-----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, FDHWKgw+TsLQYzqXaVkFJU539aVFiwsxvctDNueS7mw4IDnpijKMa31HR2+lTkjw dWRi3s6itkb1S4gtootcAQ== 0001012870-97-001887.txt : 19971003 0001012870-97-001887.hdr.sgml : 19971003 ACCESSION NUMBER: 0001012870-97-001887 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19971001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSYNC SYSTEMS INC CENTRAL INDEX KEY: 0000909211 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 770227489 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36979 FILM NUMBER: 97689647 BUSINESS ADDRESS: STREET 1: 1463 CENTRE POINTE DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089463100 MAIL ADDRESS: STREET 1: 1463 CENTRE POINT DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997. REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- INSYNC SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- CALIFORNIA 1647773 77-0227489 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1463 CENTRE POINTE DRIVE MILPITAS, CA 95035 (408) 946-3100 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- STANLEY L. LEOPARD, CHIEF EXECUTIVE OFFICER TERENCE J. GRIFFIN, CHIEF FINANCIAL OFFICER INSYNC SYSTEMS, INC. 1463 CENTRE POINTE DRIVE MILPITAS, CA 95035 (408) 946-3100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: FRANK S. CURRIE, ESQ. CARLA S. NEWELL, ESQ. JOHN T. SHERIDAN, ESQ. BENNETT L. YEE, ESQ. ANTON COMMISSARIS, ESQ. NANCY M. CHEN, ESQ. CHRISTOPHER G. NICHOLSON, ESQ. FRANK GRANT, ESQ. WILSON SONSINI GOODRICH & ROSATI GUNDERSON DETTMER STOUGH VILLENEUVE PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP 650 PAGE MILL ROAD 155 CONSTITUTION DRIVE PALO ALTO, CA 94304 MENLO PARK, CA 94025 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following effectiveness of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE
============================================================================================= PROPOSED PROPOSED MAXIMUM AMOUNT MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE - --------------------------------------------------------------------------------------------- Common Stock................... shares $ $39,000,000 $11,819 =============================================================================================
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the registration fee. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS + +OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION OCTOBER 1, 1997 PROSPECTUS Shares [LOGO OF INSYNC SYSTEMS APPEARS HERE] Common Stock -------- Of the shares of Common Stock offered hereby, shares are being sold by Insync Systems, Inc., a California corporation ("Insync" or the "Company"), and shares are being sold by certain shareholders (the "Selling Shareholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. See "Principal and Selling Shareholders." Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for the factors considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "INSY." -------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================= PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS - --------------------------------------------------------------------------------------------- Per Share.............. $ $ $ $ - --------------------------------------------------------------------------------------------- Total(3)............... $ $ $ $ =============================================================================================
(1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting offering expenses estimated at $ payable by the Company. (3) The Company and certain of the Selling Shareholders have granted the Underwriters a 30-day option to purchase in the aggregate up to additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." -------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1997. BT ALEX. BROWN PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1997 GAS DELIVERY SYSTEM [Photograph of a Gas Delivery System with a person standing adjacent] [INSYNC LOGO APPEARS HERE] IGS [Photograph of the Company's Integrated Gas System with person adjacent] GAS DELIVERY SYSTEMS Gas delivery systems and subassemblies are critical to the operation of deposition, etch and other semiconductor manufacturing equipment. The Company manufactures gas delivery systems and subassemblies in clean room production facilities using specialized manufacturing techniques. INTEGRATED GAS SYSTEM The Company's Integrated Gas System (IGS) is a modular platform for gas delivery that is designed to simplify the specification and manufacturing process for gas delivery systems in order to reduce component inventory requirements, configuration complexity, cycle time and overall semiconductor process equipment costs. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." "Insync" and the Insync logo appearing on the cover page of this Prospectus are trademarks of the Company. This Prospectus also includes trademarks of other companies. 2 [INSYNC LOGO GAS DELIVERY SYSTEMS IN THE FAB APPEARS HERE] Gas delivery systems and subassemblies are pervasive throughout the semiconductor device manufacturing process. The Company's gas delivery systems and subassemblies are primarily incorporated into deposition, etch and, to a lesser extent, other semiconductor process equipment. The Company's customers include four major North American semiconductor equipment manufacturers: Applied Materials, Lam Research, Novellus Systems and Watkins-Johnson. [Diagram of a typical Fab floor depicting various manufacturing areas, highlighting semiconductor process equipment that use gas delivery systems and subassemblies.] The Company's gas delivery systems and subassemblies are designed to reduce contamination in the process chamber and shorten cycle times for equipment manufacturers, thereby contributing to lower wafer manufacturing costs for device manufacturers. Process Equipment Requiring GAS DELIVERY SYSTEMS PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties, including statements regarding strategies, intentions or expectations. The Company's actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Insync is a leading provider of outsourcing services to semiconductor equipment manufacturers for the design and manufacture of gas delivery systems and subassemblies. Gas delivery is a critical component of deposition, etch and other semiconductor process equipment. The Company believes its outsourcing services reduce its customers' total costs by shortening product delivery cycle times, reducing inventory and materials procurement costs, eliminating redundant work, enhancing information exchange and coordinating increasingly complex manufacturing and design processes. The Company's principal customers are Applied Materials, Inc., Lam Research Corporation, Watkins-Johnson Company and most recently, Novellus Systems, Inc., four major North American semiconductor equipment manufacturers. The Company offers a full range of gas delivery solutions, including subassemblies for integration into its customers' internally manufactured gas delivery systems and complete systems for incorporation into its customers' products at final assembly. Insync has recently introduced the Integrated Gas System (the "IGS"), a modular platform for gas delivery that is designed to simplify the specification, configuration, manufacturing and serviceability for gas delivery systems. The manufacture of semiconductors has required increasingly complex and sophisticated process technologies. More than 40% of all semiconductor manufacturing equipment, which in turn performs more than 70% of the manufacturing process steps, requires the introduction, management and evacuation of process gases. These steps include the deposition of insulating or conducting materials onto a wafer ("deposition") and the etching of the wafer to selectively remove deposited material ("etch"). Deposition and etch processes require highly controlled process environments and chemistry and, as a result, the equipment used for deposition and etch is complex and incorporates sophisticated systems to control various process gases and the conditions in which they are used. Device manufacturers continuously demand innovations in the core process technologies underlying deposition and etch. In order to meet such demands, equipment manufacturers have been required to repeatedly improve their process equipment in many respects, including the inclusion of increasingly complex and sophisticated gas delivery systems. Insync has expertise in gas delivery requirements and specialized production capabilities focused on the design and manufacture of complex, customized gas delivery systems and subassemblies within the time constraints demanded by equipment manufacturers. The Company has invested significant resources in developing additional manufacturing capabilities and capacity in order to offer its customers advanced production capabilities that, in many cases, exceed the customer's own internal capabilities. The Company believes its customers benefit by outsourcing resource-intensive design and manufacturing activities for gas delivery systems and subassemblies, and from the expertise and efficiencies that the Company derives from providing outsourced gas delivery solutions to multiple leading equipment manufacturers. The Company's objective is to be the primary provider of outsourcing design and manufacturing services for gas delivery to leading semiconductor equipment manufacturers. The Company's strategy is to extend its leadership in gas delivery, expand its gas delivery systems business, strengthen its relationships with customers and suppliers, leverage its manufacturing capabilities and promote modular approaches to gas delivery systems. In January 1996, Insync acquired substantially all of the non-cash assets and liabilities of Pullbrite, Inc. ("Pullbrite"), another independent provider of gas delivery systems to semiconductor equipment manufacturers. Insync was founded in 1989. Insync's address is 1463 Centre Pointe Drive, Milpitas, California 95035 and its telephone number is (408) 946-3100. 3 THE OFFERING Common Stock offered by the Company.. shares Common Stock offered by the Selling Shareholders........................ shares Common Stock outstanding after the Offering ........................... shares (1) Use of proceeds...................... Repayment of debt and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. INSY
SUMMARY FINANCIAL DATA (in thousands, except per share data)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- --------- -------- -------- -------- ------- STATEMENT OF OPERATIONS DATA: Net sales............... $ 2,771 $ 7,199 $ 20,617 $49,969 $86,099 $59,448 $34,679 Income (loss) from operations............. 178 (72) 1,477 5,518 (8,260)(2) 9,411 2,174 Interest expense and other, net............. 75 114 230 434 2,562 1,358 1,675 Net income (loss)....... 101 (188) 734 2,996 (6,508) 4,818 310 Pro forma net income (loss) per share(3).... $ (0.87) $ 0.03 Pro forma shares used in per share computations(3)........ 7,617 8,214 QUARTER ENDED ---------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1996 1996 1996 1996 1997 1997 -------- -------- --------- -------- -------- -------- Net sales............... $33,125 $26,323 $ 16,015 $10,636 $15,102 $19,577 Income (loss) from operations............. 5,768 3,643 (18,117)(2) 446 344 1,830 Interest expense and other, net............. 713 645 608 596 913 762 Net income (loss)....... $ 3,019 $ 1,799 $(11,239) $ (87) $ (336) $ 646
JUNE 30, 1997 --------------------- AS ACTUAL ADJUSTED (4) ------- ------------ BALANCE SHEET DATA: Working capital........................................... $ 7,951 $ Total assets.............................................. 39,241 Long-term obligations..................................... 17,108 Redeemable Preferred Stock and put warrants............... 23,845 Shareholders' equity (deficiency)......................... (17,030)
- -------- (1) Excludes as of June 30, 1997 (i) 1,257,901 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.90 per share and (ii) 317,996 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $3.81 per share. See "Management--Stock Plans" and Notes 8 and 12 of Notes to Financial Statements of Insync. (2) Includes charges of $16.6 million and $858,000 for the write down of intangible assets and restructuring charges, respectively. See Notes 2 and 3 of Notes to Financial Statements of Insync. (3) See Note 1 of Notes to Financial Statements of Insync for an explanation of the number of shares used in computing pro forma net income (loss) per share. (4) Adjusted to reflect (i) conversion of each of the outstanding shares of redeemable Series A Preferred Stock upon the closing of the Offering and (ii) the sale of the shares of Common Stock offered by the Company at an assumed initial public offering price of $ per share (after deduction of the underwriting discounts and commissions and estimated offering expenses) and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." Unless the context otherwise specifies, the information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option, (ii) the conversion of all outstanding shares of redeemable Series A Preferred Stock of the Company (the "Redeemable Preferred Stock") into an aggregate of 2,352,940 shares of Common Stock upon the closing of the Offering, and (iii) the completion of a 2-for-3 reverse stock split of the Company's outstanding Common Stock to be effected prior to the effectiveness of the Offering. See "Certain Transactions" and "Underwriting." 4 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. This Prospectus contains forward- looking statements that involve risks and uncertainties, including statements regarding strategies, intentions or expectations. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of certain factors including those set forth in the following risk factors and elsewhere in this Prospectus. Fluctuations in Operating Results. The Company's operating results have fluctuated in the past and continue to be subject to annual and quarterly fluctuations due to a variety of factors over which the Company may have limited or no control and which may be difficult or impossible for the Company to predict. For example, the Company's net sales for the quarters ended March 31, 1996, December 31, 1996, and June 30, 1997, were $33.1 million, $10.6 million and $19.6 million, respectively. Factors that may cause the Company's operating results to fluctuate include: the timing and product mix of significant orders and shipping schedules of its customers; industry-wide changes in the demand for semiconductors or for semiconductor manufacturing equipment; the ability of the Company to design, manufacture, test and deliver defect-free gas delivery systems and subassemblies in a timely and cost effective manner; the gain or loss of any significant customer; competitive pressures; the timing of product announcements by the Company's competitors, its customers or their competitors; seasonal changes in purchases of semiconductor manufacturing equipment; the availability and cost of components from the Company's suppliers; and the availability of production capacity. In addition to fluctuations in net sales, gross margins can vary from period to period as a result of a number of factors including the management of production capacity and changes in product mix. For example, historically, gas delivery systems have had lower gross margins than subassemblies and gross margins for different types of subassemblies have varied. There can be no assurances that the Company will anticipate or respond in a timely manner to those factors listed above or that, irrespective of the Company's response, such factors will not materially and adversely affect the Company's business, operating results and financial condition in one or more quarterly or annual periods. A significant portion of the Company's operating and manufacturing expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. In the event of a decline in net sales, the Company would likely not be able to adjust spending quickly enough to compensate for such decline which would magnify the adverse impact of the net sales shortfall on the Company's business, operating results and financial condition. For example, the Company has expended resources in recent periods to expand its capabilities and capacity in anticipation of semiconductor manufacturing industry growth. If such industry growth does not occur when anticipated or at all, the Company's business, operating results and financial condition would be materially adversely affected. In particular, the Company's manufacturing capacity and operating expenses currently exceed levels required to support present net sales and there can be no assurance that the Company's net sales will increase in the future. For these and other reasons, results of operations in any period should not be considered indicative of the results to be expected for future periods and there can be no assurance that the Company will be profitable in any future period. Due to the foregoing factors, it is likely that in one or more future quarters, the Company's operating results will fall below the expectations of public market analysts or investors. In each such event, the price of the Company's Common Stock could decline significantly. See "--Customer Concentration," "--Industry Concentration; Cyclicality of Semiconductor Industry," "--Management of Business Fluctuations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Customer Concentration. Historically, substantially all of the Company's net sales in any particular period have been attributable to a limited number of semiconductor equipment manufacturers. Net sales 5 to four of the Company's customers, Applied Materials, Lam Research, Watkins- Johnson and Novellus Systems, accounted for approximately 86% of the Company's net sales during 1996 and approximately 90% of its net sales for the six months ended June 30, 1997. The Company expects that sales to a small number of key customers will continue to account for substantially all of its net sales for the foreseeable future. None of the Company's customers has entered into a long-term agreement requiring them to purchase the Company's systems or subassemblies or use its services. The Company's sales contracts generally allow customers to cancel orders at any time with liability only for custom material purchased and manufacturing steps completed as of the time of cancellation. The demand for the Company's products and services from its customers is dependent in part on orders received by them from their semiconductor device manufacturer customers who are increasing capacity in existing wafer fabrication facilities or building new facilities. As purchases related to a particular new or expanded wafer fabrication facility are completed, sales related to that semiconductor device manufacturer are likely to decrease sharply. If completed contracts are not replaced on a timely basis by new orders from the Company's customers relating to the same or other device manufacturers, the Company's business, operating results and financial condition could be materially adversely affected. Further, the appearance of a close working relationship with a particular customer may materially adversely affect the Company's ability to establish or maintain a relationship with, or sell products to, competitors of that customer. The Company's net sales could be materially adversely affected by a number of factors, including: the loss of a significant customer or any reduction in orders from any significant customer or the cancellation or delay of a significant order from a customer; the Company's failure to be selected as a provider of gas delivery systems or subassemblies for a new product or product line of a significant customer; a customer's use of internal or multiple external sources for its gas delivery requirements; customer deviations from recent buying patterns; or financial difficulties of a customer or a significant semiconductor device manufacturer. The Company has experienced significant reductions in net sales in prior periods due to such factors. For example, net sales attributable to a key customer declined from $13.2 million for the first calendar quarter of 1996 to $2.0 million for the fourth calendar quarter of 1996, which the Company believes was due primarily to reduced production levels by such customer in response to a general slowdown of the semiconductor equipment market which began in the second calendar quarter of 1996, the decision by such customer to work off inventories built up during prior quarters and the selection by such customer of another gas delivery provider for systems related to a new product. In addition, there can be no assurance that one or more of the Company's key customers will not temporarily or permanently elect to produce a higher proportion of their gas delivery requirements internally. Any such reductions in outsourcing, which may be more likely during periods of slowdown, would magnify the adverse effects of any slowdowns in the Company's business and could limit the success of the Company's strategy to supply an increasing portion of its customers' total gas delivery requirements. The occurrence or recurrence of any of such factors, many of which are outside the Company's control, could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that any of the Company's customers will not reduce or cease ordering the Company's products or services due to the above factors or other reasons. Any such reduction or cessation would likely have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, attempts to mitigate the adverse effects of such reduction or cessation through the prompt addition of a new customer or customers would likely be difficult since prospective customers typically require lengthy qualification periods prior to placing volume orders with a new provider of gas delivery systems and subassemblies. Although the Company maintains a backlog, the Company's customers may defer or cancel orders without significant penalties. Anticipated orders from the Company's customers have in the past failed to materialize and delivery schedules have been deferred or canceled as a result of changes in customer requirements. Order deferrals and cancellations have in the past and may in the future have a material 6 adverse effect on the Company's business, operating results and financial condition. See "--Dependence on Outsourcing; Evolving Gas Delivery Industry," "--Industry Concentration; Cyclicality of Semiconductor Industry," "Business-- Customers" and Note 10 to Notes to Financial Statements of Insync. Dependence on Selection as Provider for New Products. The Company's ability to generate net sales in the future is primarily dependent on its being selected by semiconductor equipment manufacturers as a provider of gas delivery systems and/or subassemblies for their new products. In any given period, the Company's gas delivery systems and subassemblies are included in only a limited number of different models of semiconductor device manufacturing equipment, each having a limited life cycle. In the past, equipment manufacturers have selected gas delivery providers for new product models during the design and testing phases of their product development cycles. The Company believes that it would be difficult for it to begin providing gas delivery systems and/or subassemblies for use in a particular model of wafer processing equipment if the Company had not been selected and qualified as a provider during the development of such product. Therefore, a failure to be selected as a provider during the early stages of a product's life cycle could preclude the Company from being an outsourced provider of gas delivery systems and/or subassemblies for such product model throughout its life cycle. For example, the Company's net sales were negatively affected during the second half of 1996 when a competitor became the primary provider of the gas delivery system for a new product generation developed by one of the Company's major customers. In addition, such failure to be selected could reduce the Company's ability to be selected as a provider for future product models if, for example, such failure adversely affects the working relationship between the Company and the manufacturer of such product model. There can be no assurance that the Company will be selected as a provider of gas delivery systems and/or subassemblies for new product models introduced by existing customers or other equipment manufacturers. Unless the Company is selected as a provider of gas delivery systems and/or subassemblies for new models as existing models are phased out, the Company's business, operating results and financial condition will be materially and adversely affected. Industry Concentration; Cyclicality of Semiconductor Industry. Substantially all of the Company's net sales are derived from the sale of gas delivery systems and subassemblies to semiconductor equipment manufacturers. The gas delivery requirements of semiconductor equipment manufacturers are, in turn, dependent upon capital expenditures by semiconductor device manufacturers, particularly those opening new wafer fabrication facilities or expanding or upgrading existing facilities. The construction and expansion of fabrication facilities is influenced in large part by the current and anticipated market demand for semiconductors and products utilizing such devices. There can be no assurance as to when or whether semiconductor device manufacturers will construct and expand wafer fabrication facilities. The semiconductor industry has historically been highly cyclical and has experienced periods of oversupply. Such periods have resulted in significantly reduced demand for semiconductor manufacturing equipment, including equipment requiring the gas delivery systems and subassemblies provided by the Company. Furthermore, the Company believes that its net sales may decline disproportionately as compared to the semiconductor equipment market in periods of slowdown or downturn if its customers respond to such slowdowns or downturns by reducing their inventory levels or by reducing outsourcing. For example, the Company's net sales declined from $33.1 million for the first quarter of 1996 to $10.6 million for the fourth quarter of 1996 which the Company believes was primarily due to a downturn in the semiconductor equipment market. In addition, the Company believes its ability to reduce expenses in a future downturn will be constrained by the need to sustain investments in marketing, research, development and engineering, and the need to maintain extensive customer service and support capabilities. The Company expects that the semiconductor device and equipment markets will continue to be cyclical and will decline in some future periods. The Company's business, operating results and financial condition could be materially adversely affected by such downturns or slowdowns in the semiconductor device and equipment markets. 7 Failure to Meet Customer Performance Criteria; Risk of Delays or Defects. The Company's gas delivery systems and subassemblies are intended to be integrated into semiconductor process equipment manufactured by the Company's customers for sale to semiconductor device manufacturers. The Company's customers have demanding requirements for on-time delivery of defect-free systems and subassemblies. Any delay by the Company in delivering fully functional systems and subassemblies to any customer may lead to lost or delayed sales. A failure to meet on-time delivery or performance criteria could, in addition to resulting in the loss of revenue from, and loss of future business with, such customer, cause long-term damage to the Company's reputation, delay market acceptance of the Company's systems, subassemblies and technologies (including the IGS), and increase warranty and service costs, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. In the past, the Company has experienced difficulty in meeting its customers' delivery schedules and quality standards, particularly during periods in which the Company was attempting to rapidly increase or decrease production capacity in response to significant fluctuations in demand. For example, during the first six months of 1997, the rates of late deliveries to customers and items rejected by customers for defects or deviations from specifications were substantially higher than the Company has historically experienced. The Company believes that these increases were primarily attributable to difficulties associated with training newly hired employees and increasing the Company's production capacity following employee layoffs and decreases in production experienced in the second half of 1996 and from changes to manufacturing processes implemented during the first half of 1997. Although the Company's on-time delivery and performance standards have recently returned to historic levels, there can be no assurance that the Company will continue to meet on-time delivery and product performance specifications in the future. A failure to meet on-time delivery and specifications of customers could have a material adverse effect upon the Company's business, operating results and financial condition. Dependence on Outsourcing; Evolving Gas Delivery Industry. The Company is dependent on the outsourcing of gas delivery systems and subassembly requirements by semiconductor equipment manufacturers. The Company believes that the market created by such outsourcing is evolving rapidly. Historically, semiconductor equipment manufacturers designed and manufactured the majority of gas delivery systems and subassemblies internally due to their highly specialized design, need for last-minute configurability, and importance to overall equipment performance. Companies providing outsourcing services have historically addressed only part of equipment manufacturers' total gas delivery needs, often building selected subassemblies to the equipment manufacturers' specifications. The Company believes that equipment manufacturers will not substantially increase the degree to which they outsource their gas delivery requirements until independent providers can demonstrate their ability to consistently provide comprehensive gas delivery systems on a cost competitive basis, in a timely and efficient manner and in quantities sufficient to support volume production. The Company's objectives of adding new customers and increasing sales to existing customers are dependent on the Company developing such capabilities and capacity and on equipment manufacturers selecting the Company as a provider of such outsourcing services. Although the Company has invested substantial financial and other resources in efforts to develop such capabilities and capacity and to build relationships with equipment manufacturers, there can be no assurance that the Company will have the capabilities and capacity to provide the full breadth of these requirements on a cost competitive basis. In addition, there can be no assurance that the Company will successfully develop the capabilities to address, on a consistent basis, the complete array of gas delivery requirements demanded by semiconductor equipment manufacturers. Regardless of whether the Company is successful in meeting the gas delivery requirements of semiconductor equipment manufacturers, there can be no assurance that the market for independent gas delivery suppliers will not decrease in the future. Such market is dependent on the degree to which semiconductor equipment manufacturers outsource their gas delivery needs. There can be no assurance that equipment manufacturers will continue to outsource their gas delivery requirements or, if such outsourcing continues, that such customers will increase their outsourcing or that the Company will be selected as a provider of outsourcing services. In particular, in the event of a slowdown or an overall 8 decline in the semiconductor equipment industry (such as the slowdown which began in the second quarter of 1996) there can be no assurance that semiconductor equipment manufacturers will not produce a greater proportion of their gas delivery system requirements internally. A decrease or slowdown in the market for independent gas delivery providers could have a material adverse effect on the business, operating results and financial condition of the Company. Competition. The Company believes that competition in the gas delivery market is intense and likely to increase substantially. Traditionally, gas delivery systems and subassemblies have been primarily manufactured internally by semiconductor equipment manufacturers. While these equipment manufacturers are significant customers or potential customers of the Company, companies including Applied Materials and Lam Research continue to produce significant quantities of gas delivery systems internally. For a variety of reasons, including any downturn or slowdown in the semiconductor equipment industry, there can be no assurance that semiconductor equipment manufacturers will not elect to utilize their internal manufacturing capacity to manufacture a greater percentage of their gas delivery requirements. The Company's competitors also include numerous privately and publicly held independent gas delivery providers, mass flow controller companies and others. Other companies not currently offering such systems, including gas suppliers, may attempt to enter and develop products for this market or to develop alternative technologies which could reduce the need for the Company's products. The trend towards consolidation in the semiconductor equipment industry has made it increasingly important to have the financial resources and manufacturing capacity necessary to meet the requirements of large equipment manufacturers, to fund customer service and support, and to invest in both product and process research and development. Current and potential competitors may have substantially greater financial resources, name recognition and more extensive engineering, manufacturing, marketing and customer service and support capabilities than the Company. In addition, most of the Company's key customers have established relationships with one or more of the Company's competitors as additional or alternative providers, which the Company believes tends to further intensify competition and may limit the Company's ability to capture a greater percentage of a customer's outsourced gas delivery requirements. The Company expects its current competitors to continue to improve the design and performance of their existing products and processes, and to introduce new products and processes with improved performance characteristics and/or lower prices. New product introductions or product announcements by the Company's competitors could cause a decline in sales or a loss of market acceptance of the Company's gas delivery systems and subassemblies. Moreover, such increased competitive pressure could lead to intensified price competition, which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully in the future. See "Business--Competition." Management of Business Fluctuations. The Company has, in the past, undergone periods of rapid growth and periods of rapid declines in net sales. See "-- Fluctuations in Operating Results." In response to the downturn in the semiconductor equipment industry that began in the second quarter of 1996, the Company significantly reduced its workforce and production capacity and deferred expenditures for operational and financial infrastructure. As a result of significant increases in orders in the first and second quarters of 1997, compared to the fourth quarter of 1996, the Company hired and trained a significant number of new employees in the first half of 1997. The Company believes that problems associated with rapid growth in the Company's capacity caused the Company to fail to meet customers' on-time delivery and product specifications requirements in the first half of 1997, which in turn adversely affected the net sales of the Company during such period. The significant quarter to quarter net sales increases and decreases historically experienced from time to time by the Company and by the semiconductor equipment industry require the Company to balance its short term operational needs with long range planning needs. If the Company believes a downturn is of relatively short duration, management may choose to retain capacity and capabilities that 9 exceed present needs to avoid disruptions. Any decision to retain such capacity and capabilities would have at least a short-term adverse effect on the Company's business, operating results and financial condition. Conversely, if management determines to reduce its capacity and capabilities, the Company may be unable to take advantage of future industry growth, or may lose market share to competitors with greater manufacturing capacity