona 85233-2237 Phoenix, Arizona 85003 with a copy to: O'Connor Cavanagh One East Camelback Road, Suite 1100 Phoenix, Arizona 85012 Attention: Karl A. Freeburg, Esq. Facsimile No.: (602) 263-2900 19 20 EXHIBIT A [BANK OF AMERICA LOGO] SECURITY AGREEMENT (EQUIPMENT) - ------------------------------------------------------------------------------- THIS SECURITY AGREEMENT (this "Agreement") is entered into as of December , 1998, between CERPROBE CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). 1. THE SECURITY. The Borrower hereby assigns and grants to the Bank a security interest in the following described property ("Collateral"): A. All of the machinery, furniture, fixtures and other equipment of every type which is purchased or financed with, or for the purchase of which the Borrower is reimbursed for with, the proceeds of the Term Loan as defined in the Business Loan Agreement, dated as of December , 1998, between the Borrower and the Bank, as amended from time to time (the "Loan Agreement"), including, without limitation, the equipment and other property listed on Exhibit A attached hereto and incorporated herein, together with any and all replacements thereof and substitutions therefor. B . All documents now owned or hereafter acquired by Borrower covering any of the above-described property. C. All rights under contracts of insurance now owned or hereafter acquired by Borrower covering any of the above-described property. D. All proceeds, product, rents and profits now owned or hereafter acquired by Borrower of any of the above-described property. 2. THE INDEBTEDNESS. The Collateral secures and will secure all Indebtedness of Borrower to Bank. For the purpose of this Agreement, "Indebtedness" means all of the Borrower's obligations under the Loan Agreement with respect to the Term Loan (as such term is defined in the Loan Agreement). 3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless compliance is waived by Bank in writing: A. Borrower will properly preserve the Collateral; defend the Collateral against any adverse claims and demands; and keep accurate books and records relating to the Collateral (the "Books and Records"), time during normal business hours for the purpose of examination and for the purpose of making copies of any portion thereof.) B. Borrower has notified Bank in writing of, and will notify Bank in writing prior to any change in, the locations of (i) Borrower's place of business or Borrower's chief executive office if Borrower has more than one place of business, and (ii) any Collateral, including the Books and Records. C. Borrower will notify Bank in writing prior to any change in Borrower's name, identity or organizational documents. A-1 21 D. Borrower will maintain and keep in force insurance covering Collateral designated by Bank against fire and extended coverages. Such insurance shall require losses to be paid on a replacement cost basis, be issued by insurance companies reasonably acceptable to Bank and include a loss payable endorsement in favor of Bank in a form acceptable to Bank. E. Borrower has not granted and will not grant any security interest in any of the Collateral except to Bank, and will keep the Collateral free of all liens, claims, security interests and encumbrances of any kind or nature except the security interest of Bank and other liens permitted by Section 7.8 of the Loan Agreement. F. Borrower will not sell, lease, agree to sell or lease, or otherwise dispose of any Collateral or remove any Collateral from Borrower's place of business except with the prior written consent of Bank, except for any obsolete equipment having a value of less than $5,000.00 disposed of or sold in the ordinary course of Borrower's business. G. Borrower will promptly notify Bank in writing of any event which materially affects the value of any Collateral, the ability of Borrower or Bank to dispose of any Collateral, or the rights and remedies of Bank in relation thereto, including, but not limited to, the levy of any legal process against any Collateral. H. If any Collateral is or becomes the subject of any registration certificate or negotiable document of title, including any warehouse receipt or bill of lading, Borrower shall immediately deliver such document to Bank. I. Borrower will not attach any Collateral to any real property or fixture in a manner which might cause such Collateral to become a part thereof unless Borrower first obtains the written consent of any owner, holder of any lien on the real property or fixture, or other person having an interest in such property to the removal by Bank of the Collateral from such real property or fixture. Such written consent shall be in form and substance acceptable to Bank and shall provide that Bank has no liability to such owner, holder of any lien, or any other person. 4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its option at any time, whether or not Borrower is in default: A. Require Borrower to deliver to Bank (i) copies of or extracts from the Books and Records, and (ii) information on any contracts or other matters affecting the Collateral. B. Examine the Collateral, including the Books and Records, and make copies of or extracts from the Books and Records, and for such purposes enter at any reasonable time upon the property where any Collateral or any Books and Records are located in accordance with Section 3A. above. C. Notify any person of Bank's interest in the Collateral to the extent necessary to continue the perfection or priority of the security interest of Bank in the Collateral. D. After a default under this Agreement or the Loan Agreement, demand and collect any proceeds of the Collateral. In connection therewith Borrower irrevocably authorizes Bank to endorse or sign Borrower's name on all checks, drafts, collections, receipts and other documents, and to take possession of and open the mail addressed to Borrower and remove therefrom any proceeds of the Collateral. 