during subsequent periods of expansion, thus reducing the Company's net sales in future quarters. The Company is making significant expenditures in the second half of 1997 to prepare for potential growth in the semiconductor industry based, in part, upon management's belief that customers' selection of the Company's systems and services may depend on the Company having the demonstrable capacity to accommodate such customers' volume and other requirements. Company initiatives include expansion of production capacity, hiring and training employees and implementation and installation of a variety of new and upgraded operating and financial systems, procedures and controls, including the enhancement of its accounting and other internal management systems and the linking of its systems and processes with those of its key customers. There can be no assurance, however, that the Company will successfully implement such installation or achieve such enhancement or that such enhancement, if achieved, will result in lower costs or on-time performance. In addition, in the event that anticipated growth in the semiconductor industry and the Company's customers do not materialize in the near term, the expenditures incurred by the Company in implementing such expansion measures would have a material adverse effect on the Company's business, operating results and financial condition. In periods of growth, the Company must identify, recruit, train and integrate new employees quickly to keep pace with such growth. The availability of qualified personnel is limited and competition for such personnel is intense. Any such growth could also significantly strain the Company's management, manufacturing, financial and other resources. Any failure to address these growth issues in an effective manner could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the additions and upgrades to the Company's operating systems, procedures and controls being implemented in the second half of 1997 will be implemented successfully or without unexpected costs, delays or difficulties, or will enhance the Company's ability to manage any future growth or closely integrate the Company's systems with those of its customers. Moreover, there can be no assurance that the Company will grow in future periods, or if such growth occurs, that the Company's systems, procedures and controls will be adequate to support the Company's expanded operations. Finally, the expansion of its facilities or any move to new facilities could be disruptive and could have a material adverse effect on the Company's business, operating results and financial condition. In particular, there can be no assurance of the Company's ability to fully utilize any expanded capacity on a timely basis. Rapid Technological Change. The semiconductor equipment industry is characterized by, among other things, rapid technological change, evolving industry standards, frequent new product introductions and significant competition. The success of the Company in developing, introducing, selling and supporting gas delivery systems and subassemblies depends upon effectively managing total costs to customers and a variety of other factors including: the ability of the Company to identify and address emerging customer requirements; the timely and efficient completion of gas delivery system design, development, manufacture and assembly; software development; and product field-testing. To the extent gas delivery systems, subassemblies and capabilities developed by the Company are based upon anticipated changes in semiconductor production technologies, sales for such offerings may be materially adversely affected if such technologies do not gain acceptance in the industry. There can be no assurance that the Company will be successful in developing, manufacturing, marketing or enhancing existing or new gas delivery systems or subassemblies for new or emerging process technologies. Furthermore, there can be no assurance that it will be able to do so quickly enough to keep pace with rapid technological advances in the industry. In addition, the introduction of new or enhanced gas delivery systems, 10 subassemblies and capabilities by the Company's competitors, suppliers or customers could cause a decline in net sales or loss of market acceptance of the Company's existing and/or future offerings. The Company's future operating results could also be adversely affected if it fails to support newly introduced and accepted modular gas delivery system platforms. The Company believes that equipment manufacturers may begin to supplant traditional, fully-customized design techniques with more modular approaches in an effort to simplify the design, specification, manufacture and installation of gas delivery systems. To the extent equipment manufacturers demand gas delivery systems based on modular platforms, the Company's business, operating results and financial condition would be materially adversely affected if the IGS, the Company's modular platform, fails to gain wide market acceptance. Furthermore, fundamental changes in gas delivery system requirements for semiconductor process technologies could materially reduce or eliminate the semiconductor equipment industry's demand for and dependence on the capabilities that the Company has developed with respect to current gas delivery system methodologies. The failure of the Company to respond quickly to such changes and to offer competitive solutions would likely significantly impact the Company's market share and materially adversely affect the Company's business, operating results and financial condition. See "Business-- Systems and Services." Sole or Limited Sources of Supply. The Company relies to a substantial extent on outside vendors to manufacture many of the components used in its gas delivery systems and subassemblies. From time to time, certain of these components are only attainable from a sole or limited group of suppliers. The Company's reliance on outside vendors generally, and on a sole or limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components, reduced control over pricing and timely delivery of components, and limited ability to pass on price increases to its customers. Because the procurement of certain of these components may require long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur. The Company's ability to fill customer orders may depend on the availability of thousands of different components from its suppliers and, particularly in periods of high demand, the Company has in the past experienced difficulties in obtaining certain components on a timely basis which has delayed deliveries to the Company's customers. Any such inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply, or to manufacture such components internally, could delay the Company's ability to ship its products and could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's customers, at times, require the Company to secure certain components from a specific component manufacturer. If the Company is unable to secure these specified components due to supplier shortages or for any other reason, it could adversely affect the Company's ability to retain the customer's order or to deliver products on a timely basis, which in turn could adversely affect its relationship with the customer. If significant customer relationships were adversely affected in this manner, it could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Manufacturing." Limited Intellectual Property Protection. The Company relies on a combination of patent, copyright, trademark and trade secret laws, nondisclosure agreements and other intellectual property protection methods to protect its proprietary technology. Although the Company currently holds two patents and has three pending patent applications in the United States, the Company believes that patents are of less significance in its industry than such factors as customer service, innovation, technical expertise and know-how of its personnel. There can be no assurance that the Company's competitors will not be able to legally ascertain the nonpatented proprietary information embedded in the Company's gas delivery systems or other products, in which case the Company may be unable to prevent use of such information. To the extent the Company elects to assert its patent rights, there can be no assurance that any claims of the Company's patents will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents issued to the Company will not be challenged, 11 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. Although the Company has not received any notices from third parties alleging infringement claims, there can be no assurance that infringement claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future, or that such assertions, if proven to be true, will not materially adversely affect the Company's business, operating results and financial condition. If any such claims are asserted against the Company, the Company may seek to obtain a license under the third party's intellectual property rights. There can be no assurance that a license will be available on reasonable terms or at all. Alternatively, the Company could decide to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time consuming. Adverse determinations in any litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its products. Any of these developments could have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Key Personnel. The Company's financial performance will depend in significant part upon the continued contributions of Stanley L. Leopard, its Chairman of the Board and Chief Executive Officer, Jorge L. Titinger, its President and Chief Operating Officer, Brent D. Elliot, its Executive Vice President, Technology and Marketing, and other officers and key personnel, many of whom would be difficult to replace. None of such persons has an employment or non-competition agreement with the Company. In addition, the Company maintains only limited key man life insurance on these three officers. The loss of Mr. Leopard, Mr. Titinger, Mr. Elliot or any other key person could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's future operating results depend, in part, upon its ability to attract and retain other qualified management, engineering, financial, technical, marketing and sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could materially adversely affect the Company's business, operating results and financial condition. See "Business--Employees" and "Management-- Directors and Executive Officers." Potential Future Acquisitions. In the future, the Company may pursue acquisitions of product lines, technologies or businesses. Future acquisitions by the Company may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to goodwill and other intangible assets, each of which could materially adversely affect the Company's business, operating results and financial condition. For example, in the third fiscal quarter of 1996, the Company recorded an expense of $16.6 million related to the reduction in carrying value of certain intangible assets acquired from Pullbrite, Inc. in January 1996. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired company, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. From time to time, the Company has engaged in preliminary discussions with third parties concerning potential acquisitions of product lines, technologies and businesses; however, there are currently no negotiations, commitments or agreements with respect to any acquisition. In the event that such an acquisition does occur, however, there can be no assurance as to the effect thereof on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of Notes to Financial Statements of Insync. Limited Insurance Coverage; Environmental Regulation. The operations of the Company involve the use of industrial machine tools and exposure to hazardous chemicals, with attendant risks of liability for personal injury and property damage. There can be no assurance that accidents will not occur or that the Company will not incur substantial liability in connection with the operation of its business. The 12 Company maintains workers' compensation insurance and general liability insurance, with policy limits of $1.0 million per accident or occurrence. The Company also maintains an umbrella policy with limits of $5.0 million in the aggregate. Such insurance excludes coverage for losses or liabilities relating to environmental damage or pollution. The Company's business, operating results and financial condition could be materially adversely affected by a claim that was not covered or only partially covered by its insurance. In addition, the Company is subject to a variety of governmental regulations relating to the use, storage, handling and disposal of toxic or other hazardous substances used in connection with its electropolishing activities. Any failure by the Company to control the use, storage, handling or disposal or adequately restrict the discharge of hazardous or toxic substances could subject the Company to significant liabilities or could cause the Company's manufacturing operations to be curtailed or suspended. Control by Directors and Executive Officers. The Company's directors, executive officers and their affiliates will beneficially own approximately % of the Company's outstanding Common Stock upon completion of the Offering. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. Additionally, as a result of their securities ownership and their positions with the Company, these shareholders will have significant influence over major corporate transactions as well as the election of directors of the Company and matters on which the Board of Directors may act. See "Principal and Selling Shareholders." No Prior Public Market; Possible Volatility of Stock Price. Prior to the Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price will be determined by negotiations among the Company, the Selling Shareholders and the representatives of the Underwriters based upon several factors and may not be indicative of future market prices. The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company, its competitors or its customers, trends in the semiconductor manufacturing industry and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market prices for many companies in the semiconductor sector. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has been initiated against the issuing company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, operating results and financial condition. Any settlement or adverse determination in such litigation could also subject the Company to significant liability, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Underwriting." Anti-Takeover Effects of Unissued Preferred Stock. Upon the completion of the Offering, the Company's Board of Directors will have the authority to issue up to 4,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deterring or preventing a change in control of the Company. The Company has no present plans to issue shares of Preferred Stock after completion of the Offering. See "Description of Capital Stock." Need for Additional Capital. The Company believes that in order to remain competitive it may require additional financial resources over the next several years for working capital, research,. 13 development and engineering, expansion of sales and marketing efforts, capital expenditures and potential acquisitions. Although the Company believes that it will be able to fund planned expenditures for at least the next 12 months from a combination of the proceeds of the Offering, cash flow from operations, existing cash balances and the Company's bank line of credit, there can be no assurance that the Company will be able to obtain any additional financing which may be required in the future on acceptable terms or at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Shares Eligible for Future Sale. Sales of substantial amounts of shares in the public market or the prospect of such sales could adversely affect the market price of the Company's Common Stock. Upon completion of the Offering, the Company will have outstanding shares of Common Stock. Of these shares, (i) all of the shares offered hereby and an additional shares held by existing shareholders will be freely saleable upon the effectiveness of the Offering, (ii) shares will be eligible for sale 90 days following the effectiveness of the Offering under Rules 144 and 701 promulgated under to the Securities Act of 1933, as amended (the "Securities Act") and (iii) an additional shares of Common Stock held by current shareholders are subject to lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. After the 180-day period, approximately shares will be eligible for sale under Rules 144 and 701. The remaining approximately shares held by existing shareholders will become eligible for sale from time to time in the future under Rule 144. In addition, the Company intends to file a registration statement under the Securities Act shortly after the effectiveness of the Offering, covering the sale of shares of Common Stock reserved for issuance under the Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan"), 1997 Stock Plan (the "1997 Plan") and 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"). As of August 1, 1997, there were options outstanding to purchase a total of approximately shares of the Company's Common Stock, all of which are subject to 180-day lock-up agreements, and approximately additional shares reserved for future option grants. Approximately shares issuable upon exercise of such options will be eligible for purchase and resale into the public market 180 days after the date of this Prospectus in reliance upon Rule 701. Certain existing shareholders, holding an aggregate of approximately shares of Common Stock and the holders of warrants to purchase shares of Common Stock also will be entitled to registration rights with respect to their shares of Common Stock after the Offering. See "Management--Stock Plans," "Description of Capital Stock--Registration Rights of Certain Holders," "Shares Eligible for Future Sale," and "Underwriting." Dilution. Purchasers in the Offering will experience immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. Additional dilution will occur upon the exercise of outstanding stock options and warrants. See "Dilution" and "Management--Stock Plans." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby, based on an assumed initial public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be $ million ($ million if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of shares of Common Stock to be sold by the Selling Shareholders in the Offering. The Company will use approximately $12.0 million of the net proceeds of the Offering to repay a portion of the outstanding balance owed on a term loan and will repay the outstanding balance on the Company's bank line of credit ($1.5 million outstanding at June 30, 1997). The remaining net proceeds will be used for working capital and general corporate purposes. A portion of the net proceeds may also be used for investments in or acquisitions of complimentary businesses, products or technologies, although no such transactions are currently under negotiation. Pending such uses, the Company will invest the net proceeds from the Offering in short-term, investment grade, interest bearing securities, including government obligations and other money market instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 5 of Notes to Financial Statements of Insync. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the Company's bank credit facility prohibits the declaration or payment of dividends without the bank's prior approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 15 CAPITALIZATION The following table sets forth as of June 30, 1997 (i) the actual capitalization of the Company, (ii) the unaudited pro forma capitalization of the Company reflecting the conversion of all outstanding shares of Redeemable Preferred Stock into Common Stock and (iii) the unaudited pro forma capitalization of the Company to reflect the net sale of shares of Common Stock pursuant to the Offering at an assumed initial public offering price of $ per share and the application of the net proceeds therefrom as set forth under "Use of Proceeds." The capitalization information set forth in the table below is qualified by the more detailed Financial Statements and Notes thereto appearing elsewhere in this Prospectus and should be read in conjunction with such Financial Statements and Notes.
JUNE 30, 1997 -------------------------- PRO AS ACTUAL FORMA ADJUSTED -------- -------- -------- (IN THOUSANDS) Long-term bank notes payable and other(1)........... $ 17,108 $17,108 $ Redeemable Preferred Stock, $.01 par value; 3,000,000 shares authorized; 3,000,000 shares outstanding, actual; none outstanding pro forma and as adjusted........................................ 23,485 -- Common stock put warrants........................... 360 360 Shareholders' equity (deficiency): Preferred stock, $.01 par value, none authorized, actual; 4,000,000 shares authorized, pro forma and as adjusted; none outstanding................ -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 5,116,279 shares outstanding, actual; 7,469,219 shares outstanding, pro forma; shares outstanding, as adjusted(2)............... 951 24,436 Deferred stock compensation....................... (316) (316) Retained earnings (deficit)....................... (17,665) (17,665) -------- -------- ---- Total shareholders' equity (deficiency)........... (17,030) 6,455 -------- -------- ---- Total capitalization............................ $ 23,923 $ 23,923 $ ======== ======== ====
- -------- (1) See Note 5 of Notes to Financial Statements of Insync. (2) Excludes as of June 30, 1997 (i) 1,257,901 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $3.90 per share and (ii) 317,996 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $3.81 per share. See "Management--Stock Plans" and Notes 8 and 12 of Notes to Financial Statements of Insync. 16 DILUTION Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the pro forma net tangible book value of the Common Stock from the assumed initial public offering price. The pro forma net tangible book value of the Company's Common Stock at June 30, 1997 was $3.0 million or $0.40 per share. Pro forma net tangible book value per share is determined by dividing the amount of total tangible assets of the Company less total liabilities by the number of shares of Common Stock outstanding as of such date assuming the conversion of all outstanding shares of Redeemable Preferred Stock. After giving effect to the sale of shares of Common Stock offered by Insync hereby (at an assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of Insync at June 30, 1997 would have been $ or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors purchasing shares at the assumed initial public offering price. The following table illustrates the per share dilution: Assumed initial public offering price............................... $ Pro forma net tangible book value at June 30, 1997................ $0.40 Increase in pro forma net tangible book value attributable to new investors........................................................ ----- Pro forma net tangible book value after the Offering................ ---- Pro forma net tangible book value dilution to new investors......... $ ====
The following table sets forth on a pro forma basis as of June 30, 1997 the number of shares of Common Stock purchased from Insync, the total consideration paid to Insync, and the average price per share paid by existing shareholders and by new investors purchasing shares in the Offering (based upon an assumed initial public offering price of $ per share and before deduction of estimated underwriting discounts and commissions and offering expenses payable by Insync):
SHARES PURCHASED(1) TOTAL CONSIDERATION ----------------------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- --------------------- ------- ------------- Existing shareholders.. 7,469,219 % $27,685,000 % $3.71 New investors.......... ----------- ------- ----------- ----- Total................ 100.0% $ 100.0% =========== ======= =========== =====
- -------- (1) Sales by the Selling Shareholders in the Offering will reduce the number of shares of Common Stock held by existing shareholders to or approximately % ( shares, or approximately % if the Underwriters' over-allotment option is exercised in full) and will increase the number of shares held by new investors to or approximately % ( shares, or approximately %, if the Underwriters' over-allotment option is exercised in full) of the total number of shares of Common Stock outstanding after this Offering. See "Principal and Selling Shareholders." The computations in the tables above exclude as of June 30, 1997 (i) 1,257,901 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $3.90 per share, (ii) 317,996 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $3.81 per share and (iii) an aggregate of 676,403 additional shares of Common Stock, subject to shareholder approval, reserved for future issuance under the Company's 1993 Plan, 1997 Plan and 1997 Purchase Plan. To the extent that these options or warrants are exercised, there will be substantial further dilution to new investors. See "Capitalization," "Management--Stock Plans" and Notes 8 and 12 of Notes to Financial Statements of Insync. 17 SELECTED FINANCIAL DATA The following selected financial data of Insync as of December 31, 1995 and 1996 and June 30, 1997, and for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1997 are derived from the Company's financial statements audited by Deloitte & Touche LLP, independent auditors, included elsewhere in the Prospectus. The selected financial data as of December 31, 1994 has been derived from audited financial statements not included herein. The selected financial data as of and for the years ended December 31, 1992 and 1993 and for the six months ended June 30, 1996 have been derived from unaudited financial statements that have been prepared on the same basis as the audited financial statements and which, in the opinion of management, included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. All of the data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Financial Statements and Notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales............... $2,771 $7,199 $20,617 $49,969 $86,099 $ 59,448 $ 34,679 Cost of sales........... 1,879 5,487 15,668 36,529 62,261 41,464 26,327 ------ ------ ------- ------- ------- -------- -------- Gross profit............ 892 1,712 4,949 13,440 23,838 17,984 8,352 Operating expenses: Selling, general and administrative......... 714 1,471 2,803 5,686 11,070 6,286 4,289 Research, development and engineering........ -- 313 669 2,236 3,560 2,287 1,889 Write down of intangible assets...... -- -- -- -- 16,610 -- -- Restructuring charges.. -- -- -- -- 858 -- -- ------ ------ ------- ------- ------- -------- -------- Total operating expenses.............. 714 1,784 3,472 7,922 32,098 8,573 6,178 ------ ------ ------- ------- ------- -------- -------- Income (loss) from operations.............. 178 (72) 1,477 5,518 (8,260) 9,411 2,174 Interest expense and other, net.............. 75 114 230 434 2,562 1,358 1,675 ------ ------ ------- ------- ------- -------- -------- Income (loss) before income taxes............ 103 (186) 1,247 5,084 (10,822) 8,053 499 Provision for income taxes................... 2 2 513 2,088 (4,314) 3,235 189 ------ ------ ------- ------- ------- -------- -------- Net income (loss)....... $ 101 $ (188) $ 734 $ 2,996 $(6,508) $ 4,818 $ 310 ====== ====== ======= ======= ======= ======== ======== Pro forma net income (loss) per share(1)..... $ (0.87) $ 0.03 ======= ======== Pro forma shares used in per share computations(1)......... 7,617 8,214
DECEMBER 31, JUNE 30, ------------------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------ -------- ------ -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............. $ 85 $ 2 $ 39 $ 182 $ 2,829 $5,549 $ 929 Working capital (deficit)............... (157) 149 1,296 4,409 10,363 10,128 7,951 Intangible assets....... -- -- -- -- 3,895 20,909 3,485 Total assets............ 1,097 3,395 10,258 18,242 36,860 55,891 39,241 Long-term obligations .. 182 1,315 907 413 20,636 21,343 17,108 Redeemable Preferred Stock and put warrants.. -- -- -- -- 23,411 23,414 23,845 Shareholders' equity (deficiency)............ 122 152 2,009 7,791 (17,344) (6,268) (17,030)
- ------- (1) See Note 1 of Notes to Financial Statements of Insync for an explanation of the number of shares used in computing pro forma net income (loss) per share. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Prospectus contain forward-looking statements that involve risks and uncertainties, including statements regarding strategies, intentions or expectations. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors," "Business" and elsewhere in this Prospectus. GENERAL Insync is a leading provider of outsourcing services to semiconductor equipment manufacturers for the design and manufacture of gas delivery systems and subassemblies. The Company's gas delivery systems and subassemblies are used principally in deposition, etch and other semiconductor wafer processing equipment and are designed to, among other things, maintain purity in the process chamber and shorten cycle times for equipment manufacturers, thereby contributing to lower wafer manufacturing costs for device manufacturers. The Company offers a full range of gas delivery solutions, including subassemblies for integration into its customers' internally manufactured gas delivery systems and complete systems for incorporation into its customers' products at final assembly. In order to simplify the processes and shorten the time required to specify, design, manufacture, install and service a gas delivery system, the Company has recently introduced the IGS, a modular platform for the design and manufacture of gas delivery systems. In addition, the Company is developing proprietary design tools to allow its customers to strengthen their gas delivery system design and specification activities. In general, customer orders for subassemblies have shorter lead times than orders for gas delivery systems, and subassemblies typically range in price from $50 to $2,000 while gas delivery systems prices range from $35,000 to $75,000 (excluding mass flow controllers) and have been as high as $200,000. Gas delivery systems can require more intensive design services and closer coordination between the Company and the semiconductor manufacturer that will be the end user of the finished equipment. Sales of gas delivery systems were $13.3 million in 1996 and $10.2 million in the six months ended June 30, 1997. Sales of subassemblies were $72.8 million in 1996 and $24.5 million in the six months ended June 30, 1997. See "Risk Factors--Dependence on Outsourcing; Evolving Gas Delivery Industry." The semiconductor equipment industry has historically experienced cyclical periods of significant market expansion and contraction. The Company's business grew rapidly from 1992 through 1995 during a period of market expansion. In the first quarter of 1996, the Company completed an acquisition which further expanded its business. The Company believes that declining production levels and a general slowdown in the semiconductor equipment industry began during the second quarter of 1996 and adversely affected the business of its customers. Primarily as a result of the declining production levels and associated changes in inventory management practices of its customers, the Company experienced a decline in net sales from $33.1 million in the quarter ended March 31, 1996 to $10.6 million in the quarter ended December 31, 1996. The Company's net sales of $10.6 million during the quarter ended December 31, 1996 represented the lowest quarterly level of net sales during the current downturn. Net sales grew sequentially to $15.1 million and $19.6 million in the quarters ended March 31, 1997 and June 30, 1997, respectively. In response to the substantial decline in net sales and a related decrease in Insync's factory utilization, the Company reduced its workforce from 579 employees in March 1996 to 254 employees by the end of December 1996. The Company's workforce was 372 employees at June 30, 1997, and net sales increased from $26.7 million to $34.7 million for the six months ended December 31, 1996 and June 30, 1997, respectively. The Company expects that the semiconductor 19 device and equipment markets will continue to be cyclical and that the semiconductor device and equipment markets will decline in some future periods. See "Risk Factors--Fluctuations in Operating Results" and "--Industry Concentration; Cyclicality of Semiconductor Industry." The Company's principal customers are Applied Materials, Lam Research, Watkins-Johnson, and, most recently, Novellus Systems. These customers accounted for approximately 86% of the Company's net sales during 1996 and approximately 90% of the Company's net sales for the six months ended June 30, 1997. The Company expects that sales to a small number of key customers will continue to account for substantially all of its net sales for the foreseeable future. However, there can be no assurance that any of the Company's key customers will not reduce or cease ordering the Company's systems, subassemblies or services. See "Risk Factors--Customer Concentration." Gross margins for the Company can fluctuate depending on product mix and factory utilization. Generally, subassemblies generate gross margins that are slightly higher than gas delivery systems, and gross margins for different types of subassemblies vary. Gross margins on gas delivery systems tend to be slightly lower than for subassemblies because a higher proportion of purchased components and fixtures are used in finished gas delivery systems with correspondingly higher materials handling requirements. Margins for subassemblies are dependent to a significant degree on the cost and number of particular components and materials, and the degree of factory utilization. In addition, the Company is generally expected to have available production capacity in place prior to the receipt of large customer orders. As a result, the Company began to expand production capacity in the first six months of 1997 in anticipation of increasing customer order levels. In the event that anticipated increases in order levels were not to materialize in the near term or at all, the expenditures incurred by the Company in expanding its capacity would have a material adverse effect on the Company's business, operating results and financial condition. See "Risk Factors--Fluctuations in Operating Results" and "--Management of Business Fluctuations." The Company has recently increased its operating expenses in anticipation of increasing customer orders for gas delivery systems. In general, gas delivery systems require more engineering infrastructure than subassemblies. The Company believes its current operating expense levels will support significantly higher levels of revenues from gas delivery systems. However, there can be no assurance that such anticipated growth will occur on a timely basis or at all. On January 2, 1996, Insync acquired substantially all of the non-cash assets and liabilities of Pullbrite, another independent provider of gas delivery systems and subassemblies to semiconductor equipment manufacturers, for $30.0 million. As a result of declining sales to Pullbrite's major customer in 1996 and other factors, the Company recorded a $16.6 million charge for the write off of goodwill and the reduction of the carrying value associated with the major customer relationship. See Note 2 of Notes to Financial Statements of Insync. 20 RESULTS OF OPERATIONS The following table sets forth as a percentage of net sales the Company's results of operations for the periods shown:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................. 76.0 73.1 72.3 69.7 75.9 ------- ------- ------- -------- -------- Gross profit................. 24.0 26.9 27.7 30.3 24.1 Operating expenses: Selling, general and administrative.............. 13.6 11.4 12.6 10.6 12.7 Research, development and engineering................. 3.2 4.5 4.4 3.8 5.1 Write down of intangible assets...................... -- -- 19.3 -- -- Restructuring charges........ -- -- 1.0 -- -- ------- ------- ------- -------- -------- Total operating expenses... 16.8 15.9 37.3 14.4 17.8 ------- ------- ------- -------- -------- Income (loss) from operations.. 7.2 11.0 (9.6) 15.9 6.3 Interest expense and other, net........................... 1.2 0.8 3.0 2.4 4.9 ------- ------- ------- -------- -------- Income (loss) before income taxes......................... 6.0 10.2 (12.6) 13.5 1.4 Provision for income taxes..... 2.4 4.2 (5.0) 5.4 0.5 ------- ------- ------- -------- -------- Net income (loss).............. 3.6% 6.0% (7.6)% 8.1% 0.9% ======= ======= ======= ======== ========
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Net Sales Net sales decreased by 41.7% to $34.7 million for the six months ended June 30, 1997 as compared to $59.4 million for the six months ended June 30, 1996. During this period, net sales from gas delivery systems increased by $3.1 million or 43.7% from $7.1 million to $10.2 million while net sales from subassemblies declined by $27.8 million or 53.2% from $52.3 million to $24.5 million. The increase in the gas delivery systems revenue resulted from the Company's increased success in providing complete gas delivery systems. The decrease in subassembly revenues was primarily attributable to a downturn in the semiconductor equipment industry and a corresponding decrease in sales by the Company to certain of its major customers. Sales to Lam Research, Applied Materials and Watkins-Johnson declined by an aggregate of $24.1 million from $51.5 million for the six months ended June 30, 1996 to $27.4 million for the six months ended June 30, 1997. This decrease was partially offset by the addition of Novellus Systems, a significant new customer. Gross Profit Gross profit decreased to $8.4 million or 24.1% of net sales for the six months ended June 30, 1997 as compared to $18.0 million or 30.3% of net sales for the six months ended June 30, 1996. The decline in gross profit was primarily due to the Company's increase in production capacity in the first half of 1997 following a significant reduction in its capacity as the semiconductor equipment market declined during the second half of 1996. In response to the Company's significant sales decline and to minimize the impact of the industry downturn on the Company's gross profit, the Company implemented a number of measures to reduce its production capacity, including the consolidation of a significant amount of its Silicon Valley operations into one location at its Milpitas facility and the reduction of its workforce from 579 employees in March 1996 to 254 employees at December 31, 1996. As the Company's customers began to expand their production levels in the first six months of 1997, the 21 Company expanded its production capacity and increased its headcount to 372 at June 30, 1997. The Company's factory utilization levels remain below those levels experienced in 1995 and the first six months of 1996. See "Risk Factors--Management of Business Fluctuations." Selling, General and Administrative Selling, general and administrative expenses decreased 31.8% to $4.3 million for the six months ended June 30, 1997 as compared to $6.3 million for the six months ended June 30, 1996. The decrease was primarily due to the implementation of several expense reduction measures, including headcount and discretionary spending reductions, which the Company made in response to the semiconductor equipment industry downturn. The Company believes that its selling, general and administrative expenses will increase in absolute dollars in the future as the Company expands its staffing and experiences higher costs associated with being a public company. Research, Development and Engineering Research, development and engineering expenses decreased 17.4% to $1.9 million for the six months ended June 30, 1997 as compared to $2.3 million for the six months ended June 30, 1996. The lower expenditures in the 1997 period related to the Company's efforts to reduce costs and to higher expenses incurred by the Company during the six months ended June 30, 1996 related to the development of the IGS platform. The Company expects that research, development and engineering expenses will increase in absolute dollars as it continues to invest in its engineering capabilities and capacity in order to support potential growth in the gas delivery systems business. Interest Expense and Other, Net Interest expense and other, net increased by 23.3% to $1.7 million for the six months ended June 30, 1997 as compared to $1.4 million for the six months ended June 30, 1996. The increase was primarily due to an increase in the effective interest rate and other costs relating to the Company's bank credit facility. Provision for Income Taxes Insync's effective tax rates were 37.9% and 40.2% for the six months ended June 30, 1997 and 1996 respectively, approximating federal and statutory rates. YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 Net Sales Net sales increased by 72.3% to $86.1 million in 1996 as compared to $50.0 million in 1995. The increase resulted primarily from the acquisition of Pullbrite and, to a lesser extent, the addition of a major customer, Novellus Systems. Net sales from Pullbrite accounted for $34.2 million of the Company's net sales in 1996. Excluding the effect of the Pullbrite acquisition, the Company's net sales increased from $50.0 million in 1995 to $51.9 million in 1996, an increase of 3.8%. Net sales from gas delivery systems increased in 1996 by $4.1 million or 44.6% from $9.2 million to $13.3 million while net sales from subassemblies increased by $31.9 million or 78.4% from $40.8 million to $72.8 million. The increase in net sales of gas delivery systems resulted from the Company's increased success in providing complete gas delivery systems. The increase in net sales of subassemblies was primarily due to the acquisition of Pullbrite. Gross Profit Gross profit increased to $23.8 million or 27.7% of net sales in 1996 as compared to $13.4 million or 26.9% of net sales in 1995. The increase in gross profit reflected increased utilization of the Company's facilities during the first half of 1996 as well as the effect of fixed costs remaining constant against higher revenues. The increase was partially offset by a decline in the gross profit during the latter part of the year when the Company was carrying excess production capacity as the semiconductor equipment market declined. 22 Selling, General and Administrative Selling, general and administrative expenses increased by 94.7% to $11.1 million in 1996 as compared to $5.7 million in 1995. The increase was primarily due to the Company's acquisition of Pullbrite and the expansion of the Company's sales and information systems infrastructure. Research, Development and Engineering Research, development and engineering expenses increased by 59.2% to $3.6 million in 1996 as compared to $2.2 million in 1995 principally due to increased expenditures for the IGS platform. The Company also increased its engineering capacity and capabilities in order to enable it to provide specialized services such as mechanical and system design as well as analytical certification services in an effort to address all the gas control requirements of its customers. Write Down of Intangible Assets In 1996, the Company recorded a $16.6 million write down of intangible assets related to the write off of goodwill pertaining to the Pullbrite acquisition and the reduction in the carrying value of a major Pullbrite customer. See Note 2 of Notes to Financial Statements of Insync. Restructuring Charges In 1996, the Company recorded an $858,000 restructuring charge related to several actions including the reduction of its work force, the disposition of unproductive assets, and facility consolidations. The restructuring was completed in October 1996. See Note 3 of Notes to Financial Statements of Insync. Interest Expense and Other, Net Interest expense and other, net were $2.6 million and $434,000 in 1996 and 1995, respectively. The increase was primarily due to the impact of interest cost incurred on debt relating to the financing of the Pullbrite acquisition. Provision for Income Taxes Insync's effective tax rates were 39.9% and 41.1% for 1996 and 1995, approximating federal and state statutory rates. YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994. Net Sales Net sales increased by 142.4% to $50.0 million in 1995 as compared to $20.6 million in 1994. The increase was due to an overall expansion in the semiconductor equipment industry and increased sales to the Company's major customers. Net sales from gas delivery systems increased to $9.2 million in 1995 as compared to $2.6 million in 1994 while net sales of subassemblies increased to $40.8 million in 1995 as compared to $18.0 million in 1994. Gross Profit Gross profit increased to $13.4 million or 26.9% of net sales in 1995 as compared to $4.9 million or 24.0% of net sales in 1994. The increase in gross profit reflected increased utilization of the Company's facilities as well as the effect of fixed costs remaining constant against higher revenues. Much of the improved utilization resulted from the Company's Austin, Texas facility, which became fully operational in the first quarter of 1995. The increase in gross profit was partially offset by greater gas control systems sales which have historically had lower gross profit margins than subassembly sales. 23 Selling, General and Administrative Selling, general and administrative expenses increased by 102.9% to $5.7 million in 1995 as compared to $2.8 million in 1994. The increase was primarily related to increased staffing and associated expenses necessary to support Insync's increased scale of operations, including the addition of the Austin, Texas facility. Research, Development and Engineering Research, development and engineering expenses increased to $2.2 million in 1995 as compared to $669,000 in 1994 due to increased expenditures for the development of the IGS and to support the increased gas delivery systems business. Interest Expense and Other, Net Interest expense and other, net were $434,000 and $230,000 in 1995 and 1994, respectively. The increase was primarily attributable to a higher level of outstanding notes payable. Provision for Income Taxes Insync's effective tax rates were 41.1% and 41.1% for years 1995 and 1994, approximately federal and state statutory rates. 24 QUARTERLY RESULTS OF OPERATIONS The following table sets forth statement of operations data for the ten quarters ended June 30, 1997, both in dollar amounts and as a percentage of net sales. This information has been derived from the Company's unaudited financial statements. The unaudited financial statements have been prepared on the same basis as the audited financial statements contained elsewhere in this Prospectus and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information. Such information should be read in conjunction with the Company's audited Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Company's quarterly results are subject to fluctuations and operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------------------------ MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Net sales............... $10,374 $12,107 $12,581 $14,907 $33,125 $26,323 $ 16,015 $10,636 $15,102 $19,577 Cost of sales........... 7,906 8,981 9,081 10,561 22,734 18,730 12,465 8,332 11,839 14,488 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Gross profit........... 2,468 3,126 3,500 4,346 10,391 7,593 3,550 2,304 3,263 5,089 Operating expenses: Selling, general and administrative........ 1,165 1,324 1,526 1,671 3,374 2,912 3,058 1,726 2,068 2,221 Research, development and engineering....... 414 486 611 725 1,249 1,038 676 597 851 1,038 Write down of intangible assets..... -- -- -- -- -- -- 16,610 -- -- -- Restructuring charges.. -- -- -- -- -- -- 1,323 (465) -- -- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Total operating expenses.............. 1,579 1,810 2,137 2,396 4,623 3,950 21,667 1,858 2,919 3,259 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Income (loss) from operations............. 889 1,316 1,363 1,950 5,768 3,643 (18,117) 446 344 1,830 Interest expense and other, net............. 130 113 105 86 713 645 608 596 913 762 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Income (loss) before income taxes........... 759 1,203 1,258 1,864 5,055 2,998 (18,725) (150) (569) 1,068 Provision for income taxes.................. 310 501 534 743 2,036 1,199 (7,486) (63) (233) 422 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Net income (loss)....... $ 449 $ 702 $ 724 $ 1,121 $ 3,019 $ 1,799 $(11,239) $ (87) $ (336) $ 646 ======= ======= ======= ======= ======= ======= ======== ======= ======= ======= QUARTER ENDED ------------------------------------------------------------------------------------------------------ MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 -------- -------- --------- -------- -------- -------- --------- -------- -------- -------- AS A PERCENTAGE OF NET SALES Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0% Cost of sales........... 76.2 74.2 72.2 70.8 68.6 71.2 77.8 78.3 78.4 74.0 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Gross profit........... 23.8 25.8 27.8 29.2 31.4 28.8 22.2 21.7 21.6 26.0 Operating expenses: Selling, general and administrative........ 11.2 10.9 12.1 11.2 10.2 11.1 19.1 16.2 13.7 11.3 Research, development and engineering....... 4.0 4.1 4.9 4.9 3.8 3.9 4.2 5.7 5.6 5.3 Write down of intangible assets..... -- -- -- -- -- -- 103.7 -- -- -- Restructuring charges.. -- -- -- -- -- -- 8.3 (4.4) -- -- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Total operating expenses.............. 15.2 15.0 17.0 16.1 14.0 15.0 135.3 17.5 19.3 16.6 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Income (loss) from operations............. 8.6 10.8 10.8 13.1 17.4 13.8 (113.1) 4.2 2.3 9.4 Interest expense and other, net............. 1.3 0.9 0.8 0.6 2.2 2.4 3.8 5.6 6.1 3.9 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Income (loss) before income taxes........... 7.3 9.9 10.0 12.5 15.2 11.4 (116.9) (1.4) (3.8) 5.5 Provision for income taxes.................. 3.0 4.1 4.2 5.0 6.1 4.6 (46.7) (0.6) (1.6) 2.2 ------- ------- ------- ------- ------- ------- -------- ------- ------- ------- Net income (loss)....... 4.3% 5.8% 5.8% 7.5% 9.1% 6.8% (70.2)% (0.8)% (2.2)% 3.3% ======= ======= ======= ======= ======= ======= ======== ======= ======= =======
25 Quarterly net sales increased in each quarter of 1995 reflecting increased demand from the Company's semiconductor equipment customers, and increased by $18.2 million or 122.1% in the first quarter of 1996 as compared to $14.9 million in the fourth quarter of 1995 primarily due to the acquisition of Pullbrite. Excluding net sales attributable to the Pullbrite acquisition, Insync's net sales for the fourth quarter of 1995 and the first quarter of 1996 grew 8.9%, or from $14.9 million to $16.2 million, respectively. The Company experienced a significant decline in net sales beginning in the first quarter of 1996 to its major customers. This decline was primarily related to a downturn in the semiconductor equipment industry and the ensuing reduction of inventory levels by the Company's customers. The Company experienced increases in net sales for the first two quarters of 1997 reflecting increased demand from the Company's customers. Gross profit began declining during the second half of 1996 primarily due to the Company's excess production capacity as the semiconductor equipment market declined. Gross profit was additionally impacted during the third quarter of 1996, when the Company recorded a $331,000 sales return reserve in connection with a decision to permit a major customer to return product. In the fourth quarter of 1996, the Company's negotiations with this major customer resulted in no product being returned and the previously provided sales return reserve was reversed. Gross profit was also favorably impacted in the fourth quarter of 1996, when the Company reversed a $150,000 warranty accrual established in 1995 for a specific product warranty exposure which no longer existed. Excluding these items, the gross profit for the fourth quarter of 1996 was $1.8 million or 17.1% of net sales. In response to the declining sales in 1996, the Company reduced its workforce and recorded a related charge to operating expenses of $330,000 during the second quarter of 1996. During the third quarter of 1996, the Company reversed a $365,000 bonus accrual which had been recorded during the first quarter of 1996, pursuant to its management bonus program and was no longer payable due to the Company's losses. Excluding the write down of intangibles and restructuring charges in the third quarter of 1996, operating expenses declined significantly in the fourth quarter of 1996 as compared to the third quarter of 1996 due to the implementation of several additional expense reduction measures, including headcount and discretionary spending reductions in response to the semiconductor industry equipment downturn and the partial reversal of the restructuring reserve due to the favorable outcome of a lease amendment. The significant increase in interest expense in 1996 as compared to 1995 was primarily due to the impact of interest incurred as a result of increased debt related to the financing of the Pullbrite acquisition. The increase in interest expense in 1997 was primarily due to an increase in the effective interest rate and other costs relating to the Company's bank credit facility. The Company's quarterly operating results have in the past and may in the future fluctuate significantly depending on a number of factors, including but not limited to: the timing and product mix of significant orders and shipping schedules of its customers; industry-wide changes in the demand for semiconductors or for semiconductor manufacturing equipment; the ability of the Company to design, manufacture, test and deliver defect-free gas delivery systems and subassemblies in a timely and cost effective manner; the gain or loss of any significant customer; competitive pressures; the timing of product announcements by the Company's competitors, its customers or their competitors; seasonal changes in purchases of semiconductor manufacturing equipment; the availability and cost of components from the Company's suppliers; and the availability of production capacity. For these and other reasons, results of operations in any period should not be considered indicative of the results to be expected for future periods and there can be no assurance that the Company will be profitable in any future period. See "Risk Factors--Fluctuations in Operating Results." LIQUIDITY AND CAPITAL RESOURCES Insync has primarily financed its operations and capital expenditures through cash flows from operations, the private sale of equity securities, bank credit facilities and long-term and short-term notes. Insync's principal sources of liquidity as of June 30, 1997 consisted of $929,000 of cash and cash 26 equivalents and $3.5 million available under a $5 million line of credit. The Company's bank credit facility includes this line of credit and an outstanding term loan of $24.0 million at June 30, 1997 which is due in quarterly installments through the year 2000. Borrowings bear interest at the bank's prime rate (8.5% at June 30, 1997) plus 2% and are secured by substantially all of the Company's assets. The bank credit facility subjects the Company to certain financial covenants. See "Use of Proceeds," and Notes 5, 7 and 13 of Notes to Financial Statements of Insync. Cash provided (used) by operations was $(1.1) million, $7.5 million, $2.3 million and $(1.8) million for the six months ended June 30, 1997 and for the years 1996, 1995, and 1994, respectively. For the six months ended June 30, 1997, the primary source of cash was an increase in accounts payable of $2.7 million while the significant uses of cash included increases in accounts receivable of $3.6 million and inventory of $2.3 million. In 1996, the primary sources of cash included decreases in accounts receivable and inventory of $7.5 million and $1.4 million, respectively. The decreases were partially offset by decreases in accounts payable of $5.9 million and accrued liabilities of $1.8 million. For the years 1995 and 1994, increases in accounts receivable and inventory of $4.8 million and $6.4 million, respectively, were the primary uses of cash due to the significant increase in net sales during such periods. The primary sources of cash for 1995 and 1994 were increases in accounts payable and other accrued liabilities of $3.2 million and $3.4 million, respectively. Cash provided by (used) for investing activities was $136,000, $(19.2) million, $(3.1) million and $(722,000) for the six months ended June 30, 1997 and for the years 1996, 1995 and 1994, respectively. The significant use for investing activities in 1996 was primarily related to the purchase of Pullbrite while the uses for the six months ended June 30, 1997, and for 1995 and 1994 were primarily due to capital expenditures at both the Company's Milpitas, California and Austin, Texas facilities. Financing activities provided (used) cash of $(938,000), $14.3 million, $912,000 and $2.5 million for the six months ended June 30, 1997 and for the years 1996, 1995 and 1994, respectively. Repayment of debt of $3.0 million was the major use of cash for the six months ended June 30, 1997 while borrowings under the Company's line of credit of $1.5 million was the major source of cash. In 1996, notes payable borrowings provided cash of $39.3 million. This was partially offset by repayments of notes payable in the amount of $14.6 million. Additionally, repayment of subordinated notes payable used cash of $15.0 million. A private placement of Redeemable Preferred Stock in the amount of $23.5 million (net of issuance costs) provided cash from financing activities. This amount was partially offset by a repurchase of Common Stock of $19.3 million. In 1995, cash was provided by a private placement of Common Stock in the amount of $1.9 million which was offset by repayments of borrowings under the line of credit in the amount of $1.1 million. In 1994, cash was provided by net borrowings under the line of credit in the amount of $2.2 million. The Company believes that the net proceeds and the sale of the Common Stock offered hereby, together with its current cash balances, cash available under its bank credit facility and cash from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. However, the Company may require additional funds to support its working capital requirements or for other purposes, particularly to the extent that the Company experiences growth in the future. There can be no assurances that any necessary additional financing will be available to the Company on commercially reasonable terms, if at all. In addition, although there are no present understandings, commitments or agreements with respect to any acquisition of businesses, products or technologies, the Company, from time to time, evaluates potential acquisitions of other businesses, products and technologies that are complimentary to those of the Company, and may in the future require additional equity or debt financings to consummate such acquisitions. See "Risk Factors--Need for Additional Capital." 27 BUSINESS This Business section and other parts of this Prospectus contain forward- looking statements that involve risks and uncertainties, including statements regarding strategies, intentions or expectations. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this Prospectus. INTRODUCTION Insync is a leading provider of outsourcing services to semiconductor equipment manufacturers for the design and manufacture of gas delivery systems and subassemblies. The Company's gas delivery systems and subassemblies are used principally in deposition, etch and other semiconductor wafer processing equipment and are designed to, among other things, maintain purity in the process chamber and shorten cycle times for equipment manufacturers, thereby contributing to lower wafer manufacturing costs for device manufacturers. The Company's principal customers are Applied Materials, Lam Research, Watkins- Johnson and, most recently Novellus Systems, four major North American semiconductor equipment manufacturers. The Company offers a full range of gas delivery capabilities, including subassemblies for integration into its customers' internally manufactured gas delivery systems and complete systems for incorporation into its customers' products at final assembly. In order to simplify the processes and shorten the time required to specify, design, manufacture, install and service a gas delivery system, the Company has recently introduced the IGS, a modular platform for the design and manufacture of gas delivery systems. In addition, the Company is developing proprietary design tools to allow its customers to strengthen their gas delivery system design and specification activities. The Company's objective is to be the primary provider of outsourcing design and manufacturing services for gas delivery to leading semiconductor equipment manufacturers. - ------- ------------- ------------- INSYNC Systems SEMICONDUCTOR Deposition, Etch SEMICONDUCTOR SYSTEMS Subassemblies EQUIPMENT and other Process DEVICE - ------- IGS MANUFACTUERS Equipment MANUFACTURERS ------------- ------------- INDUSTRY BACKGROUND Advances in design and manufacturing process technologies have enabled the semiconductor industry to continue to produce devices with increased speed and performance and reduced geometries. The process technologies necessary to manufacture these advanced devices have required increasingly complex and sophisticated process equipment that have significantly increased the costs of wafer fabrication facilities ("fabs") and have increased the manufacturing challenges for semiconductor device manufacturers. Today's advanced technology fabs typically cost in excess of $1 billion, with a significant portion directed to critical "front-end" manufacturing process equipment which build the layers on semiconductor wafers which make up a single semiconductor device. More than 40% of all semiconductor equipment, which in turn perform more than 70% of the process steps, requires the introduction, management and evacuation of process gases. These steps include the deposition of insulating or conducting materials onto a wafer; the etching of the wafer to selectively remove deposited material; and other process steps. According to VLSI Research, in 1996, the market for deposition and etch equipment was $10.4 billion. Deposition and etch processes require highly controlled process environments and chemistry and, as a result, the equipment used for deposition and etch is complex and 28 incorporates sophisticated systems to control various process gases and the conditions in which they are used. In an attempt to continue the historical trends of increasing device density and performance while maintaining or improving manufacturing yield, device manufacturers continuously demand innovations in the core process technologies underlying deposition and etching, among others. In order to meet such demands, equipment manufacturers have been required to repeatedly improve their process equipment in many respects, including the inclusion of increasingly complex and sophisticated gas delivery systems. Gas delivery systems and subassemblies are critical to the equipment's ability to perform the deposition, etching and other process steps required in semiconductor device production. These process steps frequently include the precise introduction of various high-purity process gases, the exact management of process chamber conditions and the evacuation of process gases from the chamber before each new step. Gas delivery systems also play a critical role in controlling contamination in the semiconductor manufacturing process. Maintenance of gas purity and the reduction of particle contaminants are increasingly important as geometric reductions in feature sizes and greater densities magnify the effect of impurities on manufacturing yields. In order to achieve higher yields, greater throughput and higher levels of equipment utilization, semiconductor device manufacturers require equipment that incorporates increasingly complex and specialized gas delivery systems that, among other things, minimize chemical particle contamination. [DIAGRAM 29-A TO BE INSERTED HERE] [A diagram depicting typical multi-chamber semiconductor process equipment, highlighting and labeling gas delivery systems and subassemblies.] The size of gas delivery systems and the number of components used in such systems and subassemblies have increased steadily. Gas delivery systems are typically comprised of subassemblies of numerous discrete components such as filters, purifiers, regulators, transducers (monitors), manifolds, valves and mass flow controllers whose role in the aggregate is to maintain gas purity, deliver required gas to the process equipment, measure gas flow rates, precisely time the introduction and mixture of 29 process gases to the process chamber and evacuate residual gases from the chamber in preparation for the next process step. Today, an advanced gas delivery system for etch can be as large as 16 cubic feet and incorporate more than 200 components, many of which are available from multiple vendors. Further, equipment manufacturers have customarily offered their device manufacturer customers the opportunity to specify discrete gas delivery component parts from particular vendors, even though such component parts perform the same functions as parts which could be obtained from another vendor. Thus, the procurement of various discrete gas delivery components has become increasingly costly and time consuming. As a result of such broad component availability, device manufacturers have tended to specify highly customized gas delivery systems which often require ongoing modifications up until the final stages of assembly. These customization requirements, when coupled with the specification by customers of multiple discrete component parts from particular vendors, have required equipment manufacturers to develop capabilities in specialized and small lot manufacturing, to maintain large gas delivery component inventories and to repeatedly design iterations for gas delivery systems and subassemblies. At the same time, the period for delivering and installing semiconductor equipment in a fab has become increasingly compressed because significant delays in constructing, in equipping, or in achieving full operating utilization of a fab result in higher start up costs, lost revenue and market share, lower operating margins and ultimately, lower profits for semiconductor device manufacturers. The effective and timely manufacture of the gas delivery system is crucial to an equipment manufacturer's ability to install its equipment on time in a fab. As a result, equipment manufacturers must be able to respond quickly and effectively to the last-minute reconfiguration requests and quick turn around demands of device manufacturers. The growing complexity of gas delivery systems and rising demands by device manufacturers for their last minute customization and rapid turnaround have placed increasing demands on semiconductor equipment manufacturers for resources dedicated to the design and manufacture of gas delivery systems and to the procurement and stocking of components. In contrast to core process technologies, the Company does not believe that gas delivery systems have been a competitive differentiator among equipment manufacturers. The Company believes that equipment manufacturers are increasingly required to develop innovations to their core deposition, etch and other process technologies, as semiconductor wafer sizes increase from 8 to 12 inches, line widths decrease to 0.25 microns and below, and semiconductor densities increase. The Company believes that the desire of equipment manufacturers to concentrate on their core competencies, and to ensure that gas delivery requirements can be met in a timely and cost effective manner has led to outsourcing gas delivery systems to third parties, and to attempts to create gas delivery systems which are more capable of standardized volume manufacture rather than the present specialized, small lot manufacturing approach. Many equipment manufacturers outsource the manufacture of gas delivery subassemblies, but then provide final gas delivery system integration in house. In some cases, equipment manufacturers outsource the design and manufacture of the entire gas delivery system. In general, the design and manufacture of entire systems requires greater infrastructure and expertise than subassembly manufacturing in order to meet turnaround and performance requirements, and equipment manufacturers' requirements for independent suppliers of gas delivery systems are more comprehensive than for providers of gas delivery subassemblies. The Company believes that equipment manufacturers are seeking more standardized volume manufacturing and as a result are encouraging device manufacturers to eliminate the specification of large numbers of discrete component parts from particular vendors, and instead to accept a more limited number of "modular" choices for their gas delivery needs. The Company believes that the drive toward a modular approach will become increasingly important as new fabs are constructed to manufacture 12 inch wafers. The Company believes that this simplified "modular" approach has the potential to reduce the number of vendors and specific parts required to be ordered for a given gas delivery system, and thus reduce cycle time and inventory management, while enabling the cost savings associated with volume manufacturing. 30 The Company believes that semiconductor equipment manufacturers are increasingly seeking independent providers that are focused exclusively on the development and production of gas delivery systems and subassemblies. As evolving process technologies have become more complex, the Company believes that equipment manufacturers will seek independent providers that can provide precisely fabricated gas delivery subassemblies and, increasingly, complete traditional or modular gas delivery systems, more quickly and cost effectively than their internal capabilities and resources allow. These independent providers may benefit from the efficiencies associated with servicing multiple equipment manufacturers and may provide the expertise and rapid turnaround capabilities necessary to meet the requirements of the ultimate device manufacturer customers. The Company believes that as the semiconductor industry evolves toward 12 inch wafers, the ability of independent providers to provide a more standardized modular gas delivery platform will become increasingly important. INSYNC SOLUTION The Company is a leading provider of outsourcing services to semiconductor equipment manufacturers for the design and manufacture of gas delivery systems and subassemblies. The Company believes its outsourcing services reduce its customers' total costs by shortening product delivery cycle times, reducing inventory and materials procurement costs, eliminating redundant work, enhancing information exchange, and coordinating increasingly complex manufacturing and design processes. With extensive expertise in gas delivery requirements and the ability to design and manufacture complex customized systems and subassemblies within the short time constraints demanded by equipment manufacturers, the Company enables its customers to focus resources on core process technologies. The Company has also recently introduced the IGS, a modular platform for gas delivery that is designed to simplify the specification, configuration, manufacturing and serviceability, and reduce cycle time and overall semiconductor process equipment cost. The Company believes that its customers benefit from the expertise and efficiencies that the Company derives from providing outsourced gas delivery solutions to multiple leading equipment manufacturers. STRATEGY The Company's objective is to be the primary provider of outsourcing design and manufacturing services for gas delivery to leading semiconductor equipment manufacturers. To accomplish this objective, Insync seeks to develop and provide solutions which allow equipment manufacturers to fully outsource their gas delivery requirements and consistently satisfy their customers' demands for on-time delivery of reliable process equipment. To fulfill its objective, the Company intends to: Extend Leadership in Gas Delivery. The Company has developed significant expertise in key gas delivery disciplines such as gas chemistry, physics, thermodynamics and ultra-clean manufacturing. The Company's key customers currently include three of the five largest North American process equipment manufacturers. The Company is seeking to extend its leadership position by strengthening its close working relationships both with its equipment manufacturing customers and their customers (semiconductor device manufacturers) in order to increase its knowledge and understanding of gas delivery in the actual fab operating environment. The Company believes these relationships provide it with an early insight into advances in semiconductor manufacturing technologies and an opportunity to develop innovations and technologies in response to the current and emerging gas delivery needs of device manufactures. For example, the IGS, the Company's modular platform for designing and manufacturing gas delivery systems, was developed to address a perceived need for simplification, modularity and rapid configurability which the Company believes will become increasingly important factors as the industry transitions to 12 inch wafer processing equipment. In addition, the Company is developing proprietary design tools to allow its customers to simplify their gas delivery system design and specification activities. 