5. DEFAULTS. Any one or more of the following shall be a default hereunder: A. Borrower fails to make any payment of principal or interest due under the Loan Agreement within two A-2 22 (2) days of the date when due; or the Borrower fails to make any other payment of Indebtedness within five (5) days of the date when due. B. Borrower breaches any term, provision, material warranty or material representation under this Agreement not specifically referred to in this Section 5, and, if such breach is susceptible of being cured, such breach is not cured within thirty (30) days of the earlier of (i) the earliest date on which the Borrower knew or reasonably should have known of such breach, and (ii) the date on which the Borrower notifies the Bank of such breach; or Borrower breaches any term, provision, material warranty, or material representation under any other obligation of Borrower to Bank, and such breach is not cured within any applicable cure period. C. Any custodian, receiver or trustee is appointed to take possession, custody or control of all or a substantial portion of the property of Borrower or of any guarantor of any Indebtedness. D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is generally not paying or admits in writing its inability to pay its debts as they become due, fails in business, makes a general assignment for the benefit of creditors, dies or commences any case, proceeding or other action under any bankruptcy or other law for the relief of, or relating to, debtors and, in the case of the commencement of an involuntary bankruptcy proceeding, such proceeding is not dismissed within 60 days of the filing thereof. E. Any case, proceeding or other action is commenced against Borrower or any guarantor of any Indebtedness under any bankruptcy or other law for the relief of, or relating to, debtors and, in the case of the commencement of an involuntary bankruptcy proceeding, such proceeding is not dismissed within 60 days of the filing thereof. F. Any involuntary lien of any kind or character attaches to any material portion of the Collateral. G. Any financial statements, certificates, schedules, or other information now or hereafter furnished by Borrower to Bank proves false or incorrect in any material respect. 6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do any one or more of the following: A. Declare any Indebtedness immediately due and payable, without notice or demand. B. Enforce the security interest given hereunder pursuant to the Arizona Uniform Commercial Code and any other applicable law. C. Require Borrower to assemble the Collateral, including the Books and Records, and make them available to Bank at a place designated by Bank. D. Enter upon the property where any Collateral, including any Books and Records, are located and take possession of such Collateral and such Books and Records, and use such Collateral and such Books and Records relating thereto, if Bank deems such use necessary or advisable in order to take possession of, hold, preserve, process, assemble, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral. E. Grant extensions and compromise or settle claims for less than face value relating to any proceeds of the Collateral, all without prior notice to Borrower. F. Use or transfer any of Borrower's rights and interests in any Intellectual Property now owned or hereafter acquired by Borrower, if Bank deems such use or transfer necessary or advisable in order to A-3 23 take possession of, hold, preserve, process, assemble, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral. Borrower agrees that any such use or transfer shall be without any additional consideration to Borrower. As used in this paragraph, "Intellectual Property" includes, but is not limited to, all trade secrets, computer software, service marks, trademarks, trade names, trade styles, copyrights, patents, applications for any of the foregoing, customer lists, working drawings, instructional manuals, and rights in processes for technical manufacturing, packaging and labeling, in which Borrower has any right or interest, whether by ownership, license, contract or otherwise. G. Have a receiver appointed by any court of competent jurisdiction to take possession of the Collateral. H. Take such measures as Bank may deem necessary or advisable to take possession of, hold, preserve, process, assemble, insure, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral, and Borrower hereby irrevocably constitutes and appoints Bank as Borrower's attorney-in-fact to perform all acts and execute all documents in connection therewith. 7. MISCELLANEOUS A. Any waiver, express or implied, of any provision hereunder and any delay or failure by Bank to enforce any provision shall not preclude Bank from enforcing any such provision thereafter. B. Borrower shall, at the reasonable request of Bank, execute such other agreements, documents, instruments or financing statements in connection with this Agreement as Bank may reasonably deem necessary. A carbon, photostat or other reproduction of this Agreement or any financing statement is sufficient as a financing statement. C. All notes, security agreements, subordination agreements and other documents executed by Borrower or furnished to Bank in connection with this Agreement must be in form and substance reasonably satisfactory to Bank. D. This Agreement shall be governed by and construed according to the laws of the State of Arizona, to the jurisdiction of which the parties hereto submit. E. All rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law. Any single or partial exercise of any right or remedy shall not preclude the further exercise thereof or the exercise of any other right or remedy. F. All terms not defined herein are used as set forth in the Arizona Uniform Commercial Code. G. In the event of any action by Bank to enforce this Agreement or to protect the security interest of Bank in the Collateral, or to preserve, process, assemble, insure, prepare for sale of lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral, Borrower agrees to pay immediately all reasonable costs and expenses thereof, together with reasonable attorney's fees and allocated costs for in-house legal services. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION _________________________________ Kathleen P. Sowa, Vice President A-4 24 CERPROBE CORPORATION ____________________________ Name: Title: A-5 25 [BANK OF AMERICA LOGO] PAYMENT GUARANTY Borrower: Cerprobe Corporation Guarantor: CompuRoute, Inc. - ------------------------------------------------------------------------------- (1) For valuable consideration, the undersigned ("Guarantor") unconditionally guarantees and promises to pay to Bank of America National Trust and Savings Association ("Bank"), or order, on demand, in lawful money of the United States, any and all indebtedness of Cerprobe Corporation, a Delaware corporation ("Borrower") to Bank. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrower, heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary arising pursuant to the Business Loan Agreement of December__, 1998, executed by Borrower and Bank, or any document executed in connection therewith, as such loan agreement and other documents may be amended, modified, extended, or renewed from time to time (said loan agreement, together with such other documents, as amended, modified, extended, or renewed from time to time are collectively referred to herein as the "Loan Documents"), whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrower may be liable individually or jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtedness may be or hereafter become otherwise unenforceable. (2) The liability of Guarantor under this Guaranty (exclusive of liability under any other guaranties executed by Guarantor) shall not exceed at any one time the total of (a) Thirteen Million and No/100 Dollars ($13,000,000.00), for the principal amount of the indebtedness and (b) all interest, fees, and other reasonable costs and expenses relating to or arising out of the indebtedness or such part of the indebtedness as shall not exceed the foregoing limitation. Bank may permit the indebtedness of Borrower to exceed Guarantor's liability, and may apply any amounts received from any source, other than from Guarantor, to the unguaranteed portion of Borrower's indebtedness. Any payment by Guarantor shall not reduce their maximum obligation hereunder, unless written notice to that effect be actually received by Bank at or prior to the time of such payment. (3) The obligations hereunder are joint and several, and independent of the obligations of Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or whether Borrower be joined in any such action or actions and regardless of whether a trustee's sale is held under any deed of trust, if any, securing the indebtedness or regardless of whether a judicial foreclosure sale is held if any deed of trust, if any, securing the indebtedness is judicially foreclosed as a mortgage. Guarantor waives the benefit of any statute of limitations affecting their liability hereunder. (4) Guarantor authorizes Bank, without notice or demand and without affecting their liability hereunder, from time to time, either before or after revocation hereof, to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (b) receive and hold security for the payment of this Guaranty or the indebtedness guaranteed, and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Bank in its discretion may determine, except to the extent specifically prohibited by law; and (d) release or substitute any one or more of the endorsers or Guarantor. (5) Guarantor waives any right to require Bank to (a) proceed against Borrower; (b) proceed against or exhaust any security held from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Guarantor waives any defense arising by reason of any disability or other defense of Borrower, or the cessation from any cause whatsoever of the liability of Borrower, or any claim that Guarantor's obligations exceed or are more burdensome than those of Borrower. Guarantor waives any benefit of the provisions of Arizona Revised Statutes Sections 12-1641 and 12-1642 et seq., and Rule 17(f) of the Arizona Rules of Civil Procedures, which set forth certain rights and obligations among guarantors, debtors and creditors, to the extent applicable. Guarantor waives any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory or otherwise), including without limitation, any claim or right of subrogation under the Bankruptcy 26 Code (Title 11 of the U.S. Code) or any successor statute, arising from the existence or performance of this Guaranty and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Bank. Bank may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the indebtedness, and, even though the foreclosure may destroy or diminish Guarantor's rights against Borrower, Guarantor shall be liable to Bank for any part of the indebtedness remaining unpaid after the foreclosure. Guarantor waives any benefit of any statutory provision limiting the right of Bank to recover a deficiency judgment, or to otherwise proceed, against any person or entity obligated for payment of the indebtedness, after any judicial foreclosure sale or trustee's sale of any collateral securing the indebtedness including, without limitation, the benefits, if any, of Arizona Revised Statutes Section 33-814, except to the extent otherwise required by law. Guarantor waives any homestead or exemption rights. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness. (6) Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from Borrower such information concerning Borrower's financial conditions or business operations as Guarantor may require, and that Bank has no duty at any time to disclose to Guarantor any information relating to the business operations or financial conditions of Borrower. (7) In addition to Bank's rights of setoff, to secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Bank a security interest in all moneys, securities and other property of Guarantor now or hereafter in the possession of Bank, and all deposit accounts of Guarantor maintained with Bank, and all proceeds thereof. Upon material default or material breach of any of Guarantor's obligations to Bank, Bank may apply any deposit account to reduce the indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Bank and Guarantor. (8) Any obligations of Borrower or Guarantor, nor or hereafter existing, including but not limited to any obligations to Guarantor as subrogees of Bank or resulting from Guarantor's performance under this Guaranty, are hereby subordinated to the indebtedness. Such obligations of Borrower to Guarantor if Bank so requests shall be enforced and performance received by Guarantor as trustee for Bank and the proceeds thereof shall be paid over to Bank on account of the indebtedness of Borrower to Bank, but without reducing or affecting in any manner the liability of Guarantor under the provisions of this Guaranty. (9) This Guaranty shall automatically terminate upon payment of all obligations under the Loan Documents and cancellation of the Loan Documents. (10) It is not necessary for Bank to inquire into the powers of Borrower or of the officers, directors, or agents acting or purporting to act on behalf of Borrower, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. (11) Bank may, without notice to Guarantor and without affecting Guarantor's obligations hereunder, assign the indebtedness and this Guaranty, in whole or in part. Guarantor agrees that Bank may disclose to any prospective purchaser and any purchaser of all or part of the indebtedness any and all information in Bank's possession concerning Guarantor, this Guaranty and any security for this Guaranty. (12) Guarantor agrees to pay all reasonable attorneys' fees, the reasonable allocated costs of Bank's in-house counsel, and all other reasonable costs and expenses which may be incurred by Bank in the enforcement of this Guaranty, including without limitation all reasonable costs and necessary disbursements in any legal action or arbitration proceeding. (13) This Guaranty shall be governed by and construed according to the laws of the State of Arizona, to the jurisdiction of which the parties hereto submit. (14) (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Guaranty or any agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration 2 27 Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Guaranty, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) No provision of this paragraph shall limit the right of any party to this Guaranty to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. Executed this day of , 1998. ---------- ---------------- CompuRoute, Inc. By: /s/ Randal L. Buness ---------------------- Name: Randal L. Buness -------------------- Title: CFO ------------------- Dallas, Texas Tax I.D. No.: 91-1752910 Address for notices to Bank: Bank of America National Trust and Savings Association Phoenix C&I, Unit #8211 101 North First Avenue Phoenix, Arizona 85003 3 28 [BANK OF AMERICA LOGO] PAYMENT GUARANTY Borrower: Cerprobe Corporation Guarantor: SVTR, Inc. (1) For valuable consideration, the undersigned ("Guarantor") unconditionally guarantees and promises to pay to Bank of America National Trust and Savings Association ("Bank"), or order, on demand, in lawful money of the United States, any and all indebtedness of Cerprobe Corporation, a Delaware corporation ("Borrower") to Bank. The word "indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrower, heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary arising pursuant to the Business Loan Agreement of December , 1998, executed by Borrower and Bank, or any document executed in connection therewith, as such loan agreement and other documents may be amended, modified, extended, or renewed from time to time (said loan agreement, together with such other documents, as amended, modified, extended, or renewed from time to time are collectively referred to herein as the "Loan Documents"), whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrower may be liable individually or jointly with others, or whether recovery upon such indebtedness may be or hereafter become barred by any statue of limitations, or whether such indebtedness may be or hereafter become otherwise unenforceable. (2) The liability of Guarantor under this Guaranty (exclusive of liability under any other guaranties executed by Guarantor) shall not exceed at any one time the total of (a) Thirteen Million and No/100 Dollars ($13,000,000.00), for the principal amount of the indebtedness and (b) all interest, fees, and other reasonable costs and expenses relating to or arising out of the indebtedness or such part of the indebtedness as shall not exceed the foregoing limitation. Bank may permit the indebtedness of Borrower to exceed Guarantor's liability, and may apply any amounts received from any source, other than from Guarantor, to the unguaranteed portion of Borrower's indebtedness. Any payment by Guarantor shall not reduce their maximum obligation hereunder, unless written notice to that effect be actually received by Bank at or prior to the time of such payment. (3) The obligations hereunder are joint and several, and independent of the obligations of Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or whether Borrower be joined in any such action or actions and regardless of whether a trustee's sale is held under any deed of trust, if any, securing the indebtedness or regardless of whether a judicial foreclosure sale is held if any deed of trust, if any, securing the indebtedness is judicially foreclosed as a mortgage. Guarantor waives the benefit of any statute of limitations affecting their liability hereunder. (4) Guarantor authorizes Bank, without notice or demand and without affecting their liability hereunder, from time to time, either before or after revocation