31 Expand Gas Delivery Systems Business. The Company is seeking to expand the gas delivery systems sector of its business which it believes represents a significant future market opportunity. The Company believes that, to the extent the complexity and resource demands of gas delivery systems continue to distract equipment manufacturers' from their core competencies, they will increasingly outsource their gas delivery requirements, including the outsourcing of complete gas delivery systems. The Company believes that existing and potential customers will view a significant gas delivery system capability as an important factor in selecting an outsource gas delivery provider. In order to expand its gas delivery system capacity and capabilities, the Company has tailored its manufacturing operations to include a dedicated gas delivery system manufacturing capability. Strengthen Relationships with Customers and Suppliers. The Company intends to continue to integrate its business processes with those of its key customers and suppliers in order to: reduce total costs for its customers, its suppliers and the Company; eliminate redundant work; enhance information exchange; coordinate increasingly complex manufacturing and design processes; and to enable its customers to shorten their product delivery cycle times. For example, by providing substantially all of the gas delivery needs of Watkins- Johnson, Insync has reduced this customer's costs by reducing the customer's design engineering expenses, redesigning critical components and significantly curtailing redundant overhead expenses. The Company believes that the establishment of such close relationships improves its potential to supply a greater proportion of its existing customers' gas delivery needs and may attract new customers and suppliers. Leverage Manufacturing Capabilities. The Company is developing world-class manufacturing capabilities that equal or exceed those of its key customers and competitors with respect to gas delivery systems and subassemblies. The Company believes that manufacturing capabilities, as well as capacity, are a critical determinant in an equipment manufacturer's decision to outsource its gas delivery system and subassembly needs. The Company believes its manufacturing process capabilities and capacity enable it to provide multiple and varied customers with complex, customized gas delivery systems and subassemblies within the short time demands of equipment manufacturers. This assists its customers in maintaining or reducing their cycle times and maintaining high quality standards on a cost-competitive basis. The Company has invested significant resources in recent years in new manufacturing facilities and in the redesign of its manufacturing processes, including the establishment of new protocols for tooling and automation and specific manufacturing cells for gas delivery systems, for subassemblies and for "quick-turn" projects to accommodate last-minute changes and rush orders. Particularly in the area of gas delivery system manufacturing, the Company has extended its capabilities and expanded its capacity to levels that it believes exceed current demand to demonstrate its ability to meet the needs of customers and potential customers. Promote Modular Platform Approach. The Company believes that a shift to "modular" approaches to gas system design and manufacture from the present practice of specifying a large number of discrete component parts of specified manufacturers, is an essential step in the ability to reduce cycle time, reduce inventory management and achieve the cost savings associated with volume manufacturing of standard products. Although the Company does not anticipate that modular gas delivery systems will be deployed in high volumes in equipment designed for traditional gas systems, the Company believes that the transition to 12 inch wafer processing equipment will present an opportunity for widespread adoption of modular gas systems. In anticipation of this opportunity, the Company developed the IGS, a modular platform for gas delivery systems in order to, among other things, significantly reduce the required number of discrete components and reduce cycle times for designing and manufacturing gas delivery systems. 32 SYSTEMS AND SERVICES The Company is a leading provider of outsourcing services to semiconductor equipment manufacturers for the design and manufacture of gas delivery systems and subassemblies. Gas delivery systems and subassemblies are used principally in deposition, etch and other processing equipment. The Company's systems and services are designed to, among other things, maintain purity in the process chamber and shorten cycle times for equipment manufacturers, thereby contributing to lower wafer manufacturing costs for device manufacturers. The manufacture of gas delivery systems and subassemblies is a highly specialized process. The various components and materials used in each product must be inspected and certified for purity and usability. The infrastructure must be precisely sized and assembled to fit the individual semiconductor equipment manufacturers' specifications and to ensure that each connection is free of oxidation and corrosion. Inspection and testing procedures must be rigorous and exact to insure that high purity standards have been maintained. Gas Delivery Systems. The Company's gas delivery systems regulate the exact flow, pressure, purity and mixing of the gases to the process chamber, functions that are critical to successful semiconductor manufacturing. Production of these complex systems involves conceptual system design, mechanical design, materials procurement and management, quality assurance, fabrication and assembly of various components and product testing and analytical certification. The Company's systems are most frequently used on etch and deposition process equipment such as Lam Research's Rainbow series, Watkins-Johnson's APCVD-1000 and Novellus System's Speed series. Prices of the Company's gas delivery systems vary according to size, complexity and number of components in the system, and generally range between $35,000 and $75,000 (excluding mass flow controllers) and have been as high as $200,000. Insync is committed to being the market leader in gas delivery for semiconductor equipment manufacturers by simplifying the processes and shortening the time required to specify, design, manufacture and install a gas delivery system. The Company believes that providing these benefits to semiconductor equipment manufacturers will encourage them to adopt the Company as their primary outsourced gas delivery system provider. Accordingly, the Company has devoted a significant amount of its research, development and engineering efforts in the past three years towards the development of the IGS, the Company's modular platform for systems. The Company introduced the IGS in June 1997. Although net sales attributable to the IGS have not been material to date, the Company believes the IGS will reduce total gas delivery system costs and permit users to: reduce cycle time for manufacturing gas delivery systems; reduce gas delivery system design expenses; reduce equipment footprint to better utilize expensive fab clean room space; reduce the required number of discrete components; increase gas delivery system performance and overall equipment utilization in certain processes; reduce contamination through moisture reduction and shortened flow paths for gases; and reduce time for field modifications and maintenance through its modular design. There can be no assurance that the IGS platform will achieve wide market acceptance. See "Risk Factors--Evolving Gas Delivery Industry; Dependence on Outsourcing" and "--Rapid Technological Change." Subassemblies. Subassemblies are customized configurations of components such as regulators, valves, filters and fittings. The Company manufactures subassemblies separately for its customers and also combines them to form the core of its gas delivery systems. Subassemblies also serve as interconnections between the gas delivery systems, the process chambers and the vacuum pumps located in the fab. Semiconductor equipment manufacturers require numerous subassemblies, often in multiple configurations, to support the gas delivery requirements of their customers. The Company's 33 subassemblies range in price from approximately $50 to over $2,000. The Company believes that subassemblies will continue to be a significant source of its net sales. The various processes and procedures required to produce gas delivery products generally must be accomplished rapidly due to the "last minute" design nature of gas delivery configurations. The Company believes the ability to produce subassemblies rapidly is an important competitive factor. Insync's manufacturing process generally enables the Company to provide rapid fabrication of complex subassemblies in between two and 72 hours. See "Risk Factors--Failure to Meet Customer Performance Criteria; Risk of Relays or Defects." Services. The Company provides specialized services in an ongoing effort to address all the gas delivery requirements of its semiconductor equipment manufacturer customers. Specifically, the Company provides assistance in mechanical and system design as well as analytical certification services. For example, the Company has redesigned a gas delivery system for a key customer, which substantially improved overall equipment performance and reliability and reduced field service costs by approximately one million dollars during the 12 month period following deployment of the redesigned system. Mechanical design services include the design of new gas delivery systems and the redesign of existing gas delivery systems. The design process includes concept evaluation, cost analysis, design and documentation. Analytical certification services generally include the moisture and particulate evaluation of components, subassemblies and gas delivery systems. CUSTOMERS The Company is a leading independent provider of gas delivery systems and subassemblies to four major North American semiconductor equipment manufacturers: Applied Materials, Lam Research, Watkins-Johnson and Novellus Systems. In addition, the Company has sold gas delivery systems and subassemblies to numerous other semiconductor equipment manufacturers. Applied Materials, Lam Research and Watkins-Johnson each represented in excess of 10% of the Company's net sales during both 1996 and the six months ended June 30, 1997. These three, together with Novellus Systems, represented approximately 86% of the Company's net sales during 1996 and approximately 90% of its net sales for the six months ended June 30, 1997. The Company believes that its ongoing relationships with these major companies will enhance its ability to stay abreast of the latest developments in gas delivery system requirements and technologies. The Company expects that a significant portion of its net sales will continue to be derived from sales to a limited number of customers for the foreseeable future. The Company's operating results could be materially adversely affected by any loss of business from, the cancellation of orders by, or decreases in prices of products sold to, any of these customers. See "Risk Factors--Customer Concentration," "--Dependence on Selection as Provider for New Products" and "--Dependence on Outsourcing; Evolving Gas Delivery Industry." MARKETING, SALES AND SUPPORT The Company's ability to increase its net sales is largely dependent upon maintaining its role as a primary supplier of gas delivery products to its existing customers, its ability to continue to increase its capacity in support of its customers' growth and its success in adding new customers. Each of the Company's four key customers is serviced by a customer specific team. The teams are comprised of sales managers, sales support personnel, engineers and manufacturing managers who implement and integrate the multiple specialized services required to complete a customized order. In addition, the teams assist in the design and implementation of various cooperative projects with customers, including those that eliminate unnecessary processes and costs and those which provide support before, during and after orders are received. The Company believes that it has close working relationships with its key customers and that these relationships help it to continually forecast requirements for inventory and manufacturing 34 capacity, which allow it to plan resources so that customer demands can be satisfied in a timely manner. As a principal element of its marketing and support strategy, Insync concentrates on pursuing the integration of its business processes and information systems with those of its customers to provide both significant improvements in cycle time and the reduction of total costs for key customers and the Company. The Company also maintains an engineering group which works directly with its customers' technical personnel on-site to produce innovative technology and to increase the Company's understanding of its customers' gas delivery system needs. RESEARCH, DEVELOPMENT AND ENGINEERING The market for semiconductor manufacturing equipment is characterized by, among other things, rapid technological change. As more process steps are required and device geometries are reduced in the production of semiconductors, the risks of contamination also increase. The increasing complexity of the wafer fabrication process has led to the requirement for increasingly complex and precise gas delivery systems and subassemblies. The Company believes that the continued and timely development of new solutions and manufacturing methods are essential for it to maintain its competitive position. The Company works directly with semiconductor equipment and semiconductor device manufacturers to develop gas delivery technologies that exceed the device manufacturers' requirements for purity and that improve the throughput of fabs and decrease the time to full manufacturing utilization. As of June 30, 1997, the Company had 44 full time employees in research, development and engineering. The Company incurred research, development and engineering expenses of $699,000, $2.2 million, $3.6 million and $1.9 million during 1994, 1995 and 1996 and the six months ended June 30, 1997, respectively, and expects to continue to increase such expenditures in the future. The Company also intends to continue to leverage its research and development efforts by engaging in projects with its customers and other third parties. See "Risk Factors--Rapid Technological Change." MANUFACTURING The Company believes that advanced manufacturing process capabilities and the ability to increase manufacturing capacity concurrent with the expanding requirements of semiconductor equipment manufacturers are critical competitive factors in the gas delivery marketplace. The Company currently offers its customers proprietary manufacturing methods, including automated stainless steel tube cutting, manufacturing and tooling protocols and specialized tubing which produce less corrosion and correspondingly less contamination in the production environment. Other manufacturing techniques in which the Company has significant expertise include patented moisture reduction methods, and electropolishing techniques for reduction of contamination. The Company's manufacturing activities consist of a multi-step process which can include assembly and testing of subassemblies and their integration into finished gas delivery systems. Stringent cleanliness controls are present throughout the manufacturing process and testing areas of production to reduce particle contamination. Much of the assembly and testing of the Company's systems are conducted in clean room environments. Prior to shipping a completed product, the customers' engineers may perform acceptance tests at the Company's facilities. After passing the acceptance tests, the gas delivery system or subassembly is packaged in a clean room environment and prepared for shipment. The Company is in the process of installing a new management information system which it anticipates will enable it to maintain high manufacturing standards at significantly increased production levels and to interface directly with the information systems of its customers. The Company intends to continue to strive for improvements in processes, training, tool development and internal organization which the Company believes will contribute to lower costs and improve on-time performance. There can be no assurance, however, that the Company will successfully implement such installation or achieve such improvements or that such improvements, if achieved, will result in lower costs or on-time performance. 35 The Company procures certain components and raw materials included in its products from single source suppliers or a limited group of suppliers. Most single source supply requirements result from specification of particular components by semiconductor device manufacturers. To date, the Company has generally been able to obtain adequate supplies of such components and raw materials in a timely manner. However, disruption or termination of certain of these sources without adequate or timely replacement sources could have a material adverse effect on the Company's operations. The Company believes that alternative sources could be obtained and qualified to supply these products, if necessary. See "Risk Factors--Management of Business Fluctuations" and "-- Sole or Limited Sources of Supply." COMPETITION The Company believes that competition in the gas delivery market is intense and likely to increase substantially. Traditionally, gas delivery systems and subassemblies have been primarily manufactured internally by semiconductor equipment manufacturers. While these equipment manufacturers are significant customers or potential customers of the Company, companies including Applied Materials and Lam Research continue to produce significant quantities of gas delivery systems internally. For a variety of reasons, including any downturn or slowdown in the semiconductor equipment industry, there can be no assurance that semiconductor equipment manufacturers will not elect to utilize their internal manufacturing capacity to manufacture a greater percentage or all of their gas delivery requirements. The Company's competitors also include numerous privately and publicly held independent gas delivery providers, mass flow controller companies and others. The Company competes with these independent gas delivery providers, mass flow controller companies and other companies on the basis of an ability to: provide advanced system design and engineering services; offer adequate manufacturing capacity to meet customers' cycle time requirements; price competitively; provide outstanding equipment performance, reliability and quality; maintain sufficient financial resources; deliver superior customer service; and, support and maintain good relationships with customers and parts suppliers. The Company believes it presently competes favorably with respect to these factors. Other companies not currently offering such systems, including gas suppliers, may attempt to enter and develop products for this market or to develop alternative technologies which could reduce the need for the Company's products. The trend towards consolidation in the semiconductor equipment industry has made it increasingly important to have the financial resources and manufacturing capacity necessary to meet the requirements of large equipment manufacturers, to fund customer service and support, and to invest in both product and process research and development. Current and potential competitors may have substantially greater financial resources, name recognition and more extensive engineering, manufacturing, marketing and customer service and support capabilities than the Company. In addition, most of the Company's key customers have established relationships with one or more of the Company's competitors as additional or alternative providers, which the Company believes tends to further intensify competition and may limit the Company's ability to capture a greater percentage of a customer's outsourced gas delivery systems requirements. The Company expects its current competitors to continue to improve the design and performance of their existing products and processes, and to introduce new products and processes with improved performance characteristics and/or lower prices. New product introductions or product announcements by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products. Moreover, such increased competitive pressure could lead to intensified price competition, which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully in the future. BACKLOG As of June 30, 1997, the Company's backlog was approximately $9.9 million. The Company includes in its backlog only those customer orders for systems and subassemblies for which it has accepted 36 purchase orders and assigned shipment dates within the following 12 months. Industry practice allows the customer to cancel or reschedule orders prior to shipment with liability only for purchased materials and manufacturing steps completed as of the date of cancellation. Accordingly, the Company's backlog at a particular date may not necessarily be representative of actual sales for any succeeding period. INTELLECTUAL PROPERTY The Company relies on a combination of patent, copyright, trademark and trade secret laws, nondisclosure agreements and other intellectual property protection methods to protect its proprietary technology. Although the Company currently holds two patents and has three pending patent applications in the United States, the Company believes that patents are of less significance in this industry than such factors as innovative skills, technical expertise and know-how of its personnel. There can be no assurance that the Company's competitors will not be able to legally ascertain the nonpatented proprietary information embedded in the Company's gas delivery systems, in which case the Company may be precluded from preventing the use of such information. To the extent the Company elects to assert its patent rights, there can be no assurance that any claims of the Company's patents will be sufficiently broad to protect the Company's technology. In addition, 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. Although the Company has not received any notices from third parties alleging infringement claims, there can be no assurance that infringement claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's financial condition, business and results of operations. If any such claims are asserted against the Company, the Company may seek to obtain a license under the third party's intellectual property rights. There can be no assurance that a license will be available on reasonable terms or at all. The Company could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time consuming. Adverse determinations in any litigation could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties and prevent the Company from manufacturing and selling its products. Any of these developments could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of June 30, 1997, Insync had a workforce consisting of 324 full time employees and 48 persons employed on a temporary basis. No employee of the Company is currently represented by a labor union. Management considers its employee relations to be good. The Company believes that its future success is dependent to a significant degree on its being able to continue to attract and retain skilled personnel. FACILITIES The Company maintains its headquarters in Milpitas, California in a leased 71,000 square foot facility. In addition to housing its corporate offices, the facility is the center for one of the Company's three manufacturing groups. The lease on 48,000 square feet of the facility expires on August 1, 2000 with two five-year renewal periods available. The lease on the remaining 23,000 square feet of the Milpitas facility expires on March 31, 1998. The Company also leases a manufacturing facility in Austin, Texas. This facility comprises 70,000 square feet and the lease thereon expires September 2001, with three three-year renewal periods available. The Company's manufacturing facility in Fremont, California encompasses 21,000 square feet and the lease thereon expires on December 31, 2001 with one five-year renewal period available. The Company's locations are convenient to the corporate and product design offices and manufacturing facilities of its key customers. 37 ENVIRONMENTAL REGULATIONS The Company is subject to a variety of governmental regulations relating to the use, storage, handling, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company uses lubricants, adhesives, solvents and cleaners in connection with its manufacturing and assembly operations. The Company believes that its storage, use and disposal of such materials complies in all material respects with applicable governmental regulations, and that it has obtained all necessary environmental permits to conduct its business. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities, resulting in a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Limited Insurance Coverage; Environmental Regulation." 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the Company's directors and executive officers as of June 30, 1997:
NAME AGE POSITION ---- --- -------- Stanley L. Leopard(1)............ 50 Chairman of the Board and Chief Executive Officer Jorge L. Titinger................ 36 President and Chief Operating Officer Brent D. Elliot.................. 34 Executive Vice President, Technology and Marketing and Director Frank R. Balma................... 48 Vice Chairman of the Board Terence J. Griffin............... 35 Senior Vice President, Chief Financial Officer and Secretary Michael C. Child(2).............. 42 Director Don M. Lyle(2)(3)................ 58 Director Russell G. Redenbaugh(1)......... 52 Director W. Lee Shevel(1)(3).............. 65 Director
- -------- (1) Member of the Executive Committee (2) Member of the Compensation Committee (3) Member of the Audit Committee Stanley L. Leopard became Chairman of the Board of the Company in January 1993 after serving in an advisory capacity for two years. He was named Chief Executive Officer in August 1994. Mr. Leopard also served as the Company's Chief Financial Officer from January 1993 to July 1994. Prior to joining the Company, Mr. Leopard was a principal of Leopard & Associates, a management consulting firm that he formed in 1983. Jorge L. Titinger has served as the Company's President and Chief Operating Officer since November 1996. From November 1995 to November 1996, Mr. Titinger served as the Company's Vice President of Operations. From February 1993 to October 1995, Mr. Titinger was Vice President of Operations and Customer Service as well as one of the founders of NeTpower, Inc., a network computing company. Prior to founding NeTpower, Inc. Mr. Titinger worked in various management capacities for MIPS/Silicon Graphics from October 1989 to January 1993. Brent D. Elliot, a founder of the Company, has served as Executive Vice President, Technology and Marketing since April 1997, after having served as Senior Vice President, Technology and Marketing since November 1996. Prior to that, Mr. Elliot served in the Company's Office of the President from August 1995 to November 1996. Mr. Elliot previously held a number of other positions at the Company, including Chief Technical Officer from April 1994 to November 1996, Chief Financial Officer from September 1989 to January 1993, Secretary from September 1989 to July 1994 and Executive Vice President from September 1989 to April 1994. In addition, Mr. Elliot has been a director of the Company since its inception in 1989. From 1981 through 1989, Mr. Elliot served as Director of Operations of Innovative Engineering, Inc., a manufacturer of hazardous gas abatement equipment for the semiconductor industry. Frank R. Balma, a founder of the Company, has served as Vice Chairman of the Board since November 1996. From August 1995 until November 1996, he served in the Company's Office of the President and was its Chief Operating Officer from August 1994 to November 1996. From September 1989 to August 1995, Mr. Balma served as the Company's President. He also served as the Company's Chief Executive Officer from September 1989 to August 1994. In addition, Mr. Balma has been a director of the Company since its inception in 1989. From 1986 to 1989, Mr. Balma was Director of Sales at 39 Innovative Engineering, Inc., a manufacturer of hazardous gas abatement equipment for the semiconductor industry. Terence J. Griffin joined the Company in August 1993 as Corporate Controller and has been the Company's Chief Financial Officer, Vice President and Secretary since July 1994. In April 1997, Mr. Griffin was appointed as a Senior Vice President of the Company. From 1986 to 1993, Mr. Griffin held various financial positions at Diasonics, Inc., a manufacturer of medical imaging equipment, ultimately serving as Finance Manager for Diasonics' Ultrasound Division. Michael C. Child has been a director of the Company since January 1996. Mr. Child is currently a Managing Director of TA Associates, a private equity firm. Mr. Child joined TA Associates in 1982 and served as a General Partner from 1986 to 1994. Mr. Child also serves as a director of Sonic Solutions, a digital audio workstation company. Don M. Lyle has been a director of the Company since April 1995 after serving in an advisory capacity from November 1993 to March 1995. He has been a principal of Technology Management Co., a management consulting firm, since 1983. He also served as Vice President of Tandem Computers, a computer manufacturing company, from June 1988 to December 1994. From 1968 to 1983, Mr. Lyle served in various capacities at Burroughs Corporation, a mainframe and computer manufacturing company, including Vice President, Systems Management and Vice President, Advanced Technology. He is currently a director of DH Technology, Inc., a communications networking firm, a director of Emulex Network Systems, a specialty printer company and a director of NRI Corporation, a company. Russell G. Redenbaugh has been a director of the Company since April 1995 after serving in an advisory capacity from May 1994 to March 1995. He has been a partner and director of Cooke & Bieler, Inc., a Philadelphia-based investment management firm, since 1969. Since 1985 Mr. Redenbaugh has been president of Kairos, Inc., a management consulting firm. In addition, he is a member of the U.S. Civil Rights Commission. W. Lee Shevel has been a director of the Company since April 1995 after serving in an advisory capacity from November 1993 to March 1995. He has been an owner and Managing Director of EIM, a management consulting firm, since June 1994. Dr. Shevel served in several positions with Unisys Corporation, an information systems and services company, from June 1992 to June 1994. In addition, Dr. Shevel was President of Paramax Canada, a Unisys company, from 1988 to 1992 and Vice President, Systems and Technology from 1984 to 1988. Directors are elected by the shareholders of the Company for one-year terms and hold office until the next annual meeting of shareholders or until their successors are elected and qualified. COMMITTEES OF THE BOARD OF DIRECTORS The Executive Committee consists of Stanley L. Leopard, Russel G. Redenbaugh and W. Lee Shevel. The Executive Committee has all the authority and powers of the Board of Directors to act on behalf of the Company subject to certain limitations set forth in the Company's Bylaws. These limitations include a prohibition on taking any action requiring shareholder approval; the filling of vacancies or appointments to the Board of Directors or any other committee of the Company and the fixing of compensation with respect to such positions; and distributions to shareholders except at a rate and range and during a period previously determined by the Board of Directors. Following the taking of any action by the Executive Committee, the Committee is required to prepare a report to the Board of Directors of the Company. The Compensation Committee consists of Michael C. Child and Don M. Lyle. The Compensation Committee reviews and evaluates the compensation and benefits of employees of the Company, reviews 40 general policy matters relating to the compensation and benefits of employees of the Company and makes recommendations concerning these matters to the Board of Directors. The Compensation Committee also administers the Company's 1993 Plan and will administer the 1997 Plan and the 1997 Purchase Plan when such plans become effective. The Audit Committee consists of Don M. Lyle and W. Lee Shevel. The Audit Committee reviews the scope and timing of the Company's independent auditors' audit services and other services they are asked to perform, including the auditors' report on the Company's financial statements following completion of their audit and the Company's policies and procedures with respect to internal accounting and financial controls. In addition, the Audit Committee makes annual recommendations to the Board of Directors for the appointment of the Company's independent auditors for the ensuing year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the Compensation Committee members has been at any time an officer or employee of the Company. No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other Company's board of director's compensation committee. DIRECTOR COMPENSATION The Company does not have a formal director compensation plan, but currently pays directors a $2,500 stipend for each fiscal quarter of service. In addition, the Company has, from time to time, granted its directors stock options and warrants to purchase Common Stock. See "Certain Transactions." EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS The Company does not currently have any employment contract in effect with its Chief Executive Officer or any other Named Executive Officer (as defined below). 41 EXECUTIVE COMPENSATION Summary Compensation. The following table sets forth all compensation for services rendered during the year ended December 31, 1996 earned by the Company's Chief Executive Officer and each of the four other most highly compensated officers of the Company whose aggregate compensation exceeded $100,000 (the "Named Executive Officers") for services rendered in all capacities.
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION AWARDS -------------------- ------------ SECURITIES NAME AND PRINCIPAL UNDERLYING ALL OTHER POSITIONS SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION(1)(2) ------------------ ---------- --------- ------------ ------------------ Stanley L. Leopard(3)..... $223,558 $61,555 -- $ 7,625 Chairman of the Board, Chief Executive Officer Frank R. Balma............ 165,773 43,542 -- 5,770 Vice Chairman of the Board Jorge L. Titinger......... 153,192 11,000 99,999(4) 4,925 President and Chief Operating Officer Brent D. Elliot .......... 203,337 17,979 -- 5,350 Executive Vice President, Technology and Marketing Terence J. Griffin........ 98,615 10,834 -- 4,004 Senior Vice President, Chief Financial Officer and Secretary
- -------- (1) In accordance with the rules of the Securities and Exchange Commission, other annual compensation in the form of perquisites and other personal benefits has been omitted in those cases where the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officer for such year. (2) Consists of life insurance premiums paid by the Company and certain contributions to benefit plans. (3) Excludes value of the country club membership described in "Certain Transactions." (4) Includes (i) 50,000 options issued on July 23, 1996 in replacement for 50,000 options issued on November 3, 1995 and canceled on July 23, 1996; (ii) 16,666 options issued on July 23, 1996 in replacement for 16,666 options issued on April 19, 1996, and (iii) 33,333 options issued on October 23, 1996. Excludes 16,666 options issued on April 19, 1996 and subsequently cancelled on July 23, 1996. 42 Option Grants in Last Fiscal Year. The following table sets forth certain information with respect to the grant of stock options during 1996 to the Named Executive Officers.
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF SECURITIES GRANTED TO PRICE APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTIONS TERM(4) OPTIONS IN FISCAL PRICE EXPIRATION ----------------------- NAME GRANTED(1) YEAR(2) PER SHARE(3) DATE 5% 10% ---- ---------- ---------- ------------ ---------- -- ----------- Stanley L. Leopard...... -- -- -- -- -- -- Frank R. Balma.......... -- -- -- -- -- -- Jorge L. Titinger....... 16,666(5) 3.3% $9.00 canceled -- -- 16,666(5) 3.3 6.00 4/19/06 $ 60,877 $153,151 33,333 6.7 6.00 10/23/06 125,866 319,019 50,000(6) 10.0 6.00 11/3/05 171,977 427,048 Brent D. Elliot......... -- -- -- -- -- -- Terence J. Griffin...... -- -- -- -- -- --
- -------- (1) Mr. Titinger's options were granted pursuant to the Company's 1993 Plan and become exercisable on an annual basis at the rate of 20% per year. Options exercisable for 16,666 shares of Common Stock have a vesting commencement date of July 1, 1996; Options exercisable for 33,333 shares have a vesting commencement date of January 1, 1997; and options exercisable for 50,000 shares have a vesting commencement date of January 1, 1996. (2) Includes options to purchase 210,000 shares of Common Stock granted to employees in July 1996 with an exercise price of $6.00. These stock options were issued to replace outstanding stock options which had been previously granted at a price greater than $6.00, and canceled in July 1996. (3) The per share exercise prices represent 100% of the fair market value of the underlying Common Stock, as determined by the Company's Board of Directors, as of the date of grant. (4) Amounts reported in this column represent hypothetical values that may be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compound rates of appreciation of the Company's Common Stock over the term of these options. These numbers are calculated based on rules promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the timing of such exercises and the future performance of the Company's Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the individuals. This table does not take into account any appreciation in the price of the Common Stock from the date of grant to the current date. The values shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. (5) Options exercisable for 16,666 shares of Common Stock were originally issued on April 19, 1996 with an exercise price of $9.00 per share, were canceled on July 23, 1996, and replaced by 16,666 options with an exercise price of $6.00 per share. Both grants are shown in the table. (6) Options for 50,000 shares of Common Stock were originally issued on November 3, 1995, with an exercise price of $9.00 per share, were canceled on July 23, 1996, and were replaced by options exercisable for 50,000 shares with an exercise price of $6.00 per share. The options exercisable for 50 ,000 shares granted on July 23, 1996 are shown in the table. 43 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values. None of the Named Executive Officers exercised any options to purchase stock of the Company during the year ended December 31, 1996. The following table sets forth information for the Named Executive Officers with respect to options to purchase Common Stock of the Company held at December 31, 1996.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996(1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Stanley L. Leopard......... 33,333 133,333 $117,499 $469,999 Frank R. Balma............. -- -- -- -- Jorge L. Titinger.......... -- 99,999 -- -- Brent D. Elliot............ -- -- -- -- Terence J. Griffin......... 40,000 26,666 210,000 139,997
- -------- (1) There was no public trading market for the Company's Common Stock as of December 31, 1996. Accordingly, these values have been calculated on the basis of the fair market value of $6.00 per share, as had most recently been determined by the Board of Directors as of such date. STOCK PLANS Amended and Restated 1993 Stock Option Plan The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Plan") was adopted by the Board of Directors on August 9, 1993 and approved by the shareholders on August 16, 1993. The 1993 Plan was most recently amended on September 15, 1997. The 1993 Plan provides, subject to shareholder approval, for the issuance of a maximum of 1,933,333 shares. As of August 1, 1997, 1,359,751 shares were subject to outstanding options, and 32,692 shares had been issued upon exercise of options granted under the 1993 Plan. Following the Offering, no additional options to purchase Common Stock will be issued under the 1993 Plan. The 1993 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code 1986, as amended, (the "Code") to employees (including officers and employee directors) and for the grant of nonstatutory stock options to employees, directors and consultants. Options granted under the 1993 Plan are not transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1993 Plan must generally be exercised within three months after the end of the optionee's status as an employee, director or consultant of the Company, or within 12 months after such optionee's termination by death or disability, but in no event later than the expiration of the option's ten year term. The 1993 Plan provides that in the event of (i) a merger of the Company with or into another corporation, (ii) a sale of substantially all of the Company's assets or (iii) a reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger, each option shall be assumed or an equivalent option substituted for by the successor corporation. If the successor corporation assumes or substitutes for options and subsequently involuntarily terminates any employee within 12 months of the merger or sale of assets, then the employee shall have the right to exercise the option as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the outstanding options are not assumed or substituted for by the successor corporation, the Board of Directors shall provide for the optionee to have the right to exercise the option as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. 44 1997 Stock Plan The Company's 1997 Stock Plan (the "1997 Plan") was adopted by the Board of Directors on September 15, 1997 and is subject to shareholder approval. The 1997 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to employees (including officers and employee directors) and for the grant of nonstatutory stock options and stock purchase rights ("SPRs") to employees, directors and consultants. The number of shares of Common Stock currently reserved for issuance pursuant to the 1997 Plan, is equal to (a) 133,333 shares plus (b) the number of shares reserved under the 1993 Plan but not issued or underlying granted options and any shares returned to the 1993 Plan as a result of termination of options under the 1993 Plan, plus (c) annual share increases equal to the lesser of (i) 333,333 shares, (ii) 2.5% of the Company's outstanding shares of capital stock on January 1 of each year or (iii) any amount determined by the Board of Directors. Unless terminated sooner, the 1997 Plan will terminate automatically on September 15, 2007. The 1997 Plan may be administered by the Board of Directors or a committee of the Board (as applicable, the "Administrator"). The Administrator has the power to determine the terms of the options or SPRs granted, including the exercise price of the option or SPR, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Administrator has the authority to amend, suspend or terminate the 1997 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1997 Plan. Options and SPRs granted under the 1997 Plan are generally not transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1997 Plan must generally be exercised within three months after the end of the optionee's status as an employee, director or consultant of the Company, or within 12 months after such optionee's termination by death or disability, but in no event later than the expiration of the option's ten year term. In the case of SPRs, unless the Administrator determines otherwise, the restricted stock purchase agreements relating to SPRs shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for shares repurchased pursuant to such restricted stock purchase agreements shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. The exercise price of all incentive stock options granted under the 1997 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1997 Plan is determined by the Administrator, but with respect to nonstatutory stock options intended to qualify as "performance- based compensation" within the meaning of Section 162(m) of the Code, the exercise price must be at least equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1997 Plan may not exceed ten years. The 1997 Plan provides that each non-employee director shall automatically be granted an option to purchase shares of Common Stock on the date that such person first becomes a non-employee director, unless immediately prior to becoming a non-employee director, such person was an employee director of the Company. In addition, each non-employee director shall automatically be granted an option to purchase shares on the date of the Company's annual meeting of shareholders, if on such date he or she shall have served on the Board for at least the preceding six months. Each option granted to a non- employee director shall have a term of 10 years, shall vest as to 45 25% of optioned stock one year from the date of grant, and 1/48 of the optioned stock shall vest each month thereafter, provided that the person continues to serve as a Director on such dates, and the exercise price of each such option shall be 100% of the fair market value per share of the Common Stock on the date of grant. The 1997 Plan provides that in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each option and SPR shall be assumed or an equivalent option or SPR substituted for by the successor corporation. If the successor corporation assumes or substitutes options and SPRs and subsequently involuntarily terminates any employee other than for cause within 12 months of the merger or sale of assets, then the employee shall have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the outstanding options and SPRs are not assumed or substituted for by the successor corporation, the Administrator shall provide for the optionee to have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be exercisable. If the Administrator makes an option or SPR exercisable in full in the event of a merger or sale of assets, the Administrator shall notify the optionee that the option or SPR shall be fully exercisable for a period of 15 days from the date of such notice, and the option or SPR will terminate upon the expiration of such period. 1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors on September 15, 1997 and is subject to shareholder approval. A total of 166,666 shares of Common Stock has been reserved for issuance under the 1997 Purchase Plan, plus annual increases equal to the lesser of (i) 133,333 shares, (ii) 1% of the outstanding shares on January 1 of each year or (iii) any amount determined by the Board of Directors. The 1997 Purchase Plan, which is intended to qualify under Section 423 of the Code, contains consecutive, overlapping, 12 month offering periods. Each offering period incudes two six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of the Offering and ends on the last trading day on or before October 31, 1998. Employees are eligible to participate if they are employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, any employee who (i) immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all capital stock of the Company or (ii) whose rights to purchase stock under all employee stock purchase plans of the Company accrues at a rate which exceeds $25,000 worth of stock for each calendar year may not be granted an option to purchase stock under the 1997 Purchase Plan. The 1997 Purchase Plan permits participants to purchase Common Stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings only, excluding payments for overtime, commissions, shift premiums, incentive compensation, bonuses and other compensation. The maximum number of shares a participant may purchase during a single purchase period is 3,333 shares. Amounts deducted and accumulated by the participant are used to purchase shares of Common Stock at the end of each purchase period. The price of stock purchased under the 1997 Purchase Plan is 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the 46 new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be reimbursed their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. Rights granted under the 1997 Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 1997 Purchase Plan will terminate on September 15, 2007. The Board of Directors has the authority to amend or terminate the 1997 Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock under the 1997 Purchase Plan. PROFIT SHARING/401(K) PLAN The Company maintains the Insync Systems, Inc. Profit Sharing/401(k) Plan (the "401(k) Plan"). All eligible employees of the Company who have attained age 18 may participate in the 401(k) Plan after completing six months of service by enrolling on the first day of any calendar quarter. The 401(k) Plan provides that each participant may contribute from 1% to 15% of his or her pre- tax compensation (up to a statutorily prescribed annual limit of $9,500 in 1997) to the 401(k) Plan. The Company currently matches salary deferral contributions at a rate of 50% up to a limit of 3% of the employee's pre-tax compensation. At the discretion of the Board of Directors, the Company may make a profit sharing contribution to the 401(k) Plan. To date, the Company has not made any profit sharing contribution. The 401(k) Plan includes a stock bonus provision for non-highly compensated participants. The Board of Directors elected to contribute, as of January 1, 1996, an aggregate amount of Common Stock equal to 100 shares per eligible participant up to a maximum of 13,500 shares of Common Stock. Any shares directed to be contributed pursuant to the stock bonus provision by the Board of Directors are allocated equally among the eligible participants. Generally, participants must be employed on the last day of the plan year and have 1,000 hours of service in that plan year to be eligible to receive matching, profit sharing or stock bonus contributions. Matching contributions are always fully vested; stock bonus and profit sharing contributions are subject to a vesting schedule. Participants are permitted to borrow from their account and may also request hardship withdrawals. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Amended and Restated Articles of Incorporation that limits the liability of its directors for monetary damages as directors to the fullest extent permitted by the California Corporations Code. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company will indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by California law. In addition, as permitted by its Bylaws, the Company has also entered into indemnification agreements with its directors and executive officers in addition to the indemnification provided for in the Company's Bylaws. The indemnification agreements may require the Company, among other things, to indemnify its directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 47 CERTAIN TRANSACTIONS On January 30, 1996 and March 6, 1996, the Company sold an aggregate of 3,000,000 shares of its Redeemable Preferred Stock for an aggregate consideration of $24 million pursuant to a Series A Preferred Stock and Warrant Purchase Agreement (the "Series A Purchase Agreement"). On January 30, 1996, in connection with the sale of its Redeemable Preferred Stock, the Company also sold, for an aggregate consideration of $1,000, warrants to acquire up to 66,666 shares of its Common Stock at an exercise price of $12.00 per share. Entities affiliated with TA Associates, Inc. purchased an aggregate of 2,500,000 shares of Redeemable Preferred Stock and all of such warrants. Michael C. Child, a director of the Company, is a Managing Director of TA Associates, Inc. The Company's Articles of Incorporation in effect prior to the completion of the Offering provide for the conversion of each share of Redeemable Preferred Stock into between one share and approximately 1.176471 shares of the Company's Common Stock, on a pre-split basis, upon the first public offering of the Company's Common Stock which meets certain criteria, with the exact conversion rate dependent on the public offering price per share applicable to such offering. In connection with the Offering, such conversion rate would be approximately 1.176471, resulting in the 2,500,000 shares of Redeemable Preferred Stock held by entities affiliated with TA Associates, Inc. being converted into 2,941,176 shares of Common Stock of the Company on a pre- split basis, or 1,960,784 shares of Common Stock giving effect to the 2-for-3 reverse stock split to be effected in connection with the Offering. The purchasers of Redeemable Preferred Stock, including entities affiliated with TA Associates, Inc., were also granted certain rights to cause the Company to register the Common Stock issuable upon the conversion of the Redeemable Preferred Stock under the Securities Act. Between January 31, 1996 and March 6, 1996, in connection with the sale of its Redeemable Preferred Stock, the Company repurchased an aggregate of 1,607,213 shares of its Common Stock from existing shareholders at a price of $12.00 per share. The opportunity to participate in such repurchase program was extended to all holders of Common Stock on a pro rata basis, with unexercised rights being reallocated to shareholders who desired to sell more than their pro rata allocation. The following table summarizes the sales of Common Stock made by the officers and directors of the Company in such repurchase program:
SHARES OF AGGREGATE COMMON STOCK CONSIDERATION SOLD TO THE PAID BY COMPANY THE COMPANY ------------ ------------- Stanley L. Leopard................................... 146,918 $ 1,763,016 Frank R. Balma....................................... 375,248 4,502,984 Brent D. Elliot...................................... 366,666 4,400,000 Don M. Lyle.......................................... 13,333 160,000 Lee W. Shevel........................................ 13,333 160,000 ------- ----------- Total.............................................. 915,498 $10,986,000 ======= ===========
On May 1, 1994, for consulting services rendered to the Company in his individual capacity, Russell Redenbaugh, a director of the Company, was issued a fully-vested warrant expiring in 2004 to purchase 33,333 shares of the Company's Common Stock at an exercise price of $0.75 per share. On March 8, 1995, Mr. Redenbaugh was granted an option under the 1993 Plan to purchase 50,000 shares of Common Stock at an exercise price of $4.50 per share which will become exercisable in equal quarterly installments over five years of continued service commencing January 1, 1995. On April 5, 1995, for his services as a director, Mr. Redenbaugh was granted an option under the 1993 Plan to purchase 16,666 shares of Common Stock at an exercise price of $4.50 per share, which will become exercisable in five equal annual installments upon completion of each year of service subsequent to April 5, 1995. On August 23, 1995, Mr. Redenbaugh was issued a fully-vested warrant expiring in 2005 to purchase 23,333 shares of Common Stock at an exercise price of $5.25 per share, for services in his capacity as a consultant to the Company. On January 23, 1996, Mr. Redenbaugh purchased 20,000 shares of the Company's Common Stock from each of Stanley L. Leopard, Frank R. Balma and Brent D. Elliot, at a per share price of $5.25 pursuant to options granted to Mr. Redenbaugh by each of the named individuals. 48 Mr. Redenbaugh, a director of the Company, is the Chief Executive Officer and majority shareholder of Kairos, Inc. ("Kairos"), a management consulting firm. Beginning in 1994, the Company engaged the services of Kairos to advise the Company on certain management and business matters for which the Company paid Kairos $110,000. During 1997, 1996 and 1995, the Company paid Kairos $100,000, $112,000 and $186,000 respectively for consulting services. In addition, during 1995, the Company issued to certain Kairos employees and consultants options and warrants to purchase an aggregate of 99,997 shares of Common Stock at a weighted average exercise price of $2.75, of which 43,333 fully-vested warrants expiring in 2005 with an exercise price of $1.50 per share were granted to Mr. Redenbaugh and 5,000 fully-vested warrants were granted to Frederick T. Hecht, a consultant of the Company as described below. The Company also paid approximately $157,000, $241,000, $144,000 and $64,000 in 1997, 1996, 1995 and 1994, respectively, to Hecht and Associates, Inc. for sales and management training classes for certain of the Company's employees. Frederick T. Hecht owns a majority interest in Hecht and Associates, Inc. and has also been paid $6,000 and $3,000 in 1995 and 1994, respectively, for services rendered in his individual capacity as an advisor to the Company's Board of Directors. Stanley L. Leopard, the Company's Chairman and Chief Executive Officer, formerly held a minority interest in Hecht and Associates, Inc. In return for his consulting services in 1994, on May 1, 1994 Mr. Hecht was issued a fully-vested warrant from the Company expiring in 2004 for 33,333 shares of Common Stock at an exercise price per share of $0.75. On May 10, 1995, Mr. Hecht received another fully-vested warrant expiring in 2005 for 5,000 shares of Common Stock at an exercise price per share of $1.50 for his consulting services to the Company rendered on behalf of Kairos. Mr. Hecht also received a gift of 6,666 shares of Common Stock from Frank R. Balma in 1995. On March 8, 1995, the Company granted Mr. Hecht an option under the 1993 Plan to purchase 50,000 shares of Common Stock at an exercise price per share of $4.50 in return for consulting services, which will become exercisable in equal quarterly installments over five years of continued service commencing January 1, 1995. On April 5, 1995, for his services as a director of the Company, Don M. Lyle was granted an option under the 1993 Plan to purchase 16,666 shares of Common Stock at an exercise price per share of $4.50 which will become exercisable in five equal annual installments subject to his continued service. On August 23, 1995, Mr. Lyle was granted an additional option under the 1993 Plan to purchase 16,666 shares of Common Stock at an exercise price per share of $5.25, which will become exercisable over a five-year period subject to his continued service. On April 5, 1995, for his services as a director of the Company, W. Lee Shevel was granted an option under the 1993 Plan to purchase 16,666 shares of Common Stock at an exercise price per share of $4.50, which will become exercisable in five equal annual installments upon his completion of each year of service subsequent to April 5, 1995. On March 8, 1995, Dr. Shevel was granted an additional option under the 1993 Plan to purchase 50,000 shares of Common Stock at an exercise price per share of $4.50 exercisable in equal quarterly installments over five years of continued service. On May 27, 1996, the Company and Stanley L. Leopard entered into a co- investment agreement with respect to the purchase of one full-use country club membership. Pursuant to such agreement, the Company and Mr. Leopard each paid 50 percent of the $100,000 membership purchase price and will each acquire a 50 percent equity interest in the membership. Mr. Leopard will have the use of the membership and will be responsible for the payment of all periodic fees, dues, and/or costs relating to the membership. In the event that Mr. Leopard's employment with the Company terminates for any reason, Mr. Leopard will have the option to purchase, within 90 days of such termination, the Company's interest in the membership at the greater of (i) the Company's cost and (ii) the then-current fair market value. 49 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information as of August 1, 1997 as adjusted to reflect the sale of shares of Common Stock by the Company and based on information obtained from the persons named below with respect to the beneficial ownership of shares of Common Stock by (i) each person (or group of affiliated persons) known by the Company to be the owner of more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors; (iii) each of the Named Executive Officers; and (iv) all officers and directors as a group. Unless otherwise indicated, the address of each shareholder in the table below is c/o Insync Systems, Inc., 1463 Centre Pointe Drive, Milpitas, CA 95035.
SHARES SHARES SHARES BENEFICIALLY OWNED TO BE BENEFICIALLY OWNED 5% SHAREHOLDERS, BEFORE OFFERING(2)(3) SOLD IN AFTER OFFERING(2)(3) DIRECTORS AND EXECUTIVE ------------------------- THE ----------------------- OFFICERS(1) NUMBER PERCENT OFFERING NUMBER PERCENT - ----------------------- ------------- ----------- -------- ---------- ---------- Entities affiliated with TA Associates, Inc.(4)............... 2,027,450 27.1% High Street Tower, Suite 2500 125 High Street Boston, Massachusettes 02110-2720 Michael C. Child(4).... 2,027,450 27.1 Frank R. Balma......... 991,579 13.9 Brent D. Elliot(5)..... 593,754 8.3 Stanley L. Leopard(6).. 450,599 6.3 Elizabeth Reilly(7).... 438,058 6.2 7572 Lockford Ct. Cupertino, CA 95014 Entities affiliated with Summit Partners(8)........... 392,156 5.5 499 Hamilton Avenue, Suite 200 Palo Alto, CA 94301 Russell G. Redenbaugh(9)......... 220,500 3.0 W. Lee Shevel(10)...... 135,166 1.9 Don M. Lyle(11)........ 89,999 1.3 Terence J. Griffin(12). 53,333 * Jorge L. Titinger(13).. 13,333 * All Officers and Directors as a Group (9 persons)(14)....... 4,575,712 58.4% Other Selling Shareholders
- -------- * Less than one percent. (1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name. (2) Applicable percentage of ownership is based on 7,116,278 shares of Common Stock and as-if-converted Redeemable Preferred Stock outstanding on August 1, 1997 and shares of Common Stock outstanding after the completion of the Offering assuming no exercise of the Underwriters' over- allotment option. If the Underwriters' over-allotment option is exercised in full the Company and certain shareholders will sell an aggregate of additional shares of Common Stock. 50 (3) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of August 1, 1997 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the above table and pursuant to applicable community property laws, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name. (4) Includes 1,960,784 shares of Common Stock issuable upon conversion of Redeemable Preferred Stock in connection with the Offering. Also includes 66,666 shares of Common Stock issuable pursuant to warrants held and exercisable within 60 days after August 1, 1997. The shares and warrants are held of record by Advent VII L.P., Advent New York L.P., Advent Atlantic and Pacific II L.P., Advent Industrial II, L.P., Chestnut Capital International III Limited Partnership and TA Venture Investors Limited. Such entities are part of an affiliated group of investment partnerships associated with TA Associates, Inc. Michael C. Child, a director of the Company, is a Managing Director of TA Associates, Inc., which in turn, directly or indirectly possesses investment and voting power with respect to the shares and warrants held of record by the aforementioned entities. Therefore, Mr. Child directly or indirectly holds shared investment and voting power with respect to such shares and warrants, but disclaims beneficial ownership of such shares and warrants, except to the extent of his pecuniary interest therein. See "Certain Transactions." (5) Excludes 438,058 shares held in the name of Elizabeth Reilly, the former spouse of Mr. Elliot, and as to which Mr. Elliot holds neither voting nor dispositive rights. (6) Includes 367,266 shares of Common Stock outstanding as of August 1, 1997 and 66,666 shares of Common Stock issuable pursuant to options held by Mr. Leopard which may be exercised within 60 days of August 1, 1997. Also includes 16,666 shares of Common Stock in the name of the Balma Education Trust of which Mr. Leopard is a trustee. Excludes 105,000 shares of Common Stock held in the name of the Stanley L. Leopard 1994 Irrevocable Trust for the benefit of Mr. Leopard's children of which Mr. Leopard is not a trustee. Excludes 233,333 shares of Common Stock in the Melody Rae Leopard Trust of which Mr. Leopard is neither a beneficiary nor trustee. (7) Excludes 593,754 shares held in the name of Brent D. Elliot, the former spouse of Elizabeth Reilly, as to which Ms. Reilly holds neither voting nor dispositive rights. (8) Includes 392,156 shares of Common Stock issuable upon conversion of Redeemable Preferred Stock in connection with the Offering. The shares are held of record by Summit Ventures IV, L.P. and Summit Investors III, L.P. See "Certain Transactions." (9) Includes 68,000 shares of Common Stock outstanding as of August 1, 1997 and 152,500 shares of Common Stock issuable pursuant to options and warrants held by Mr. Redenbaugh which may be exercised within 60 days after August 1, 1997. (10) Includes 82,666 shares of Common Stock outstanding as of August 1, 1997 and 52,500 shares issuable pursuant to options held by Mr. Shevel which may be exercised within 60 days after August 1, 1997. (11) Includes 76,666 shares of Common Stock outstanding as of August 1, 1997 and 13,333 shares of Common Stock issuable pursuant to options held by Mr. Lyle which may be exercised within 60 days after August 1, 1997. (12) Includes 53,333 shares of Common Stock issuable pursuant to options held by Mr. Griffin which may be exercised within 60 days after August 1, 1997. (13) Includes 13,333 shares of Common Stock issuable pursuant to options held by Mr. Titinger which may be exercised within 60 days after August 1, 1997. (14) Includes 418,331 shares of Common Stock issuable pursuant to options and warrants which may be exercised within 60 days after August 1, 1997. 51 DESCRIPTION OF CAPITAL STOCK Upon completion of the Offering the Company's authorized capital stock will consist of 50,000,000 shares of Common Stock, $0.01 par value per share, and 4,000,000 shares of Preferred Stock, $0.01 par value per share. The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Amended and Restated Articles of Incorporation, which is included as an exhibit to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law. COMMON STOCK As of August 1, 1997, there were 5,116,279 shares of Common Stock outstanding and held of record by 263 shareholders. Immediately after completion of the Offering and assuming no exercise of the Underwriters' over-allotment option, there will be an aggregate of shares of Common Stock outstanding as well as options to purchase an aggregate of approximately shares of Common Stock. Matters submitted for shareholder approval generally require a majority vote. Holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders. Subject to any preferences that may be applicable to outstanding shares of Preferred Stock, if any, holders of Common Stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock will be entitled to share ratably in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preferences granted the holders of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive or other subscription rights. The shares of Common Stock are not convertible into any other security. The outstanding shares of Common Stock are, and the shares being offered hereby will be, upon issuance and sale, fully paid and nonassessable. See "Dividend Policy." PREFERRED STOCK Upon completion of the Offering, the Board of Directors will be authorized to issue 4,000,000 shares of undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock and to fix the number of shares constituting any series in the designations of such series, without further vote or action by the shareholders. The Board of Directors, without shareholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue Preferred Stock following the Offering. WARRANTS As of August 1, 1997 the Company had outstanding warrants to purchase 317,996 shares of Common Stock at a weighted average exercise price of $3.81 per share. Following the Offering, the holders of warrants to purchase up to 40,000 shares of the Company's Common Stock will have the right to cause the Company to purchase all or part of such warrants or the Common Stock issued upon exercise thereof at a price of $9.00 per share. REGISTRATION RIGHTS OF CERTAIN HOLDERS Upon completion of the Offering, the holders of approximately shares of Common Stock will be entitled upon expiration of lock-up agreements with the Underwriters to certain rights with 52 respect to the registration of such shares under the Securities Act. Under the terms of the agreements between the Company and the holders of such registrable securities, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other securities holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. Holders of registration rights may also require the Company to file a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. Further, holders may require the Company to file registration statements on Form S-3 at the Company's expense when such form becomes available for use by the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. In the event of such limitation, the number of the shares to be included in such an offering will be allocated among the persons exercising registration rights pursuant to a formula which favors inclusion of shares with a higher original issuance price. As a result, the holders of the Common Stock issuable upon the conversion of the Redeemable Preferred Stock, including entities affiliated with Michael C. Child, a director of the Company, will generally be allowed to include a greater percentage of their shares in such offering in the event of such limitations. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF AMENDED AND RESTATED ARTICLES OF INCORPORATION, AMENDED AND RESTATED BYLAWS The Company's Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, among other things, (i) limit the rights of shareholders to take action by written consent without a meeting and (ii) provide that the Board of Directors, without action by the shareholders, may issue and fix the rights and preferences of shares of Preferred Stock. These provisions may have the effect of delaying, deferring or preventing a change of control of the Company without further action by the shareholders, may discourage bids for the Common Stock at a premium over the market price of the Common Stock, may adversely affect the market price of, and the voting and other rights of, the holders of the Common Stock and could have the effect of discouraging certain attempts to acquire the Company or remove incumbent management, including incumbent members of the Company's Board of Directors, even if some or a majority of the Company's shareholders deemed such an attempt to be in their best interests. See "Risk Factors--Control by Directors and Executive Officers" and "--Anti-Takeover Effects of Unissued Preferred Stock." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company. Its telephone number is (718) 921-8247. LISTING The Company has filed an application to list its Common Stock on the Nasdaq National Market under the trading symbol "INSY." 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offering, there has been no public market for securities of the Company. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the lapse of the restrictions described below could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future at a time and in a manner which it deems appropriate. Upon completion of the Offering, the Company will have shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options or warrants after August 1, 1997. Of these shares, (i) all of the shares offered hereby and an additional shares will be freely saleable upon the effectiveness of the Offering; (ii) shares will be eligible for sale 90 days following the effectiveness of the Offering under Rules 144 and 701 of the Securities Act; and (iii) an additional shares of Common Stock held by current shareholders are subject to lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. Pursuant to the Underwriting Agreement, the Company has agreed not to consent to release any shareholders from such lock-up agreements. After the 180-day period, approximately shares will be eligible for sale under Rules 144 and 701. The remaining approximately shares held by existing shareholders will become eligible for sale from time to time in the future under Rule 144.
DAYS AFTER DATE OF THIS PROSPECTUS SHARES ELIGIBLE FOR SALE COMMENT ---------------------------------- ------------------------ ------------------------ Upon Effectiveness........ Freely tradeable shares sold in the Offering and shares saleable under Rule 144(k) that are not subject to 180-day lockup. 90 days................... an additional Shares saleable under Rules 144 and 701 that are not subject to 180- day lockup. 180 days.................. an additional Lockup released; shares saleable under Rules 144 and 701. Thereafter................ an additional Restricted securities held for one year or less.