hereof, to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (b) receive and hold security for the payment of this Guaranty or the indebtedness guaranteed, and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Bank in its discretion may determine, except to the extent specifically prohibited by law; and (d) release or substitute any one or more of the endorsers or Guarantor. (5) Guarantor waives any right to require Bank to (a) proceed against Borrower; (b) proceed against or exhaust any security held from Borrower; or (c) pursue any other remedy in Bank's power whatsoever. Guarantor waives any defense arising by reason of any disability or other defense of Borrower, or the cessation from any cause whatsoever of the liability of Borrower, or any claim that Guarantor's obligations exceed or are more burdensome than those of Borrower. Guarantor waives any benefit of the provisions of Arizona Revised Statutes Sections 12-1641 and 12-1642 et seq., and Rule 17(f) of the Arizona Rules of Civil Procedures, which set forth certain rights and obligations among guarantors, debtors and creditors, to the extent applicable. Guarantor waives any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory or otherwise), including without limitation, any claim or right of subrogation under the Bankruptcy 1 29 Code (Title 11 of the U.S. Code) or any successor statute, arising from the existence or performance of this Guaranty and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Bank. Bank may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the indebtedness, and, even though the foreclosure may destroy or diminish Guarantor's rights against Borrower, Guarantor shall be liable to Bank for any part of the indebtedness remaining unpaid after the foreclosure. Guarantor waives any benefit of any statutory provision limiting the right of Bank to recover a deficiency judgment, or to otherwise proceed, against any person or entity obligated for payment of the indebtedness, after any judicial foreclosure sale or trustee's sale of any collateral securing the indebtedness including, without limitation, the benefits, if any, of Arizona Revised Statutes Section 33-814, except to the extent otherwise required by law. Guarantor waives any homestead or exemption rights. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty and of the existence, creation, or incurring of new or additional indebtedness. (6) Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from Borrower such information concerning Borrower's financial conditions or business operations as Guarantor may require, and that Bank has no duty at any time to disclose to Guarantor any information relating to the business operations or financial conditions of Borrower. (7) In addition to Bank's rights of setoff, to secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Bank a security interest in all moneys, securities and other property of Guarantor now or hereafter in the possession of Bank, and all deposit accounts of Guarantor maintained with Bank, and all proceeds thereof. Upon material default or material breach of any of Guarantor's obligations to Bank, Bank may apply any deposit account to reduce the indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Bank and Guarantor. (8) Any obligations of Borrower to Guarantor, now or hereafter existing, including but not limited to any obligations to Guarantor as subrogees of Bank or resulting from Guarantor's performance under this Guaranty, are hereby subordinated to the indebtedness. Such obligations of Borrower to Guarantor if Bank so requests shall be enforced and performance received by Guarantor as trustee for Bank and the proceeds thereof shall be paid over to Bank on account of the indebtedness of Borrower to Bank, but without reducing or affecting in any manner the liability of Guarantor under the provisions of this Guaranty. (9) This Guaranty shall automatically terminate upon payment of all obligations under the Loan Documents and cancellation of the Loan Documents. (10) It is not necessary for Bank to inquire into the powers of Borrower or of the officers, directors, or agents acting or purporting to act on behalf of Borrower, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. (11) Bank may, without notice to Guarantor and without affecting Guarantor's obligations hereunder, assign the indebtedness and this Guaranty, in whole or in part. Guarantor agrees that Bank may disclose to any prospective purchaser and any purchaser of all or part of the indebtedness any and all information in Bank's possession concerning Guarantor, this Guaranty and any security for this Guaranty. (12) Guarantor agrees to pay all reasonable attorneys' fees, the reasonable allocated costs of Bank's in-house counsel, and all other reasonable costs and expenses which may be incurred by Bank in the enforcement of this Guaranty, including without limitation all reasonable costs and necessary disbursements in any legal action or arbitration proceeding. (13) This Guaranty shall be governed by and construed according to the laws of the State of Arizona, to the jurisdiction of which the parties hereto submit. (14) (a) Any controversy or claim between or among the parties, including but not limited to those arising out of or relating to this Guaranty or any agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration 2 30 Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Guaranty, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) No provision of this paragraph shall limit the right of any party to this Guaranty to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. Executed this day of , 1998. --------- ----------- SVTR, Inc. By: /s/ Randal L. Buness -------------------- Name: RANDAL L. BUNESS Title: CFO Tax I.D. No.: 66-0516446 Address for notices to Bank: Bank of America National Trust and Savings Association Phoenix C&I, Unit #8211 101 North First Avenue Phoenix, Arizona 85003 3 EX-10.HHH 3 EX-10.HHH 1 [BANK OF AMERICA LETTERHEAD] Exhibit: 10(hhh) SECURITY AGREEMENT (EQUIPMENT) THIS SECURITY AGREEMENT (this "Agreement") is entered into as of February ____, 1998, between CERPROBE CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). 