In general, under Rule 144, a person (or persons whose shares are aggregated), who has beneficially owned shares for at least one year is entitled to sell within any three-month period commencing 90 days after the date of this Prospectus a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately shares immediately after the Offering) or (ii) the average weekly trading volume during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. The Company is unable to estimate the number of shares that will be sold under Rule 144, as this will depend on the market price for the Common Stock of the Company, the personal circumstances of the sellers and other factors. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that a significant public market for the Common Stock will develop or be sustained after the Offering. Any future sale of substantial amounts of the Common Stock in the open market may adversely affect the market price of the Common Stock offered hereby. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the approximately shares of Common Stock issuable upon the exercise of options or reserved 54 for issuance under the 1997 Plan and 1993 Plan and the 166,666 shares of Common Stock reserved for issuance under the 1997 Purchase Plan within 180 days after the date of this Prospectus, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. Any employee or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. As of August 1, 1997, the holders of options exercisable for approximately shares of Common Stock will be eligible to sell their shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the expiration of the 180-day Lockup Period. In addition, after the Offering, the holders of approximately shares of Common Stock and the holders of warrants to purchase shares of Common Stock will be entitled to certain rights with respect to registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock--Registration Rights of Certain Holders." 55 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representatives, BT Alex. Brown Incorporated, PaineWebber Incorporated, and Prudential Securities Incorporated (the "Representatives"), have severally agreed to purchase from the Company and the Selling Shareholders the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions to be set forth on the cover page of this Prospectus:
NUMBER UNDERWRITERS OF SHARES ------------ --------- BT Alex. Brown Incorporated........................................ PaineWebber Incorporated........................................... Prudential Securities Incorporated................................. ---- Total............................................................ ====
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any such shares are purchased. The Company and the Selling Shareholders have been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the offering price and other selling terms may be changed by the Representatives. The Company and certain of the Selling Shareholders of the Company have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase in the aggregate up to additional shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to and the Company and the Selling 56 Shareholders will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the shares are being offered. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company has agreed that it will not sell or offer any shares of Common Stock or other securities convertible into or exchangeable into Common Stock or release any shareholder from any lock-up agreement for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. Shareholders of the Company, holding in the aggregate shares of Common Stock including outstanding options and warrants to purchase shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any of such shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior consent of BT Alex. Brown Incorporated. See "Shares Eligible for Future Sale". In connection with the Offering, the Underwriters and other persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in Common Stock for their own account. To cover over-allotments or to stabilize the price of the Common Stock the Underwriters may bid for, and purchase, shares of Common Stock in the open market. The Underwriters may also impose a penalty bid whereby they may reclaim selling concessions allowed to an underwriter or a dealer for distributing Common Stock in the Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short position, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of Common Stock in market making transactions. These activities may stabilize or maintain the market price of Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities and may end any of these activities at any time. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined by negotiation between the Company and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, the result of operations of the Company in recent periods, the market capitalization and stages of development of other companies which the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Shareholders by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. 57 EXPERTS The financial statements of Insync Systems, Inc. as of June 30, 1997 and December 31, 1996 and 1995, and for the six months ended June 30, 1997 and for each of the three years in the period ended December 31, 1996 and the financial statements of Pullbrite, Inc., as of and for the years ended September 30, 1995 and 1994 included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement and are included in reliance upon the reports of such firm given upon their authority as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S- 1 (the "Registration Statement") under the Securities Act and the rules and regulations promulgated thereunder with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http://www.sec.gov. The Company is not currently subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the offering of the Company's Common Stock, the Company will become subject to the informational requirements of the Exchange Act. The Company intends to furnish its shareholders with annual reports containing financial statements audited by its independent accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. 58 INDEX TO FINANCIAL STATEMENTS
PAGE ---- INSYNC SYSTEMS, INC. Independent Auditors' Report............................................. F-2 Balance Sheets........................................................... F-3 Statements of Operations................................................. F-4 Statements of Shareholders' Equity (Deficiency).......................... F-5 Statements of Cash Flows................................................. F-6 Notes to Financial Statements............................................ F-7 PULLBRITE, INC. Independent Auditors' Report............................................. F-19 Balance Sheets........................................................... F-20 Statements of Income..................................................... F-21 Statements of Stockholders' Equity....................................... F-22 Statements of Cash Flows................................................. F-23 Notes to Financial Statements............................................ F-24
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Insync Systems, Inc.: We have audited the accompanying balance sheets of Insync Systems, Inc. as of December 31, 1995 and 1996 and June 30, 1997 and the related statements of operations, shareholders' equity (deficiency) and cash flows for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, such financial statements present fairly, in all material respects, the financial position of Insync Systems, Inc. as of December 31, 1995 and 1996 and June 30, 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the six months ended June 30, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Jose, California September 16, 1997 (September 29, 1997 as to Note 13) F-2 INSYNC SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, PRO FORMA ---------------- JUNE 30, JUNE 30, 1995 1996 1997 1997 ------- -------- -------- --------- ASSETS Current Assets: Cash and equivalents................... $ 182 $ 2,829 $ 929 $ 929 Short-term investments................. -- 1,500 -- -- Receivables............................ 7,387 5,765 9,347 9,347 Inventories............................ 5,664 7,832 10,147 10,147 Prepaid expenses....................... 304 564 544 544 Deferred income taxes.................. 812 2,030 2,302 2,302 ------- -------- -------- -------- Total current assets................. 14,349 20,520 23,269 23,269 Property and equipment, net.............. 3,404 5,644 5,848 5,848 Intangible assets, net................... -- 3,895 3,485 3,485 Deferred income taxes.................... -- 6,037 5,596 5,596 Other assets............................. 489 764 1,043 1,043 ------- -------- -------- -------- TOTAL.................................... $18,242 $ 36,860 $ 39,241 $ 39,241 ======= ======== ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Current portion of long-term obligations........................... $ 188 $ 6,552 $ 7,055 $ 7,055 Line of credit......................... 1,150 -- 1,500 1,500 Bank overdraft......................... -- -- 555 555 Accounts payable....................... 6,314 2,557 5,297 5,297 Accrued liabilities.................... 1,591 1,048 911 911 Income taxes payable................... 697 -- -- -- ------- -------- -------- -------- Total current liabilities............ 9,940 10,157 15,318 15,318 Long-term obligations.................... 413 20,636 17,108 17,108 Deferred income taxes.................... 98 -- -- -- ------- -------- -------- -------- Total liabilities.................... 10,451 30,793 32,426 32,426 ------- -------- -------- -------- Commitments and contingencies (note 6) -- -- -- -- Redeemable preferred stock $0.01 par value; 3,000,000 shares authorized; shares outstanding: 1995, none; 1996 and 1997, 3,000,000, pro forma, none (redemption amount of $24,000).............................. -- 23,411 23,485 -- Common stock put warrants................ -- -- 360 360 Shareholders' equity (deficiency): Common stock, $0.01 par value; 50,000,000 shares authorized; shares outstanding: 1995, 6,656,052; 1996, 5,102,848; 1997, 5,116,279; pro forma, 7,469,219............................. 4,227 896 951 24,436 Deferred stock compensation............ -- (339) (316) (316) Retained earnings (deficit)............ 3,564 (17,901) (17,665) (17,665) ------- -------- -------- -------- Total shareholders' equity (deficiency)........................ 7,791 (17,344) (17,030) 6,455 ------- -------- -------- -------- TOTAL.................................... $18,242 $ 36,860 $ 39,241 $ 39,241 ======= ======== ======== ========
See notes to financial statements. F-3 INSYNC SYSTEMS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ ------------------- 1994 1995 1996 1996 1997 ------- ------- -------- ----------- ------- (UNAUDITED) Net sales....................... $20,617 $49,969 $ 86,099 $59,448 $34,679 Cost of sales................... 15,668 36,529 62,261 41,464 26,327 ------- ------- -------- ------- ------- Gross profit................ 4,949 13,440 23,838 17,984 8,352 Operating expenses: Selling, general and administrative............... 2,803 5,686 11,070 6,286 4,289 Research, development and engineering.................. 669 2,236 3,560 2,287 1,889 Write down of intangible assets (Note 2).............. -- -- 16,610 -- -- Restructuring charge.......... -- -- 858 -- -- ------- ------- -------- ------- ------- Total operating expenses.... 3,472 7,922 32,098 8,573 6,178 ------- ------- -------- ------- ------- Income (loss) from operations... 1,477 5,518 (8,260) 9,411 2,174 Interest expense and other...... 230 434 2,562 1,358 1,675 ------- ------- -------- ------- ------- Income (loss) before income tax. 1,247 5,084 (10,822) 8,053 499 Provision for (benefit from) income taxes................... 513 2,088 (4,314) 3,235 189 ------- ------- -------- ------- ------- Net income (loss)............... $ 734 $ 2,996 (6,508) 4,818 310 ======= ======= Accretion of redeemable preferred stock................ (147) (74) (74) -------- ------- ------- Net income (loss) applicable to common shareholders............ $ (6,655) $ 4,744 $ 236 ======== ======= ======= Pro forma net income (loss) per share.......................... $ (0.87) $ 0.03 ======== ======= Pro forma shares used in computation.................... 7,617 8,214
See notes to financial statements. F-4 INSYNC SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK DEFERRED RETAINED ------------------ ------------------- STOCK EARNINGS SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) TOTAL ---------- ------ ---------- ------- ------------ --------- -------- BALANCES, JANUARY 1, 1994................... 2,000,000 $ 20 4,516,912 $ 297 $ -- $ (166) $ 151 Conversion of Series A preferred stock to common stock........... (2,000,000) (20) 666,666 20 -- -- -- Issuance of Series B preferred stock........ 588,000 588 -- -- -- -- 588 Issuance of common stock.................. 36,000 27 27 Conversion of notes payable to common stock.................. -- -- 222,222 500 -- -- 500 Common stock issued for services............... -- -- 6,000 9 -- -- 9 Net income.............. -- -- -- -- -- 734 734 ---------- ----- ---------- ------- ----- -------- -------- BALANCES, DECEMBER 31, 1994................... 588,000 588 5,447,800 853 -- 568 2,009 Conversion of Series B preferred stock to common stock........... (588,000) (588) 391,990 588 -- -- -- Issuance of common stock.................. -- -- 439,953 1,939 -- -- 1,939 Exercise of stock options................ -- -- 1,866 1 -- -- 1 Exercise of warrant..... -- -- 13,333 1 -- -- 1 Conversion of subordinated notes payable................ -- -- 341,110 565 -- -- 565 Common stock and warrants issued for services............... -- -- 20,000 280 -- -- 280 Net income.............. -- -- -- -- -- 2,996 2,996 ---------- ----- ---------- ------- ----- -------- -------- BALANCES, DECEMBER 31, 1995................... -- -- 6,656,052 4,227 -- 3,564 7,791 Issuance of common stock.................. -- -- 36,614 403 -- -- 403 Exercise of stock options................ -- -- 17,395 21 -- -- 21 Repurchase and retirement of common stock.................. -- -- (1,607,213) (4,477) -- (14,810) (19,287) Sale of warrants in connection with sale of redeemable preferred stock.................. -- -- -- 223 -- -- 223 Accretion of redeemable preferred stock........ -- -- -- -- -- (147) (147) Deferred stock compensation........... -- -- -- 499 (499) -- -- Amortization of deferred stock compensation..... -- -- -- -- 160 -- 160 Net loss................ -- -- -- -- -- (6,508) (6,508) ---------- ----- ---------- ------- ----- -------- -------- BALANCES, DECEMBER 31, 1996................... -- -- 5,102,848 896 (339) (17,901) (17,344) Exercise of stock options................ -- -- 13,431 32 -- -- 32 Accretion of redeemable preferred stock........ -- -- -- -- -- (74) (74) Amortization of deferred stock compensation..... -- -- -- -- 23 -- 23 Common stock options issued for services.... -- -- -- 23 -- -- 23 Net income.............. -- -- -- -- -- 310 310 ---------- ----- ---------- ------- ----- -------- -------- BALANCES, JUNE 30, 1997. -- $ -- 5,116,279 $ 951 $(316) $(17,665) $(17,030) ========== ===== ========== ======= ===== ======== ========
See notes to financial statements. F-5 INSYNC SYSTEMS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- -------- ---------- ------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 734 $ 2,996 $ (6,508) $ 4,818 $ 310 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Issuance of common stock and warrants for services......... 9 280 77 -- 383 Amortization of deferred stock compensation.................. -- -- 160 14 23 Depreciation and amortization.. 387 707 3,579 1,805 1,254 Loss on disposal of equipment.. -- 106 775 45 37 Deferred income taxes.......... (213) (485) (7,353) (333) 169 Write down of intangible assets........................ -- -- 16,610 -- -- Changes in assets and liabilities (net of acquisition): Receivables.................... (2,425) (3,881) 7,473 3,318 (3,582) Inventories.................... (3,928) (958) 1,360 (1,530) (2,315) Prepaid expenses............... 12 (245) (260) 94 20 Accounts payable............... 3,039 2,090 (5,930) (3,490) 2,740 Accrued liabilities............ 375 1,121 (1,757) 1,360 (137) Income taxes payable........... 240 553 (697) (523) -- ------- ------- -------- -------- ------ Net cash provided by (used for) operating activities.... (1,770) 2,284 7,529 5,578 (1,098) CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisition of Pullbrite...................... -- -- (15,000) (15,000) -- Purchases of property and equipment...................... (734) (2,616) (3,032) (1,892) (997) Purchase of short-term investments.................... -- -- (1,500) -- -- Maturities of short-term investments.................... -- -- -- -- 1,500 Other assets.................... 12 (437) 368 284 (367) ------- ------- -------- -------- ------ Net cash provided by (used for) investing activities.... (722) (3,053) (19,164) (16,608) 136 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under line of credit................. 2,150 (1,075) (1,150) (1,150) 1,500 Bank overdraft.................. -- -- -- -- 555 Notes payable borrowings........ 15 350 39,298 39,298 -- Repayments of notes payable and capital leases................. (251) (304) (13,413) (11,287) (3,025) Repayment of subordinated notes payable........................ -- -- (15,000) (15,000) -- Proceeds from issuance of common stock.......................... 27 1,941 347 336 32 Proceeds from issuance of preferred stock................ 588 -- 23,487 23,487 -- Repurchase and retirement of common stock................... -- -- (19,287) (19,287) -- ------- ------- -------- -------- ------ Net cash provided by (used for) financing activities.... 2,529 912 14,282 16,397 (938) Net increase (decrease) in cash. 37 143 2,647 5,367 (1,900) Cash and equivalents, beginning. 2 39 182 182 2,829 ------- ------- -------- -------- ------ Cash and equivalents, ending.... $ 39 $ 182 $ 2,829 $ 5,549 $ 929 ======= ======= ======== ======== ====== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid................... $ 134 $ 411 $ 1,640 $ 474 $1,316 ======= ======= ======== ======== ====== Income taxes paid............... $ 486 $ 2,050 $ 3,947 $ 3,646 $ 52 ======= ======= ======== ======== ====== NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of notes payable to common stock................... $ 500 ======= Conversion of subordinated notes payable to common stock........ $ 565 ======= Conversion of preferred stock to common stock................... $ 20 $ 588 ======= ======= Acquisition of Pullbrite: Fair value of assets acquired.. $ 33,387 $ 33,387 Cash paid...................... (15,000) (15,000) Convertible note payable issued to seller..................... (15,000) (15,000) -------- -------- Liabilities assumed............ $ 3,387 $ 3,387 ======== ========
See notes to financial statements. F-6 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Business--Insync Systems, Inc. (the "Company") was incorporated in August 1989. The Company is primarily engaged in the business of developing, manufacturing, and marketing gas delivery systems and subassemblies for the semiconductor equipment industry. The Company's products are sold primarily to customers in the United States and its business is dependent on the worldwide demand for semiconductor equipment and semiconductors. Certain Significant Risks and Uncertainties--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the amounts disclosed as contingencies at the date of the financial statements and the reported amounts of revenue and expense for the periods presented. Actual results could differ from those estimates. Such estimates include allowances for potentially uncollectible accounts receivable, valuation reserves for inventories, accrued warranty costs, and a valuation allowance for net deferred tax assets. In addition, the Company operates in a dynamic industry and believes that adverse changes in any of the following could have a negative impact on the Company's future financial position, cash flows and results of operations: the timing and product mix of significant orders and shipping schedules of its customers; industry-wide changes in the demand for semiconductors or for semiconductor manufacturing equipment; the ability of the Company to design, manufacture, test and deliver defect-free gas delivery systems and subassemblies in a timely and cost effective manner; the gain or loss of any significant customer; competitive pressures; the timing of product announcements by the Company's competitors, its customers or their competitors; seasonal changes in purchases of semiconductor manufacturing equipment; the availability and cost of components from the Company's suppliers; and the availability of production capacity. Concentration of Credit Risk--The Company extends credit to its customers, most of whom are large, established companies in the semiconductor equipment or semiconductor industries primarily located in California and Texas. Credit risk is mitigated by the Company's credit evaluation process. The Company generally does not require collateral or other security to support accounts receivable. Reserves are maintained for estimated potential credit losses. Cash and Equivalents--All highly liquid financial instruments purchased with maturities of three months or less are included as cash and cash equivalents. Short Term Investments--Short term investments consist primarily of certificates of deposit with an original maturity date of greater than 90 days. At December 31, 1996, the fair value of short term investments approximated cost. Inventories--Inventories are stated at the lower of cost (first-in, first- out) or market. Property and Equipment--Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of five years. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the improvements. Intangible Assets--Intangible assets consist primarily of a major customer relationship arising from the acquisition of Pullbrite, Inc. (see Note 2) which is being amortized using the straight-line method over five years. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. F-7 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Fair Value of Financial Instruments--Financial instruments consist of cash, cash equivalents and long-term debt. The Company believes that the fair value of financial instruments as reported in the balance sheets as of December 31, 1995 and 1996 and June 30, 1997 approximates cost. The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of long-term debt approximates the carrying amount as the borrowings are at adjustable interest rates which reprice based on fluctuations in market conditions and the level of operating cash flow of the Company. Revenue Recognition--Revenue from product sales is recognized at the time of shipment or upon receipt by the customer if the terms are FOB destination point. Product warranty costs are accrued in the period that sales are recognized. Stock-based Compensation--The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees". Income Taxes--The Company accounts for income taxes using an asset and liability approach. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions, net of a valuation allowance to reduce deferred tax assets to amounts that are more likely than not to be realized. Pro Forma Net Income (Loss) Per Share is based on the reported net income (loss) adjusted for accretion of redeemable preferred stock, to arrive at net income (loss) applicable to common stock. Pro forma net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding in 1996 and 1997. Common equivalent shares include redeemable preferred stock and common stock options and warrants (using the treasury stock method). Common stock equivalents are excluded from the computation if there is a net loss as their effect is anti- dilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins and staff policy, common and common equivalent shares issued during the period commencing twelve months prior to the initial filing of a proposed public offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method at an assumed offering price per share for stock options and the if-converted method for redeemable preferred stock). Historical net income per share for 1994 and 1995 has not been presented as such computations are not meaningful because of the significant change in the Company's capital structure from the conversion of its redeemable preferred stock that is anticipated to occur in connection with its proposed initial public offering. Unaudited Pro Forma Information--The unaudited pro forma information gives effect to the conversion of all outstanding shares of redeemable preferred stock into an aggregate of 2,352,940 shares of common stock upon the closing of the initial public offering contemplated by this Prospectus. Recently Issued Accounting Standards--In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS') No. 128, "Earnings Per Share" which establishes and simplifies the standards for computing and presenting earnings per share data. SFAS No. 128 will become effective for the Company beginning with the fiscal year ended December 31, 1997 and requires that all previously reported earnings per share data included in any future presentations be restated. Early adoption of SFAS No. 128 is not permitted. SFAS No. 128 replaces primary and fully diluted earnings per share with basic and diluted earnings per share. Pro forma basic and diluted earnings (loss) per share under SFAS No. 128 for the year ended December 31, 1996 and the six months ended June 30, 1997 would not have been materially different from the pro forma amounts reported. F-8 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and presentation of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period arising from transactions, events or circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by or distributions to owners. SFAS No. 130 will become effective for the Company beginning with the year ended December 31, 1998 and will require the presentation of total comprehensive income and its major components for the period. Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. It will become effective for the Company beginning with the year ended December 31, 1998. Adoption of these statements will have no impact on the Company's financial position, results of operations or cash flows. Interim Financial Data--In the opinion of the Company's management, the interim data includes all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the results of operations for such periods. The audited results for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year or for any other interim period. Information relating to the six months ended June 30, 1996 is unaudited. 2. ACQUISITION OF PULLBRITE On January 2, 1996, the Company acquired certain assets and assumed certain liabilities of Pullbrite, Inc. for $30 million. Pullbrite, Inc. was an independent provider of gas delivery systems and subassemblies to semiconductor equipment manufacturers. The purchase price of $30 million was paid in cash of $15 million (financed through a bank line of credit and note payable--see Note 5) and the issuance of a $15 million subordinated convertible note payable to the former owners of Pullbrite, Inc. The acquisition has been accounted for by the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net tangible assets acquired was allocated $14.4 million to a major customer relationship and $7.3 million to goodwill. During the second and third quarters of 1996, the Company experienced a significant reduction in business from the major customer and a competitor was selected to supply gas delivery systems for one of the customer's new products. As a result, management evaluated the recoverability of the carrying value of the major customer relationship and related goodwill. As a result of this evaluation, management wrote off the goodwill and reduced the carrying value of the major customer relationship to its fair value, determined based on the expected discounted cash flows from this relationship. Additionally, management reduced the amortization period for the remaining related intangible from 15 years to five years. Had the acquisition of Pullbrite, Inc. occurred at January 1, 1995, unaudited pro forma net sales, gross profit and net income would have been $98.2 million, $29.3 million and $8.6 million, respectively; however, these pro forma amounts are not necessarily indicative of the actual results of operations had the acquisition occurred on that date. 3. RESTRUCTURING CHARGES In September 1996, the Company restructured its operations and recognized a $1.3 million charge in response to declining revenues resulting from a downturn in the semiconductor equipment industry. The restructuring included the reduction of the work force, disposition of unproductive assets and facility consolidations and was completed during the fourth quarter of 1996. The initial estimate of F-9 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) $1.3 million was reduced by $465,000 in the fourth quarter due to the favorable outcome of a lease amendment. The total cost of the Company's restructuring actions reduced 1996 pretax income by $858,000 which consisted of $573,000 in write downs for the disposition of unproductive assets and $285,000 relating to severance and other facility expenses. As of December 31, 1996, all of the restructuring costs had been incurred and there were no related liabilities remaining. 4. BALANCE SHEET DETAILS
DECEMBER 31, -------------- JUNE 30, 1995 1996 1997 ------ ------ -------- (IN THOUSANDS) Accounts receivables: Receivables.................................... $7,462 $5,872 $ 9,476 Less allowance................................. (75) (107) (129) ------ ------ ------- $7,387 $5,765 $ 9,347 ====== ====== ======= Inventories: Raw materials.................................. $3,534 $5,175 $ 4,663 Work in process................................ 1,685 1,242 2,280 Finished goods................................. 445 1,415 3,204 ------ ------ ------- $5,664 $7,832 $10,147 ====== ====== ======= Property and equipment: Machinery and equipment........................ $2,894 $6,422 $ 7,069 Furniture and fixtures......................... 967 1,242 1,426 Leasehold improvements......................... 679 577 823 ------ ------ ------- 4,540 8,241 9,318 Less accumulated depreciation and amortization... (1,136) (2,597) (3,470) ------ ------ ------- $3,404 $5,644 $ 5,848 ====== ====== ======= Intangibles...................................... $ -- $5,020 $ 5,020 Less accumulated amortization.................. -- (1,125) (1,535) ------ ------ ------- $ -- $3,895 $ 3,485 ====== ====== ======= Accrued liabilities: Compensation and benefits...................... $ 707 $ 356 $ 532 Other.......................................... 884 692 379 ------ ------ ------- $1,591 $1,048 $ 911 ====== ====== =======
5. CREDIT FACILITIES At June 30, 1997, the Company had a bank credit facility commitment consisting of a term note maturing June 28, 2000 ($24 million outstanding at June 30, 1997) and $1.5 million outstanding under a $5 million revolving credit facility maturing June 28, 1998. Borrowings bear interest at the bank's prime rate (8.5% at June 30, 1997) plus a margin (2% at June 30, 1997) ranging from 0% to 2% which adjusts based on the Company's leverage ratio. The notes are secured by all tangible and intangible assets, real and personal property. Principal is due in 16 consecutive increasing quarterly installments and interest is payable monthly. Advances under the revolving note are limited to 80% of eligible accounts F-10 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) receivables and a commitment fee (0.50% at June 30, 1997), ranging from 0.25% to 0.50% which adjusts under the same terms as the margin, is payable quarterly in arrears on any unborrowed portion. As of June 30, 1997, the Company had outstanding guarantees of $635,000 granted in the form of a standby letter of credit under its revolving credit facility. Terms of the credit facility impose certain restrictions on the payment of dividends and require the Company to maintain minimum quarterly financial covenants including leverage and current ratios, operating cash flow coverage and sustained profitability (see Note 13). Secured promissory notes are due in monthly installments through 2000 with interest at 11% and are secured by the underlying machinery and equipment purchased. Long-term obligations consist of the following (in thousands):