1. THE SECURITY. The Borrower hereby assigns and grants to the Bank a security interest in the following described property ("Collateral"): A. All of the machinery, furniture, fixtures and other equipment of every type which is purchased or financed with, or for the purchase of which the Borrower is reimbursed for with, the proceeds of the Term Loan as defined in the Business Loan Agreement, dated as of December 22, 1998, between the Borrower and the Bank, as amended from time to time (the "Loan Agreement"), including, without limitation, the equipment and other property listed on Exhibit A attached hereto and incorporated herein, together with any and all replacements thereof and substitutions therefor. B. All documents now owned or hereafter acquired by Borrower covering any of the above-described property. C All rights under contracts of insurance now owned or hereafter acquired by Borrower covering any of the above-described property. D. All proceeds, product, rents and profits now owned or hereafter acquired by Borrower of any of the above-described property. 2. THE INDEBTEDNESS. The Collateral secures and will secure all Indebtedness of Borrower to Bank. For the purpose of this Agreement, "Indebtedness" means all of the Borrower's obligations under the Loan Agreement with respect to the Term Loan (as such term is defined in the Loan Agreement). 3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless compliance is waived by Bank in writing: A. Borrower will properly preserve the Collateral; defend the Collateral against any adverse claims and demands; and keep accurate books and records relating to the Collateral (the "Books and Records"), which Books and Records, upon reasonable prior notice, will be made available to the Bank at any time during normal business hours for the purpose of examination and for the purpose of making copies of any portion thereof). B. Borrower has notified Bank in writing of, and will notify Bank in writing prior to any change in, the locations of (i) Borrower's place of business or Borrower's chief executive office if Borrower has more than one place of business, and (ii) any Collateral, including the Books and Records. C. Borrower will notify Bank in writing prior to any change in Borrower's name, identity or organizational documents. D. Borrower will maintain and keep in force insurance covering Collateral designated by Bank against fire and extended coverages. Such insurance shall require losses to be paid on a replacement cost basis, 1 2 be issued by insurance companies reasonably acceptable to Bank and include a loss payable endorsement in favor of Bank in a form acceptable to Bank. E. Borrower has not granted and will not grant any security interest in any of the Collateral except to Bank, and will keep the Collateral free of all liens, claims, security interests and encumbrances of any kind or nature except the security interest of Bank and other liens permitted by Section 7.8 of the Loan Agreement. F. Borrower will not sell, lease, agree to sell or lease, or otherwise dispose of any Collateral or remove any Collateral from Borrower's place of business except with the prior written consent of Bank, except for any obsolete equipment having a value of less than $5,000.00 disposed of or sold in the ordinary course of Borrower's business. G. Borrower will promptly notify Bank in writing of any event which materially affects the value of any Collateral, the ability of Borrower or Bank to dispose of any Collateral, or the rights and remedies of Bank in relation thereto, including, but not limited to, the levy of any legal process against any Collateral. H. If any Collateral is or becomes the subject of any registration certificate or negotiable document of title, including any warehouse receipt or bill of lading, Borrower shall immediately deliver such document to Bank. I. Borrower will not attach any Collateral to any real property or fixture in a manner which might cause such Collateral to become a part thereof unless Borrower first obtains the written consent of any owner, holder of any lien on the real property or fixture, or other person having an interest in such property to the removal by Bank of the Collateral from such real property or fixture. Such written consent shall be in form and substance acceptable to Bank and shall provide that Bank has no liability to such owner, holder of any lien, or any other person. 4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its option at any time, whether or not Borrower is in default: A. Require Borrower to deliver to Bank (i) copies of or extracts from the Books and Records, and (ii) information on any contracts or other matters affecting the Collateral. B. Examine the Collateral, including the Books and Records, and make copies of or extracts from the Books and Records, and for such purposes enter at any reasonable time upon the property where any Collateral or any Books and Records are located in accordance with Section 3A. above. C. Notify any person of Bank's interest in the Collateral to the extent necessary to continue the perfection or priority of the security interest of Bank in the Collateral. D. After a default under this Agreement or the Loan Agreement, demand and collect any proceeds of the Collateral. In connection therewith Borrower irrevocably authorizes Bank to endorse or sign Borrower's name on all checks, drafts, collections, receipts and other documents, and to take possession of and open the mail addressed to Borrower and remove therefrom any proceeds of the Collateral. 5. DEFAULTS. Any one or more of the following shall be a default hereunder: A. Borrower fails to make any payment of principal or interest due under the Loan Agreement within two (2) days of the date when due; or the Borrower fails to make any other payment of Indebtedness within five (5) days of the date when due. 2 3 B. Borrower breaches any term, provision, material warranty or material representation under this Agreement not specifically referred to in this Section 5, and, if such breach is susceptible of being cured, such breach is not cured within thirty (30) days of the earlier of (i) the earliest date on which the Borrower knew or reasonably should have known of such breach, and (ii) the date on which the Borrower notifies the Bank of such breach; or Borrower breaches any term, provision, material warranty, or material representation under any other obligation of Borrower to Bank, and such breach is not cured within any applicable cure period. C. Any custodian, receiver or trustee is appointed to take possession, custody or control of all or a substantial portion of the property of Borrower or of any guarantor of any Indebtedness. D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is generally not paying or admits in writing its inability to pay its debts as they become due, fails in business, makes a general assignment for the benefit of creditors, dies or commences any case, proceeding or other action under any bankruptcy or other law for the relief of, or relating to, debtors and, in the case of the commencement of an involuntary bankruptcy proceeding, such proceeding is not dismissed within 60 days of the filing thereof. E. Any case, proceeding or other action is commenced against Borrower or any guarantor of any Indebtedness under any bankruptcy or other law for the relief of, or relating to, debtors and, in the case of the commencement of an involuntary bankruptcy proceeding, such proceeding is not dismissed within 60 days of the filing thereof. F. Any involuntary lien of any kind or character attaches to any material portion of the Collateral. G. Any financial statements, certificates, schedules, or other information now or hereafter furnished by Borrower to Bank proves false or incorrect in any material respect. 6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do any one or more of the following: A. Declare any Indebtedness immediately due and payable, without notice or demand. B. Enforce the security interest given hereunder pursuant to the Arizona Uniform Commercial Code and any other applicable law. C. Require Borrower to assemble the Collateral, including the Books and Records, and make them available to Bank at a place designated by Bank. D. Enter upon the property where any Collateral, including any Books and Records, are located and take possession of such Collateral and such Books and Records, and use such Collateral and such Books and Records relating thereto, if Bank deems such use necessary or advisable in order to take possession of, hold, preserve, process, assemble, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral. E. Grant extensions and compromise or settle claims for less than face value relating to any proceeds of the Collateral, all without prior notice to Borrower. F. Use or transfer any of Borrower's rights and interests in any Intellectual Property now owned or hereafter acquired by Borrower, if Bank deems such use or transfer necessary or advisable in order to take possession of, hold, preserve, process, assemble, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral. Borrower agrees that any such use or 3 4 transfer shall be without any additional consideration to Borrower. As used in this paragraph, "Intellectual Property" includes, but is not limited to, all trade secrets, computer software, service marks, trademarks, trade names, trade styles, copyrights, patents, applications for any of the foregoing, customer lists, working drawings, instructional manuals, and rights in processes for technical manufacturing, packaging and labeling, in which Borrower has any right or interest, whether by ownership, license, contract or otherwise. G. Have a receiver appointed by any court of competent jurisdiction to take possession of the Collateral. H. Take such measures as Bank may deem necessary or advisable to take possession of, hold, preserve, process, assemble, insure, prepare for sale or lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral, and Borrower hereby irrevocably constitutes and appoints Bank as Borrower's attorney-in-fact to perform all acts and execute all documents in connection therewith. 7. MISCELLANEOUS A. Any waiver, express or implied, of any provision hereunder and any delay or failure by Bank to enforce any provision shall not preclude Bank from enforcing any such provision thereafter. B. Borrower shall, at the reasonable request of Bank, execute such other agreements, documents, instruments or financing statements in connection with this Agreement as Bank may reasonably deem necessary. A carbon, photostat or other reproduction of this Agreement or any financing statement is sufficient as a financing statement. C. All notes, security agreements, subordination agreements and other documents executed by Borrower or furnished to Bank in connection with this Agreement must be in form and substance reasonably satisfactory to Bank. D. This Agreement shall be governed by and construed according to the laws of the State of Arizona, to the jurisdiction of which the parties hereto submit. E. All rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law. Any single or partial exercise of any right or remedy shall not preclude the further exercise thereof or the exercise of any other right or remedy. F. All terms not defined herein are used as set forth in the Arizona Uniform Commercial Code. G. In the event of any action by Bank to enforce this Agreement or to protect the security interest of Bank in the Collateral, or to preserve, process, assemble, insure, prepare for sale of lease, market for sale or lease, sell or lease, or otherwise dispose of, any Collateral, Borrower agrees to pay immediately all reasonable costs and expenses thereof, together with reasonable