DECEMBER 31, -------------- JUNE 30, 1995 1996 1997 ----- ------- -------- Bank notes payable............................... $ 348 $27,000 $24,000 Secured promissory note.......................... 253 188 163 ----- ------- ------- Total.......................................... 601 27,188 24,163 Current portion.................................. (188) (6,552) (7,055) ----- ------- ------- Long-term obligations............................ $ 413 $20,636 $17,108 ===== ======= =======
Maturities of long-term obligations as of June 30, 1997 are as follows (in thousands): Period Ending December 31, 1997 (six months).................. $ 3,527 1998............................... 7,553 1999............................... 8,548 2000............................... 4,535 ------- $24,163 =======
F-11 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. LEASE COMMITMENTS The Company leases its primary facilities and certain equipment under operating leases expiring from July 1997 through September 2001. The Company has a five year lease for its Austin, Texas facility expiring in September 2001. This lease has two five-year renewal options. Additionally, the Company has two five-year renewal options to extend its Milpitas, California facility lease which expires in August 2000. The Company also leases its Fremont facilities from the former owners of Pullbrite, Inc. through December 31, 2001. This lease has two additional five-year renewal options. Minimum lease payments to the former owners of Pullbrite, Inc. are $12,600 per month. Future minimum payments due under non-cancelable operating lease arrangements as of June 30, 1997 are as follows (in thousands): Period Ending December 31, 1997 (six months)................... $1,251 1998................................ 2,507 1999................................ 2,284 2000................................ 1,948 2001................................ 916 ------ Total minimum lease payments.......... $8,906 ======
Rent expense was $262,000, $403,000 and $1,369,000 for the years ended December 31, 1994, 1995 and 1996, respectively; and $606,000 and $848,000 for the six months ended June 30, 1996 and 1997, respectively. 7. REDEEMABLE PREFERRED STOCK AND COMMON STOCK PUT WARRANTS Redeemable Preferred Stock--In January and March of 1996, the Company issued 3,000,000 shares of redeemable preferred stock for total gross proceeds of $24 million. Approximately $5 million was used for operational purposes and the remainder was used to repurchase common stock from existing shareholders. The redeemable preferred stock is redeemable for $24 million in two equal annual installments beginning with the fifth anniversary of its issuance. Redeemable preferred stock offering costs of $513,000 were netted against the proceeds. The carrying value of the redeemable preferred stock is being accreted ratably over the five year redemption period. The redeemable preferred stock automatically converts into a maximum of 2,352,940 shares of common stock upon an initial public offering meeting certain criteria (see Note 13). The holders of the redeemable preferred stock have voting rights similar to common shareholders and may vote on all matters except the election of board members (they may elect their representative board member). Preferred shareholders are also entitled to certain preferences on liquidation or dissolution of the Company and to noncumulative annual cash dividends of $0.48 per share prior and in preference to any declaration or payment of dividends on the Company's common stock. The redeemable preferred stock has a liquidation preference of $16 per share. In connection with the redeemable preferred stock issuance, the Company granted to the holders of the redeemable preferred stock warrants to acquire 66,666 shares of the Company's common stock at an exercise price of $12.00 per share. These warrants are exercisable through January 1998 (see Note 13). The estimated fair value of the warrants of $223,000 was allocated to common stock. F-12 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Common Stock Put Warrants--In connection with the modification of certain financial covenants related to the Company's revolving credit facility commitment in April 1997, the Company issued warrants to acquire 40,000 shares of the Company's common stock at a price of $0.015 per share to its senior lenders. The warrants are exercisable through April 29, 2002 and the Company, at the option of the holder, may be obligated to purchase the common stock underlying these warrants at a price of $9.00 per share. The estimated fair value of the put warrants of $360,000 was recognized as additional interest expense during the six months ended June 30, 1997. 8. SHAREHOLDERS' EQUITY (DEFICIENCY) Stock Option Plan The Company's stock option plans (the "plans") permits the grant of incentive and nonqualified stock options to key employees, officers, directors and consultants. Under the plans, incentive stock options are issued at no less than 100% of the fair market value of the Company's common stock as determined at the date of grant or no less than 85% of fair market value for nonqualified stock options. Generally, options granted under the plans have a term of ten years from the date of grant and vest ratably over four or five years as determined by the Board of Directors. As discussed in Note 1, the Company applies APB No. 25 and related interpretations in accounting for its plans. The Company recognizes deferred compensation for the difference between the exercise price and the fair market value of the Company's common stock on the date of grant for options granted to employees. Deferred stock compensation is being amortized on a straight-line basis over the five-year vesting period of the underlying options. The related expense was $0, $0, $160,000, and $23,000 for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997, respectively. F-13 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In July 1996, the Company repriced all outstanding stock options which had been previously granted at a price greater than $6.00. The Company canceled the existing stock options to purchase 240,000 shares of common stock and granted new options with an exercise price of $6.00. These options are included in 1996 option activity. A summary of stock option activity under the plans is as follows:
OUTSTANDING OPTIONS ------------------------ NUMBER OF WEIGHTED SHARES AVERAGE PRICE --------- ------------- January 1, 1994....................................... -- Granted............................................. 713,921 $1.23 Canceled............................................ (136,624) 0.75 --------- December 31, 1994..................................... 577,297 1.35 Granted............................................. 438,710 5.87 Exercised........................................... (1,866) 0.75 Canceled............................................ (36,125) 1.10 --------- December 31, 1995 (154,746 options exercisable at a weighted average price of $1.66 per share)........... 978,016 3.39 Granted............................................. 558,043 6.68 Exercised........................................... (17,395) 1.21 Canceled............................................ (372,777) 7.61 --------- December 31, 1996 (330,636 options exercisable at a weighted average price of $2.38 per share)........... 1,145,887 3.65 Granted............................................. 166,488 6.00 Exercised........................................... (13,431) 2.31 Canceled............................................ (41,043) 5.99 --------- June 30, 1997......................................... 1,257,901 3.90 =========
Had compensation cost, for awards under the plans, been determined based on the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation", the estimated weighted average fair value per option as of the grant date for the awards made during 1995 and 1996 and the six months ended June 30, 1997 would have been $1.61, $1.91 and $1.65, respectively. At June 30, 1997, 509,407 shares were available for future grant. The following table summarizes information as of June 30, 1997 concerning currently outstanding and exercisable options:
WEIGHTED AVERAGE WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- ---------------- (YEARS) $ 0.75 292,483 6.8 $0.75 169,090 $0.75 2.25--2.475 204,995 7.4 2.43 81,997 2.43 4.50--6.00 760,423 8.6 5.50 199,050 4.91 --------- ------- 0.75--6.00 1,257,901 8.0 3.90 450,137 2.90 ========= =======
F-14 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SFAS No. 123 requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of the year ended December 31, 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differs from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affects the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 5.5 years; no stock volatility; risk free interest rate of 6%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair value of granted awards had been amortized to expense over the vesting period of the awards, pro forma net income (loss) applicable to common shareholders would have been $2,982,000, $(6,884,000) ($0.90 net loss per share) and $73,000 ($0.01 net income per share) for the years ended December 31, 1995 and 1996 and the six months ended June 30, 1997, respectively. However, the impact of outstanding non-vested stock options granted prior to January 1, 1995 has been excluded from the pro forma calculation; accordingly, the pro forma adjustments for the years ended December 31, 1995 and 1996 and the six months ended June 30, 1997 are not necessarily indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. Common Stock Grants The Company issued 6,000 and 20,000 shares of common stock to consultants in consideration of services performed during 1994 and 1995, respectively, and recognized the estimated fair value of the common stock as expense on the dates issued of $9,000 and $80,000, respectively. Employee Stock Purchase Plan During 1997, the Company established an employee stock purchase plan and reserved 166,666 shares of common stock subject to shareholder's approval. Common Stock Reserved for Issuance At June 30, 1997, the Company has reserved or otherwise committed to issue shares of common stock as follows: Preferred stock.................................................. 2,352,940 Exercise of options.............................................. 1,667,309 Exercise of warrants............................................. 317,996 Employee stock purchase plan..................................... 166,666 --------- 4,504,911 =========
Subsequent to June 30, 1997, the Board of Directors approved an increase of 266,666 shares in the number of shares available for grant under the Company's stock option plans. F-15 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES The components of the provision for income taxes are summarized as follows (in thousands):
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------- ---------------- 1994 1995 1996 1996 1997 ----- ------ ------- ----------- ---- (UNAUDITED) Currently payable: Federal.............................. $ 574 $2,023 $ 2,383 $2,967 $ 12 State................................ 152 550 656 601 8 ----- ------ ------- ------ ---- 726 2,573 3,039 3,568 20 Deferred: Federal.............................. (168) (383) (5,810) (200) 135 State................................ (45) (102) (1,543) (133) 34 ----- ------ ------- ------ ---- (213) (485) (7,353) (333) 169 ----- ------ ------- ------ ---- Total.............................. $ 513 $2,088 $(4,314) $3,235 $189 ===== ====== ======= ====== ====
A reconciliation between the Company's effective tax rate to the statutory rate is as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ----------- ---- (UNAUDITED) Tax at federal statutory rate................... 35% 35% 35% 35% 35% State income taxes, net of federal benefit...... 6 6 6 6 6 Research and Development credits................ (2) (2) -- -- -- Other........................................... 2 2 (2) (1) -- --- --- --- --- --- Total......................................... 41% 41% 39% 40% 41% === === === === ===
The components of the net deferred tax asset consist of the following (in thousands):
DECEMBER 31, -------------- JUNE 30, 1995 1996 1997 ------ ------- -------- Deferred tax assets--accruals and reserves recognized in different periods................................. $ 812 $ 1,694 $1,691 Deferred tax assets--intangible assets recognized in different periods.................................... -- 6,504 6,380 Deferred tax liabilities--depreciation and amortization......................................... (98) (131) (173) ----- ------- ------ Net deferred tax asset................................ $ 714 $ 8,067 $7,898 ===== ======= ======
F-16 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. MAJOR CUSTOMERS Sales to major customers in relation to net sales are as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------------ CUSTOMER 1994 1995 1996 1996 1997 -------- ------- ------- ------- ---------------- ------------ (UNAUDITED) A 67% 65% 33% 34% 30% B 29 32 16 16 20 C * * 32 36 29 D * * * * 11
Accounts receivable with major customers as a percentage of total receivables were as follows:
DECEMBER 31, ------------------------------------- JUNE 30, CUSTOMER 1995 1996 1997 -------- ------ ------ -------- A 47% 22% 23% B 52 * * C * 35 47 D * 12 15 E * 14 *
*Less than 10% of total. 11. EMPLOYEE BENEFIT PLAN The Company has a 401(k) tax-deferred savings plan under which participants may contribute up to 20% of their compensation, subject to certain Internal Revenue Service limitations. Additionally, the Company makes matching contributions on behalf of each plan participant equal to $0.50 per dollar of the contributions made by the participant, not to exceed an amount equal to 3% of their annual compensation. The Company's contributions were none, $60,000, $225,000 and $114,000 for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997, respectively. In addition, the Company committed in fiscal 1995 to issue 8,600 shares of common stock to the plan and recognized expense of $77,000 representing the estimated fair value of the shares at the date contributed. 12. RELATED PARTY TRANSACTIONS Related party transactions not otherwise disclosed herein are as follows: A consulting firm in which the Company's chairman had a minority interest provides sales and management development training services to the Company. During the six months ended June 30, 1997 and the years ended December 31, 1996, 1995 and 1994, the Company paid $157,000, $241,000, $144,000 and $64,000, respectively, for these services. Additionally, the Company issued in 1995 to the president of this firm options to acquire 50,000 shares of common stock at an exercise price of $4.50 per share. Also during the six months ended June 30, 1997 and the years ended December 31, 1996, 1995 and 1994, the Company paid $100,000, $112,000, $186,000 and $110,000 respectively, for services performed by consultants of a firm whose president is a director of the Company. During 1995, the Company issued options and warrants to acquire 99,997 shares of the Company's common stock at a weighted average exercise price of $2.75 per share to consultants of this firm for services performed. F-17 INSYNC SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In 1995, the Company recognized $200,000 as expense for the estimated fair value of the equity instruments granted during that year. 13. SUBSEQUENT EVENTS On September 26, 1997, the Board of Directors, acting pursuant to prior shareholder authorization, approved a two-for-three reverse split of its common stock. All share and per share information has been adjusted to retroactively give effect to the reverse split for all periods presented. On September 26, 1997, the holders of the redeemable preferred stock elected to convert their shares pursuant to their conversion rights into an aggregate of 2,352,940 shares of common stock upon the closing of the initial public offering contemplated by this Prospectus. In connection with this, the Company agreed to extend the expiration date of certain warrants previously granted to the shareholders by one year. Also on September 26, 1997, the Company obtained an amendment to its bank credit facility revising its financial covenants through December 31, 1997. As of June 30, 1997, the Company was in compliance with the financial covenants as amended. In connection with the amendment, the Company issued to its senior lenders common stock put warrants to acquire 10,000 shares of the Company's common stock at a price of $0.015 per share. The Company, at the option of the holder, may be obligated to purchase the common stock underlying these warrants at a price of $9.00 per share. F-18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Pullbrite, Inc.: We have audited the accompanying balance sheets of Pullbrite, Inc. as of September 30, 1994 and 1995, and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, such financial statements present fairly, in all material respects, the financial position of Pullbrite, Inc. as of September 30, 1994 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP San Jose, California October 20, 1995 (January 2, 1996 as to Note 9) F-19 PULLBRITE, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, --------------- 1994 1995 ------ ------- ASSETS CURRENT ASSETS: Cash......................................................... $ 850 $ 2,854 Short-term investments....................................... 155 189 Receivables, less allowances of $202 in 1994 and $40 in 1995. 3,074 4,900 Inventories.................................................. 1,319 2,586 Prepaid expenses............................................. 2 34 ------ ------- Total current assets....................................... 5,400 10,563 PROPERTY AND EQUIPMENT, net.................................... 1,297 1,395 OTHER ASSETS................................................... 494 786 ------ ------- TOTAL.......................................................... $7,191 $12,744 ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................. $ 693 $ 965 Accrued liabilities.......................................... 621 1,020 Income taxes payable......................................... 71 -- ------ ------- Total current liabilities.................................. 1,385 1,985 DEFERRED RENT AND OTHER........................................ 42 30 ------ ------- Total liabilities.......................................... 1,427 2,015 ------ ------- STOCKHOLDERS' EQUITY: Common stock, no par value, 500,000 shares authorized; shares outstanding: 20,000......................................... 19 19 Unrealized gain (loss) on available-for-sale securities...... (7) 17 Retained earnings............................................ 5,752 10,693 ------ ------- Total stockholders' equity................................. 5,764 10,729 ------ ------- TOTAL.......................................................... $7,191 $12,744 ====== =======
See notes to financial statements. F-20 PULLBRITE, INC. STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, ---------------- 1994 1995 ------- ------- NET SALES..................................................... $28,966 $42,484 COST OF SALES................................................. 20,173 28,482 ------- ------- GROSS PROFIT.................................................. 8,793 14,002 ------- ------- OPERATING EXPENSES- Selling, general and administrative......................... 1,505 2,412 ------- ------- INCOME FROM OPERATIONS........................................ 7,288 11,590 ------- ------- OTHER INCOME (EXPENSE): Interest income and other................................... 27 75 Interest expense............................................ (15) (5) ------- ------- Total other expense, net.................................. 12 70 ------- ------- INCOME BEFORE INCOME TAXES.................................... 7,300 11,660 PROVISION FOR INCOME TAXES.................................... 213 216 ------- ------- NET INCOME.................................................... $ 7,087 $11,444 ======= =======
See notes to financial statements. F-21 PULLBRITE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNREALIZED COMMON STOCK GAIN ------------- (LOSS) ON RETAINED SHARES AMOUNT SECURITIES EARNINGS TOTAL ------ ------ ---------- -------- ------- BALANCES, October 1, 1993........... 20,000 $19 $-- $ 3,725 $ 3,744 Unrealized loss on available-for- sale securities.................... (7) (7) Distributions....................... (5,060) (5,060) Net income.......................... 7,087 7,087 ------ --- --- ------- ------- BALANCES, September 30, 1994........ 20,000 19 (7) 5,752 5,764 Unrealized gain on available-for- sale securities.................... 24 24 Distributions....................... (6,503) (6,503) Net income.......................... 11,444 11,444 ------ --- --- ------- ------- BALANCES, September 30, 1995........ 20,000 $19 $17 $10,693 $10,729 ====== === === ======= =======
See notes to financial statements. F-22 PULLBRITE, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, ---------------- 1994 1995 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................... $ 7,087 $11,444 Reconciliation to net cash provided by operating activities: Depreciation and amortization............................... 163 259 Loss on disposal of equipment............................... 14 -- Loss on sale of securities.................................. 14 -- Deferred rent............................................... 13 (12) Changes in assets and liabilities: Receivables................................................ (1,021) (1,826) Inventories................................................ (422) (1,267) Prepaid expenses........................................... 6 (32) Accounts payable........................................... (183) 272 Accrued expenses........................................... 232 399 Income taxes payable....................................... (13) (71) ------- ------- Net cash provided by operating activities................. 5,890 9,166 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.......................... (842) (391) Proceeds from sale of equipment.............................. -- 34 Other assets................................................. (374) (292) Purchase of investments...................................... (3,160) (10) Proceeds from sale of investments............................ 2,984 -- ------- ------- Net cash used for investing activities.................... (1,392) (659) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit.............................. 350 -- Repayment of line of credit.................................. (350) -- Repayments of notes payable.................................. (144) -- Distributions to shareholders................................ (5,060) (6,503) ------- ------- Net cash used for financing activities.................... (5,204) (6,503) ------- ------- NET INCREASE (DECREASE) IN CASH............................... (706) 2,004 CASH, Beginning of period..................................... 1,556 850 ------- ------- CASH, End of period........................................... $ 850 $ 2,854 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid................................................ $ 36 $ 5 ======= ======= Income taxes paid............................................ $ 121 $ 287 ======= =======
See notes to financial statements. F-23 PULLBRITE, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1994 AND 1995 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS--Pullbrite, Inc. (the Company) was incorporated in August 1980. The Company is primarily in the business of manufacturing and selling gas control and vacuum systems and subassemblies and electro-polishing of stainless steel parts for the semiconductor manufacturing industry. CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject the Company to concentration of credit risk consist of short-term investments and accounts receivable. Short-term investments consist primarily of mutual fund accounts that are regularly monitored by management. For the years ended September 30, 1994 and 1995, one customer, a major manufacturer of semiconductor equipment, represented 81%, and 79% of net sales, respectively. At September 30, 1994 and 1995, 78% and 80% of receivables were due from that customer, respectively. The Company also extends credit to its other customers, most of whom are located in California and operate in the semiconductor equipment industry. Credit risk with respect to the trade receivables is mitigated by the Company's credit evaluation process. The Company generally does not require collateral or other security to support accounts receivable. INVESTMENTS--Investments consist primarily of mutual fund accounts. Short- term investments are classified as available for sale securities and are stated at market value. The unrealized gain (loss) of $(7,000) and $17,000 at September 30, 1994 and 1995, respectively, has been recognized as a separate component of stockholders' equity. INVENTORIES--Inventories are stated at the lower of cost (first-in, first- out) or market. PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of five to seven years. Leasehold improvements are amortized over their estimated useful lives of thirty years, although these lives are longer than the terms of the related leases. These leases are with related parties, and management has the ability and intends to extend these leases. REVENUE RECOGNITION--Revenues from product sales are recognized at the time of shipment. Product warranty costs are accrued in the period that sales are recognized. INCOME TAXES--The Company has elected to be taxed as an S Corporation for federal and state income tax purposes. In lieu of corporate income taxes, the shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision for federal income taxes has been included in these financial statements. Although the S Corporation election is recognized for California income tax purposes, this state requires S Corporations to pay a tax of 1.5% (2.5% before 1995) of taxable income. 2. INVENTORIES Inventories consist of:
SEPTEMBER 30, ------------- 1994 1995 ------ ------ Finished goods.............................................. $ 147 $ 581 Work in process............................................. 169 408 Raw materials............................................... 1,003 1,597 ------ ------ Total....................................................... $1,319 $2,586 ====== ======
F-24 PULLBRITE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED SEPTEMBER 30, 1994 AND 1995 3. PROPERTY AND EQUIPMENT Property and equipment consist of:
SEPTEMBER 30, -------------- 1994 1995 ------ ------ Machinery and equipment................................... $1,556 $1,851 Furniture and fixtures.................................... 55 73 Leasehold improvements.................................... 396 406 ------ ------ 2,007 2,330 Accumulated depreciation and amortization................. (710) (935) ------ ------ $1,297 $1,395 ====== ======
4. ACCRUED LIABILITIES Accrued liabilities consist of:
SEPTEMBER 30, ----------- 1994 1995 ---- ------ Compensation and benefits.................................... $337 $ 702 Other........................................................ 284 318 ---- ------ Total........................................................ $621 $1,020 ==== ======
5. LINE OF CREDIT At September 30, 1995, the Company had a $1,000,000 bank line of credit. Borrowings bear interest at the bank's prime rate (8.75% at September 30, 1995) plus .5% and are collateralized by accounts receivable, inventory, and equipment. The line of credit is guaranteed by the stockholders. The line of credit contains restrictive covenants, including maintaining a minimum current ratio of 2.0:1, and maximum debt to tangible net worth of 1.0:1. In addition, the Company must remain profitable on an annual basis. There were no borrowings outstanding on this line of credit at September 30, 1994 and 1995. 6. LEASE COMMITMENTS The Company conducts its operations in facilities that are leased from a partnership which is owned by the stockholders of the Company. Rent expense is recognized on a straight-line basis over the term of the lease due to scheduled rent increases. Future minimum annual commitments as of September 30, 1995 are as follows (in thousands):
FISCAL YEAR ----------- 1996.............................................................. $ 211 1997.............................................................. 211 1998.............................................................. 211 1999.............................................................. 236 2000.............................................................. 245 Thereafter........................................................ 797 ------ Total............................................................. $1,911 ======
Rent expense to related parties for the years ended September 30, 1994 and 1995 was $204,000 and $211,000, respectively. F-25 PULLBRITE, INC. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) YEARS ENDED SEPTEMBER 30, 1994 AND 1995 7. INCOME TAXES The provision for income taxes for the years ended September 30, 1994 and 1995 consisted of currently payable income taxes of $213,000 and $216,000. 8. EMPLOYEE BENEFIT PLANS The Company has a profit sharing plan whereby the Company may contribute up to 15% of the compensation of eligible employees. Employees who have attained the age of twenty-one become eligible after one year of service. Contributions to the profit sharing plan were $100,000 and $150,000 in each of the years ended September 30, 1994 and 1995. The amount to be contributed is discretionary and is determined each year by the Board of Directors. The Company also has a 401(k) tax-deferred savings plan under which participants may contribute up to 25% of their compensation, subject to Internal Revenue Service limitations. Contributions to the plan by the Company equal 25% of the salary reduction elected by each employee up to a maximum reduction of 4% of annual salary. The Company, at its option, may contribute additional amounts to the plan. Company contributions to the plan were $25,000 and $35,000 for the years ended September 30, 1994 and 1995, respectively. 9. SUBSEQUENT EVENTS On January 2, 1996, the Company and its stockholders entered into a definitive agreement with Insync Systems, Inc. (Insync), for Insync's acquisition of certain assets and liabilities of the Company for $30 million. On January 2, 1996, the acquisition was consummated and was accounted for as a purchase. F-26 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER OR ANY SELLING SHAREHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 15 Dividend Policy........................................................... 15 Capitalization............................................................ 16 Dilution.................................................................. 17 Selected Financial Data................................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 19 Business.................................................................. 28 Management................................................................ 39 Certain Transactions...................................................... 48 Principal and Selling Shareholders........................................ 50 Description of Capital Stock.............................................. 52 Shares Eligible for Future Sale........................................... 54 Underwriting.............................................................. 56 Legal Matters............................................................. 57 Experts................................................................... 58 Additional Information.................................................... 58 Index to Financial Statements............................................. F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR- TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT- ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares [Insync Logo] Common Stock ----------- PROSPECTUS ----------- BT Alex. Brown PaineWebber Incorporated Prudential Securities Incorporated , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated fees and expenses, other than underwriting discounts and commissions, to be paid by the Company in connection with this offering.