attorney's fees and allocated costs for in-house legal services. BANK OF AMERICA NATIONAL TRUST AND CERPROBE CORPORATION SAVINGS ASSOCIATION - -------------------------------- ------------------------------------ Kathleen P. Sowa, Vice President Randal L. Buness, Vice President/CFO 4 5 EXHIBIT A List of Equipment: (Will be provided by Borrower) 5 6 Recording Requested by and when recorded mail to: Bank of America NT&SA 101 N. 1st Avenue Phoenix, Arizona 85003 Attn: Documentation #9950 ------------------Space above this line for Recorder's Use----------------- ARIZONA UNIFORM COMMERCIAL CODE FINANCING STATEMENT - FORM UCC-1 This FINANCING STATEMENT is presented for filing (recording) pursuant to the Arizona Uniform Commercial Code. - --------------------------------------------------------------------------------------------------------------------------------- 1. Debtor(s) (Last name first and address): 2. Secured Party(ies) and address: Cerprobe Corporation Bank of America National Trust and Savings Association 1150 North Fiesta Boulevard 101 North First Avenue, Dept. 8211 Gilbert, Arizona 85233-2237 Phoenix, Arizona 85003 - --------------------------------------------------------------------------------------------------------------------------------- 3. Name and Address of Assignee of Secured Party(ies): 4. [X] If checked, products of collateral are also covered. - --------------------------------------------------------------------------------------------------------------------------------- 6. If the collateral is crops, the crops are growing or to 5. This financing Statement covers the following types be grown on the following described real estate: (or items) of property: SEE ATTACHED EXHIBIT "A"
- -------------------------------------------------------------------------------- 7. If the collateral is (a) goods which are or are to become fixtures; (b) timber to be cut; or (c) minerals or the like (including oil and gas), or accounts resulting from the sale thereof at the wellhead or minehead to which the security interest attaches upon extraction, the legal description of the real estate concerned is: And, this Financing Statement is to be recorded in the office where a mortgage on such real estate would be recorded. If the Debtor does not have an interest of record, the name of a record owner is: - -------------------------------------------------------------------------------- 8. This Financing Statement is signed by the Secured Party instead of the debtor to perfect or continue perfection of a security interest in: [] collateral already subject to a security interest in [] collateral as to which the filing has lapsed or will jurisdiction when it was brought into this state. lapse. [] proceeds of collateral because of a change in type or [] collateral acquired after a change of name, identity, use. or corporate structure of the Debtor. - --------------------------------------------------------------------------------------------------------------------------------- Dated: February _______, 1999 --------------------------------------------------------- -------------------------------------------------------- Cerprobe Corporation Bank of America National Trust and Savings Association --------------------------------------------------------- -------------------------------------------------------- By: By: --------------------------------------------------------- -------------------------------------------------------- Randal L. Buness, Vice President/CFO Kathleen P. Sowa, Vice President --------------------------------------------------------- -------------------------------------------------------- Signature(s) of Debtor(s) or Assignor Signature of Secured Party or Assignee
EX-11 4 EX-11 1 CERPROBE CORPORATION COMPUTATION OF NET INCOME (LOSS) PER SHARE Exhibit 11
YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ----------- ----------- ----------- Net income (loss) $ (495,908) $ 1,895,968 $(1,360,790) =========== =========== =========== Weighted average number of common shares outstanding 7,963,747 6,690,265 4,579,598 Common equivalent shares representing shares issuable upon exercise of stock options 287,626 292,103 194,883 Convertible preferred stock -- -- 553,858 Subtraction of common equivalent shares due to antidilutive nature -- -- (748,741) ----------- ----------- ----------- Dilutive adjusted weighted average shares and assumed conversions 8,251,373 6,982,368 4,579,598 =========== =========== =========== Basic net income (loss) per share $ (0.06) $ 0.28 $ (0.30) =========== =========== =========== Diluted net income (loss) per share $ (0.06) $ 0.27 $ (0.30) =========== =========== ===========
EX-21 5 EX-21 1 CERPROBE CORPORATION LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF CERPROBE CORPORATION: Cerprobe Interconnect Solutions, Inc. SVTR, Inc. Cerprobe Europe Limited Cerprobe Asia Holdings Pte Ltd Cerprobe Europe S.A.S. 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 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 and No. 333-34493 on Form S-3 of Cerprobe Corporation of our report dated February 2, 1999, relating to the consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Cerprobe Corporation. Phoenix, Arizona March 30, 1999 EX-27.1 7 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 4,753,696 14,305,400 9,285,044 333,364 5,303,631 36,928,688 33,260,813 10,562,304 63,685,574 6,410,068 3,204,118 0 0 406,564 53,067,286 63,685,574 76,207,477 76,207,477 45,052,300 23,447,222 269,115 186,585 269,115 9,305,597 (3,685,308) 5,236,652 (5,732,560) 0 0 (495,908) (0.06) (0.06)
EX-27.2 8 EX-27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 2,715,490 27,000,698 8,445,357 215,179 4,969,804 49,599,474 21,504,063 7,064,809 68,107,903 7,094,551 1,275,017 0 0 404,899 58,939,139 68,107,903 69,012,395 69,012,395 39,251,446 17,601,429 388,025 24,000 388,025 12,443,376 (4,810,167) 7,662,924 (5,766,956) 0 0 1,895,968 0.28 0.27
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