AMOUNT TO BE PAID -------- Securities and Exchange Commission registration fee................ $ 11,819 NASD filing fee.................................................... 4,400 Nasdaq National Market listing fee................................. * Accounting fees and expenses....................................... * Legal fees and expenses............................................ 250,000 Printing........................................................... 300,000 Printing and engraving stock certificates.......................... * Blue Sky fees and expenses......................................... 5,000 Transfer Agent and Registrar fees and expenses..................... * Road show expenses................................................. * Insurance premiums................................................. * Miscellaneous...................................................... * -------- Total............................................................ $ * ========
- -------- * To be completed by amendment. Pursuant to certain registration rights agreements between the Company and the Selling Shareholders, no portion of the above expenses will be borne by such Selling Shareholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 317 of the California Corporations Code authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended. The Company's Amended and Restated Articles of Incorporation and the Company's Bylaws provide for indemnification of the Company's directors and officers to the maximum extent permitted by the California Corporations Code. In addition, the Company has entered into indemnification agreements with its officers and directors. Reference is also made to Section 8 of the Underwriting Agreement indemnifying officers and directors of the Company against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since August 1, 1994, the Company issued and sold the following unregistered securities pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) of the Act or Rule 701 of the Act: (1) In December 1994, the Company issued 222,222 shares of Common Stock to a supplier for cancellation of indebtedness in the amount of $500,000. (2) From December 1994 through August 1995, the Company issued 26,000 shares of Common Stock for services provided in lieu of cash of $89,000. (3) From May 1995 through July 1995, the Company issued and sold 439,953 shares of Common Stock to a group of private investors for aggregate cash consideration of $1,939,000, net of issuance costs. II-1 (4) In September 1995, the Company issued 13,333 shares of Common Stock to a supplier upon the exercise of a warrant for an aggregate cash consideration of $1,000. (5) On January 30, 1996 and March 6, 1996, the Company issued and sold an aggregate of 3,000,000 shares of Series A Preferred Stock and warrants to purchase 66,666 shares of Common Stock to a group of private investors for an aggregate cash consideration of $24,001,000. (6) On January 2, 1996, the Company issued a $15 million convertible promissory note to Pullbrite, Inc. in connection with the Company's acquisition of Pullbrite, Inc. (7) Between July 1, 1994 and August 1, 1997, the Company granted options to directors and consultants pursuant to its 1993 Stock Option Plan, at exercise prices of between $0.75 and $10.50. At August 1, 1997 options to purchase 1,359,751 shares of Common Stock were outstanding. (8) Between December 1993 and September 1997, the Company granted warrants to directors, consultants and a lender of the Company to purchase 317,996 shares of Common Stock, at exercise prices ranging from $0.015 to $12.00 per share. (9) From August 1, 1995 through August 1, 1997, the Company issued and sold 32,692 shares of Common Stock upon the exercise of stock options for an aggregate consideration of $53,475. ITEM 16. EXHIBITS (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 1.01 Form of Underwriting Agreement. 2.01 Purchase Agreement by and between Pullbrite, Inc., Byron L. Bertsch, James E. Wyant and Insync Systems, Inc.* 3.01 Articles of Incorporation, as amended. 3.02 Form of Amended and Restated Articles of Incorporation of Registrant to be in effect following completion of the Offering.* 3.03 Bylaws, as amended. 3.04 Form of bylaws, to be in effect following completion of the Offering.* 4.01 Specimen of Common Stock Certificate. 4.02 Insync Systems, Inc. Amended and Restated Registration Rights Agreement dated January 19, 1996. 4.03 Insync Systems, Inc. Amended and Restated 1993 Stock Option Plan. 4.04 1997 Stock Plan and Stock Option Agreement. 4.05 Insync Systems, Inc. 1997 Employee Stock Purchase Plan with Subscription Agreement. 4.06 Insync Systems, Inc. Profit Sharing/401(k) Plan.* 4.07 Insync Systems, Inc. Profit Sharing/401(k) Plan Adoption Agreement and Summary Plan Description.* 4.08 Series A Preferred Stock and Warrant Purchase Agreement dated as of January 30, 1996 and March 6, 1996.* 4.09 Forms of Warrant to Purchase Common Stock.*
II-2
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 4.10 Form of Employee and Affiliate Stock Purchase Agreement. 4.11 Officer and Director Lockup Agreement.* 5.01 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. regarding legality of securities being registered.* 10.01 Lease of 1463 Centre Pointe Drive, Milpitas, CA.* 10.02 Commercial Lease Agreement of 200 C. Parker Drive, Suite 600, Austin, TX. 78728.* 10.03 Lease of 45437 Warm Springs Boulevard, Fremont, CA 94539.* 10.04 Lease of 1507 Centre Point Drive, Milpitas, CA.* 10.05 Consulting Services Agreement with Kairos. 10.06 Master Purchase Order and Sales Agreement with Applied Materials.* 10.07 Equity Agreement between Stanley L. Leopard and the Company. 10.08 Blank Purchase Agreement of Lam Research; Agreement #840-0001* 11.01 Statement regarding computation of per share earnings. 12.01 Statement regarding computation of ratios.* 23.01 Independent Auditors' Consent and Report on Schedules. 23.02 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.01).* 24.01 Power of attorney (See page II-5). 27.01 Financial Data Schedule.*
- -------- * To be filed by amendment. ** Pursuant to Item 601(b)(2), certain schedules and other attachments have been omitted from the indicated exhibits and which omitted items shall be furnished supplementally to the Commission upon request. *** Attached to the Registration Statement. (b) The following financial statement schedule is filed herewith: Schedule II Valuation and Qualifying Accounts. Schedules not listed above have been omitted because the information required to be set forth therein is inapplicable or is shown either in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, II-3 officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on October 1, 1997. Insync Systems, Inc. /s/ Stanley L. Leopard By: _________________________________ Stanley L. Leopard, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stanley L. Leopard and Terence J. Griffin, jointly and severally, his true and lawful attorneys-in-fact, each with the power of substitution, for him, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Stanley L. Leopard Chief Executive Officer and October 1, 1997 ____________________________________ Director Stanley L. Leopard /s/ Terence J. Griffin Chief Financial Officer October 1, 1997 ____________________________________ Terence J. Griffin /s/ Frank R. Balma Director October 1, 1997 ____________________________________ Frank R. Balma /s/ Brent D. Elliot Director October 1, 1997 ____________________________________ Brent D. Elliot /s/ Michael C. Child Director October 1, 1997 ____________________________________ Michael C. Child /s/ Don M. Lyle Director October 1, 1997 ____________________________________ Don M. Lyle /s/ Russell G. Redenbaugh Director October 1, 1997 ____________________________________ Russell G. Redenbaugh /s/ W. Lee Shevel Director October 1, 1997 ____________________________________ W. Lee Shevel
II-5 SCHEDULE II INSYNC SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE OF CHARGED TO BALANCE AT BEGINNING OF COST AND DEDUCTIONS/ END OF PERIOD EXPENSES WRITE-OFF PERIOD ------------ ---------- ----------- ---------- Year ended December 31, 1994 Accounts receivable allow- ance........................ $ 4 $ 7 $ -- $ 11 Year ended December 31, 1995 Accounts receivable allow- ance........................ $ 11 $247 $183 $ 75 Year ended December 31, 1996 Accounts receivable allow- ance........................ $ 75 $390 $358 $107 Six month period ended June 30, 1997 Accounts receivable allow- ance........................ $107 $ 22 $ -- $129
S-1 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 1.01 Form of Underwriting Agreement. 2.01 Purchase Agreement by and between Pullbrite, Inc., Byron L. Bertsch, James E. Wyant and Insync Systems, Inc.* 3.01 Articles of Incorporation, as amended. 3.02 Form of Amended and Restated Articles of Incorporation of Registrant to be in effect following completion of the Offering.* 3.03 Bylaws, as amended. 3.04 Form of bylaws, to be in effect following completion of the Offering.* 4.01 Specimen of Common Stock Certificate. 4.02 Insync Systems, Inc. Amended and Restated Registration Rights Agreement dated January 19, 1996. 4.03 Insync Systems, Inc. Amended and Restated 1993 Stock Option Plan. 4.04 1997 Stock Plan and Stock Option Agreement. 4.05 Insync Systems, Inc. 1997 Employee Stock Purchase Plan with Subscription Agreement. 4.06 Insync Systems, Inc. Profit Sharing/401(k) Plan.* 4.07 Insync Systems, Inc. Profit Sharing/401(k) Plan Adoption Agreement and Summary Plan Description.* 4.08 Series A Preferred Stock and Warrant Purchase Agreement dated as of January 30, 1996 and March 6, 1996.* 4.09 Forms of Warrant to Purchase Common Stock.* 4.10 Form of Employee and Affiliate Stock Purchase Agreement. 4.11 Officer and Director Lockup Agreement.* 5.01 Opinion of Wilson, Sonsini, Goodrich & Rosati, PC regarding legality of securities being registered.* 10.01 Lease of 1463 Centre Pointe Drive, Milpitas, CA.* 10.02 Commercial Lease Agreement of 200 C. Parker Drive, Suite 600, Austin, TX 78728.* 10.03 Lease of 45437 Warm Springs Boulevard, Fremont, CA 94539.* 10.04 Lease of 1507 Centre Point Drive, Milpitas, CA.* 10.05 Consulting Services Agreement with Kairos. 10.06 Master Purchase Order and Sales Agreement with Applied Materials.* 10.07 Equity Agreement between Stanley L. Leopard and the Company. 10.08 Blank Purchase Agreement of Lam Research; Agreement #840-0001.* 11.01 Statement regarding computation of per share earnings. 12.01 Statement regarding computation of ratios.* 23.01 Independent Auditors' Consent and Report on Schedules. 23.02 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.01).* 24.01 Power of attorney (See page II-5). 27.01 Financial Data Schedule.*
- -------- * To be filed by amendment. ** Pursuant to Item 601(b)(2), certain schedules and other attachments have been omitted from the indicated exhibit and which omitted items shall be furnished supplementally to the Commission upon request. *** Attached to the Registration Statement. EX-1.01 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.01 ____________Shares INSYNC SYSTEMS, INC. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT ---------------------- __________________, 19___ BT Alex. Brown Incorporated Paine Webber, Inc. Prudential Securities Inc. As Representatives of the Several Underwriters c/o BT Alex. Brown Incorporated One South Street Baltimore, Maryland 21202 Gentlemen: Insync Systems, Inc., a California corporation (the "Company"), and certain shareholders of the Company (the "Selling Shareholders') propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of _________ shares of the Company's Common Stock, $.01 par value (the "Firm Shares"), of which ________ shares will be sold by the Company and ________ shares will be sold by the Selling Shareholders. The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts to be sold by the Selling Shareholders are set forth opposite their names in Schedule II hereto. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "Sellers." The Company [and] [the] [certain] Selling Shareholders] also propose[s] to sell at the Underwriters' option an aggregate of up to _______ additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interest of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Company and the Selling ------------------------------------------------------------- Shareholders. - ------------ (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-1 (File No. 333- _______) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. The Company has complied with the conditions for the use of Form S-1. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully 2 paid and non-assessable and are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (iii) The outstanding shares of capital stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the portion of the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform, to the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included in the Registration 3 Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial statements and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) Deloitte & Touche, LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants are required by the Act and the Rules and Regulations. (viii) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (ix) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (x) The Company and the Subsidiaries have filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due. All tax liabilities have been adequately provided for in the financial statements of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or 4 supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. (xii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Articles of Incorporation or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and its Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Articles of Incorporation or By-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xiii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiv) The Company and each of the Subsidiaries holds all material license, certificates and permits from governmental authorities which are necessary to the conduct of their businesses; and neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. (xv) The Company and each of the Subsidiaries own, or are licensed or otherwise have the full exclusive right to use all patents, patent rights, trademarks, service marks, trade names, copyrights, mask work rights, technology, licenses, inventions, trade secrets, know-how and other intellectual property rights ("Intellectual Property") necessary to conduct the business now or proposed to be conducted by the Company and each of the Subsidiaries as described in the Prospectus, and, except as disclosed in the Prospectus, neither the Company nor any of its Subsidiaries has received any notice of infringement of or conflict with (or knows of such infringement of or conflict with) asserted rights of others with respect to the Intellectual Property, and, except as disclosed in the Prospectus and to the knowledge of the Company and each of its Subsidiaries, do not in the conduct of their business as now or proposed to be 5 conducted as described in the Prospectus, infringe or conflict with any Intellectual Property of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any thirty party, known to the Company or any of the Subsidiaries. (xvi) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Regulation M under the Exchange Act of 1934, as amended (the "Exchange Act"). (xvii) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (xviii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xix) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xx) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xxi) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of doing Business with Cuba, and the Company - --------------------------------------------------------- further agrees that if it commences 6 engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (xxii) The Company and each of its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (xxiii) No material labor dispute with employees of the Company or any of its Subsidiaries exists or to the knowledge of the Company is imminent, and, without conducting any independent investigation, the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could result in any material adverse change in the condition, financial or otherwise, the earnings, the business or operations of the Company and its Subsidiaries, taken as a whole. (b) Each of the Selling Shareholders severally represents and warrants as follows: (i) Such Selling Shareholder now has and at the Closing Date and the Option Closing Date, as the case may be (as such dates are hereinafter defined) will have good and marketable title to the Firm Shares and the Option Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Firm Shares and Option Shares; and upon the delivery of, against payment for, such Firm Shares and Option Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custodian Agreement referred to below and to perform its obligations under such Agreements. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, 7 regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Firm Shares and the Option Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement. The information pertaining to such Selling Shareholder under the caption "Selling Shareholders" in the Prospectus is complete and accurate in all material respects. (v) Each of the Selling Shareholders listed on Schedule III, severally and not jointly, represents, warrants and agrees that each of them has reviewed the Registration Statement and Prospectus and during the course of such review, no facts have come to such Selling Shareholder's attention which leads such Selling Shareholder to believe that the Registration Statement, at the time it became effective, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Prospectus, as of the date of the Prospectus, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 2. Purchase, Sale and Delivery of the Firm Shares. ---------------------------------------------- (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Sellers agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in 8 Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to he purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by each Seller as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and of each of the Selling Shareholders shall be several and not joint. (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with _______________ as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Shareholder for delivery of all Firm Shares and any Option Shares to be sold hereunder by the Selling Shareholders. Each of the Selling Shareholders specifically agrees that the Firm Shares and any Option Shares represented by the certificates held in custody for the Selling Shareholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery of the Underwriters of the Firm Shares or the Option Shares hereunder, certificates for the Firm Shares or the Option Shares, as the case may be, shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. (c) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company for the shares to be sold by it and to the order of _____________, "as Custodian" for the shares to be sold by the Selling Shareholders, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of BT Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. 9 (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company [and [the] [certain] Selling Shareholders [listed on Schedule III hereto]] hereby grant[s] an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. [The maximum number of Option Shares to be sold by the Company and the Selling Shareholders is set forth opposite their respective names on Schedule III hereto.] The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company, the Attorney-in- fact, and the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. [If the option granted hereby is exercised in part, the respective number of Option Shares to be sold by the Company and each of the Selling Shareholders listed in Schedule III hereto shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule II hereto, adjusted by you in such manner as to avoid fractional shares.] The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "'Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Attorney-in-Fact. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company [for the Option Shares to be sold by it and to the order of " , as Custodian" for the Option Share to be sold by the Selling Shareholders] against delivery of certificates therefor at the offices of BT Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland. (e) If on the Closing Date or Option Closing Date, as the case may be, any Selling Shareholder fails to sell the Firm Shares or Option Shares which such Selling Shareholder has agreed to sell on such date as set forth in Schedule II hereto, the Company agrees that it will sell or arrange for the sale - ----------- of that number of shares of Common Stock to the Underwriters which represents Firm Shares or the Option Shares which such Selling Shareholder has failed to so sell, as set forth in Schedule II hereto, or such lesser number as may be ----------- requested by the Representatives. 3. Offering by the Underwriters. ---------------------------- 10 It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company and the Selling Shareholders. ----------------------------------------------------- (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. 11 (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event no later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or 12 exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 180 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated and the Company will not consent to release any shareholder of the Company from any lock-up agreement without the prior written consent of BT Alex. Brown Incorporated. (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Nasdaq National Market. (x) The Company has caused each officer and director and specific shareholders of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Shares or derivative of Common Shares owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 180 days after the date of the final Prospectus, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated ("Lockup Agreements"). (xi) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Selling Shareholder or request the registration for the offer or sale of any of the foregoing (or as to which the Selling Shareholder has the right to direct the disposition of) will be made for a period of 180 days after the date of the final Prospectus, directly or indirectly, by such 13 Selling Shareholder otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Shareholders agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. Costs and Expenses. ------------------ The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the NASD of the terms of the sale of the Shares; the Listing Fee of the Nasdaq National Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. To the extent, if at all, that any of the Selling Shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Share to the several Underwriters will be paid by the Sellers pro rata. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company and its Subsidiaries. The Company shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several 14 Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. Conditions of Obligations of the Underwriters. --------------------------------------------- The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company and the Selling Shareholders, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are 15 fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's capital stock, including the Shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company including in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Management--Stock Plans," "Management--Profit Sharing/401(k) Plan," "Management--Limitation of Liability and Indemnification Matters," "Certain Transactions," "Description of Capital Stock" and "Shares 16 Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or By-laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholders. (xiv) Each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholders. (xv) The Custodian Agreement and the Power of Attorney executed and delivered by each Selling Shareholder is valid and binding. 17 (xvi) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by each Selling Shareholder on the Closing Date, and the Option Closing Date, as the case may be, free and clear of all liens, encumbrances, equities and claims. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements and schedules therein). With respect to such statement, Wilson Sonsini Goodrich & Rosati may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Blakely, Sokoloff, Taylor & Zafman, intellectual property counsel for the Company, dated as of the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, to the effect that such counsel is familiar with the technology used by the Company in its business and the manner of its use thereof and has read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents and trade secrets, and (i) Neither the Registration Statement nor the Prospectus, including but not limited to "Risk Factors-Limited Intellectual Property Protection" and "Business-Intellectual Property" (a) contains any untrue statement of material fact with respect to (1) patents, patent rights, trade secrets, trademarks, service marks or other proprietary information owned or used by the Company, or the manner of its use thereof, or (2) any allegation on the part of any person that the Company is infringing any patent rights, trade secrets, trademarks services marks or other proprietary information of any such person or (b) omits to state any material fact relating to (1) patents, trade secrets, trademarks, service marks or other proprietary information or materials owned or used by the Company, or the manner of its use thereof or (2) any allegation on the part of any person that the Company is infringing on any patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of any such person that is necessary to make the statements therein not misleading; (ii) Except as stated in the Registration Statement or Prospectus, there are no legal or governmental proceedings pending relating to patent rights, trade secrets, 18 trademarks, service marks or other proprietary information of the Company, and no such proceedings are threatened or contemplated by governmental authorities or others; (iii) Except as stated in the Registration Statement or Prospectus, to its knowledge, the Company is not infringing or otherwise violating any patents, trade secrets, trademarks, service marks or other proprietary information of others; and (iv) To its knowledge, the Company owns or possesses sufficient rights to use all patents, trade secrets, trademarks, service marks or other proprietary information as described in the Prospectus. (d) The Representatives shall have received from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs ___________________ of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the State of California. In rendering such opinion Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP may rely as to all matters governed other than by the laws of the State of California or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (e) The Representatives shall have received at or prior to the Closing Date from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) You shall have received, on each of the dates hereon, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of 19 Deloitte & Touche confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (g) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (h) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and 20 warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq National Market. (j) The Lockup Agreements described in Section 4(x) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholders of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Shareholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Sellers. -------------------------------------------- (a) The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. --------------- (a) The Company and the Selling Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such 21 loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company and the Selling Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholders may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the 22 extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Shareholders in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling 23 Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) no Selling Shareholder shall be required to contribute any amount in excess of the proceeds received by such Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be 24 entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Default By Underwriters. ----------------------- If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Shareholder), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Notices. ------- All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland 21202, Attention: ________________; with a copy to BT Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company or the Selling Shareholders, to Insync Systems, Inc., 1463 Centre Point Drive, Milpitas, California 95035. 25 11. Termination. ----------- This Agreement may be terminated by you by notice to the Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's common stock by the Commission on the Nasdaq National Market or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. Successors. ---------- This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 26 13. Information Provided By Underwriters. ------------------------------------ The Company, the Selling Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 27 14. Miscellaneous ------------- The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. 28 Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, INSYNC SYSTEMS, INC. By________________________________________________ Stanley L. Leopard, Chief Executive Officer Selling Shareholders listed on Schedule II By________________________________________________ Attorney-in-Fact] The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. BT ALEX. BROWN INCORPORATED PAINE WEBBER, INC. PRUDENTIAL SECURITIES, INC. As Representatives of the several Underwriters listed on Schedule I By: BT Alex. Brown Incorporated By: _______________________________ Authorized Officer 29 SCHEDULE I SCHEDULE OF UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased ----------- ------------------------------------- BT Alex. Brown Incorporated Paine Webber, Inc. Prudential Securities, Inc. _____________ Total _____________
SCHEDULE II SCHEDULE OF SELLING SHAREHOLDERS
Selling Shareholder Number of Firm Shares to be Sold ------------------- -------------------------------- _____________ Total _____________
SCHEDULE III SELLING SHAREHOLDERS PROVIDING A REPRESENTATION UNDER SECTION 1(b)(v) EX-3.01 3 ARTICLES OF INCORPORATION, AS AMENDED EXHIBIT 3.01 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INSYNC SYSTEMS, INC. -------------------- The undersigned, STANLEY L. LEOPARD and TERENCE J. GRIFFIN certify that: 1. They are the Chief Executive Officer and Secretary, respectively, of Insync Systems, Inc., a California corporation (the "Corporation"). 2. The Amended and Restated Articles of Incorporation of this Corporation are amended and restated as follows: ARTICLE I The name of this Corporation is Insync Systems, Inc. ARTICLE II The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III This Corporation is authorized to issue two classes of stock to be designated, respectively, the "Preferred Stock" and the "Common Stock". The total number of shares which this Corporation is authorized to issue is fifty- three million (53,000,000) shares. Fifty million (50,000,000) shares shall be common stock, par value $.01 per share (the "Common Stock"), and three million (3,000,000) shares shall be Preferred Stock, par value $.01 per share (the "Preferred Stock"). ARTICLE IV All three million (3,000,000) shares of Preferred Stock are hereby designated as "Series A Preferred Stock" (the "Series A Preferred Stock") with the rights, preferences and privileges specified herein. The rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred Stock are as follows: 1. Dividends. --------- (a) The holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in shares of Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation) on the Common Stock of this Corporation, cash dividends at the annual rate of $0.48 per share, payable if when and as declared by the board of directors. Such dividends shall not be cumulative. (b) After dividends on the Series A Preferred Stock shall have been declared and paid or set apart, if the board of directors shall elect to declare additional dividends out of funds legally available therefor, such additional dividends shall be declared in equal amounts per share on all shares of Series A Preferred Stock and Common Stock. 2. Liquidation Preference. ---------------------- (a) (i) For the purposes of this Section 2(a), the following definitions shall apply: (1) "Common Share Purchase Price" means $3.00 per share (subject to adjustment for splits, dividends, combinations, reclassifications, and the like); (2) "Distributable Assets" means the aggregate dollar value of all assets available for distribution upon a Liquidation; (3) "Distributable Assets per Share" means the number calculated by dividing the Distributable Assets by the Total Shares; (4) "PCT" means the number calculated by dividing $24 minus Distributable Assets per Share by $8.00; (5) "Series A Purchase Price" means $8.00 per share (subject to adjustment for splits, dividends, combinations, reclassifications and the like); (6) "Total Shares" means the sum of the number of actually issued and outstanding shares of Common Stock and the number of shares of Common Stock issuable upon the conversion of all actually issued and outstanding shares of preferred stock including all shares of Series A Preferred Stock as of the record date fixed by the Board of Directors in connection with such Liquidation. 2. (ii) In the event of any voluntary or involuntary liquidation, dissolution or winding up ("Liquidation") of the Corporation, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its shareholders, before any payment shall be made in respect of the Corporation's Common Stock, an amount per share equal to all declared and unpaid dividends thereon, if any, to the date fixed for distribution, plus a preference amount determined according to the following table: Distributable Preference per Share of Assets per Share Series A Preferred Stock ---------------- ------------------------ Less than $16 Series A Purchase Price Greater than or equal to $16, but less than or equal to $24 PCT x Series A Purchase Price Greater than $24 $0 If, upon any Liquidation of the Corporation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Preferred Stock the full amounts to which they shall be entitled, all assets of the Corporation available for distribution shall be distributed ratably to the holders of the Series A Preferred Stock. (iii) In the event that the quotient obtained by dividing (a) the difference between (1) the Distributable Assets and (2) the aggregate preferential amount, if any, due the holders of Series A Preferred Stock as set forth in Section 2(a)(ii) above (the "Aggregate Series A Preference Amount") by (b) the number of actually issued and outstanding shares of Common Stock (the "Total Common Shares") is less than or equal to the Common Share Purchase Price, after setting apart or paying in full the preferential amounts, if any, due the holders of Series A Preferred Stock as set forth in Section 2(a)(ii) above, the remaining assets of the Corporation available for distribution to shareholders, if any, shall be distributed to the holders of Common Stock, each such actually issued and outstanding share of Common Stock entitling the holder thereof to receive an equal portion of such remaining assets. (iv) In the event that the quotient obtained by dividing (a) the difference between (1) the Distributable Assets and (2) the Aggregate Series A Preference Amount by (b) the Total Common Shares is greater than the Common Share Purchase Price, after setting apart and paying in full the preferential amounts, if any, due the holders of Series A Preferred Stock as set forth in Section 2(a)(ii) above the remaining assets of the Corporation available for distribution to shareholders, if any, shall be distributed to the holders of Series A Preferred Stock and Common Stock, with 3. the amount of such distribution for each share of Series A Preferred Stock being equal to the amount of such distribution for each share of Common Stock (each such issued and outstanding share of Common Stock entitling the holder thereof to receive an equal portion of such remaining assets) multiplied by the number of shares of Common Stock into which such share of Series A Preferred Stock is convertible as of the date fixed for such distribution, subject to completion of the following distributions before such participating distribution: (x) first, each holder of a share of Common Stock shall have received, pursuant to this Section 2(a)(iv), an amount equal to the Common Share Purchase Price before any holder of Series A Preferred Stock shall be entitled to participate in any pro rata distribution pursuant to this Section 2(a)(iv); and (y) second, after such payment has been made pursuant to subparagraph (iv) (x) immediately above, each holder of Series A Preferred Stock shall have received, pursuant to this Section 2(a)(iv), an amount equal to the Common Share Purchase Price before any holder of Common Stock shall be entitled to participate further in any pro rata distribution pursuant to this Section 2(a)(iv). (b) A consolidation or merger of this Corporation or an affiliated corporation with or into any other corporation or corporations, a sale of all or substantially all of the assets of this Corporation in one or more related transactions, or the effectuation by this Corporation of a transaction or series of related transactions whereby, in each case, more than 50% of the voting power of this Corporation is disposed of (excluding a reincorporation merger) (collectively, an "Acquisition Transaction") may, upon the election of holders of a majority of the outstanding shares of Series A Preferred Stock in writing to this Corporation, be treated as a Liquidation for purposes of this Section 2. (c) In the event this Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Section 2, this Corporation shall, within ten (10) days after the date the board of directors approves such action or twenty (20) days prior to any shareholders' meeting called to approve such action, whichever is earlier, give each holder of shares of the Series A Preferred Stock written notice of the proposed action. Such written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by the holders of shares of the Series A Preferred Stock upon consummation of the proposed action and the proposed date of delivery thereof. If any material change in the facts set forth in the notice shall occur, this Corporation shall promptly give written notice to each holder of shares of the Series A Preferred Stock of such material change. 4. (d) This Corporation shall not consummate any proposed action of the type described in subsection (a) or (b) of this Section 2 before the expiration of thirty (30) days after the mailing of the initial written notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; provided, however, that any such 30-day or 10-day period may be shortened upon the written consent of the holders of a majority of the outstanding shares of the Series A Preferred Stock. (e) If this Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Section 2 which will involve the distribution of assets or properties other than cash, this Corporation shall promptly engage, at its expense, independent competent appraisers whose findings must be acceptable to the Series A Director Designee (as defined herein) to determine the value of the assets or properties to be distributed to the holders of shares of the Series A Preferred Stock and the Common Stock. This Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice of the appraiser's valuation to each holder of shares of the Series A Preferred Stock. 3. Redemption. ---------- (a) (i) Subject to the terms and conditions of this Section 3, to the extent that any outstanding shares of Series A Preferred Stock have not been redeemed and that any outstanding shares of Series A Preferred Stock have not been converted into Common Stock prior to the fifth anniversary of the date on which this Corporation first issues shares of Series A Preferred Stock (the "Original Issue Date"), this Corporation shall, solely at the option of the holders of at least a majority of the shares of Series A Preferred Stock, upon receiving, at any time prior to the fifth anniversary of the Original Issue Date, a written request for the redemption of Series A Preferred Stock signed by holders owning a majority of the then outstanding shares of Series A Preferred Stock, redeem in cash at the Redemption Price (as defined below) on the fifth anniversary of the Original Issue Date a number of shares of Series A Preferred Stock equal to 50% of such shares that are outstanding on such date and on the sixth anniversary of the Original Issue Date the remaining number of shares of Series A Preferred Stock that are outstanding on such date, resulting in the redemption or conversion to Common Stock as provided in Section 5 of all outstanding shares of Series A Preferred Stock. (ii) Upon the receipt of a written redemption request referenced in Section 3(a)(i) above, this Corporation shall give written notice by mail, postage prepaid, to the holders of the Series A Preferred Stock then outstanding to be redeemed that all shares of Series A Preferred Stock will be redeemed on such redemption dates as specified in subsection 3(a) for a cash price equal to $8.00 per share (adjusted for any dividends, subdivisions, combinations or reclassifications and the like with respect to such shares) plus an amount equal to any declared but unpaid dividends on each such share of Series A Preferred Stock (the "Redemption Price"). The notice 5. shall further call upon each such holder to surrender to this Corporation on or before such redemption date at the place designated in the notice such holder's certificate or certificates representing such holder's pro rata portion of the shares to be redeemed and shall state that, in lieu of redemption, a holder may, prior to either such redemption date, convert its Series A Preferred Stock into Common Stock in accordance with Section 5 below. On or after such redemption date, each holder of shares of Series A Preferred Stock called for redemption shall surrender the certificate evidencing such shares to this Corporation, except that such number of shares shall be reduced by the number of shares which have been converted into Common Stock between the date of the written redemption request and such redemption date, at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price. (b) From and after the relevant redemption date, unless there shall have been a default in payment of the appropriate redemption price, all rights of the holders with respect to such redeemed shares of Series A Preferred Stock (except the right to receive on the Closing Date the Redemption Price with interest upon surrender of the stock certificates) shall cease and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. (c) If the funds of this Corporation legally available for redemption of shares of Series A Preferred Stock on the relevant redemption date are insufficient to redeem the total number of shares of Series A Preferred Stock to be redeemed on such date, this Corporation shall use those funds which are legally available to redeem in cash the maximum possible number of such shares ratably among the holders of such shares to be redeemed. The shares of Series A Preferred Stock not redeemed shall remain outstanding and shall be entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of this Corporation are legally available for the redemption of shares of Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares which this Corporation has become obligated to redeem on the relevant redemption date but which it has not redeemed. (d) Although this Corporation and the holders of the Series A Preferred Stock expect this Corporation will have sufficient funds to effect each such redemption, if this Corporation lacks legally sufficient funds and assets at the time of request to effect the timely redemption of the shares of Series A Preferred Stock that are subject to redemption, then this Corporation shall pay, on each six-month anniversary following the first applicable redemption date and each subsequent six-month anniversary date until the overdue redemption payment is made in full, a dividend on the aggregate overdue redemption payment in an amount equal to the product of the aggregate overdue redemption payment from time to time outstanding during the six months preceding such six-month anniversary and the greater of 12% or 5% over the "reference 6. rate" of the Bank of America, NT & SA, from time to time in effect ("Prime Rate"), but in no event at a rate higher than that permitted by applicable law. (e) On or prior to the first redemption date, this Corporation shall deposit with a bank or trust company in San Francisco, California having a capital and surplus of at least $100,000,000, as a trust fund, a sum equal to the aggregate Redemption Price for all shares of Series A Preferred Stock called for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust company to pay, on or after the redemption date, the Redemption Price to the holders upon the surrender of their share certificates. From and after the date of such deposit, the shares so called for redemption shall be redeemed. The deposit shall constitute full payment of the shares to their holders, and from and after the date of the deposit, the shares shall be deemed to be no longer outstanding, all dividends with respect to such shares shall cease to accrue and the holders thereof shall cease to be shareholders with respect to such shares and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the Redemption Price of the shares, without interest, upon surrender of their certificates therefor, and the right to convert such shares as provided for herein. 4. Voting Rights. ------------- (a) For so long as at least 250,000 shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock, voting as a separate class, shall be entitled to elect one director. Such director shall be the candidate receiving the highest number of affirmative votes of the outstanding shares of Series A Preferred Stock (the "Series A Director Designee") with votes cast against such candidate and votes withheld having no legal effect. The election of a director by the Series A Preferred Stock shall occur at the annual meeting of holders of capital stock or at any special meeting of holders of Series A Preferred Stock called by holders of a majority of the outstanding shares of Series A Preferred Stock or by the written consent of all such holders. If the person elected by the holders of Series A Preferred Stock should cease to be a director for any reason, the vacancy shall only be filled by the vote or written consent of holders of a majority of the outstanding shares of Series A Preferred Stock. The holder of each share of the Series A Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of such series of Series A Preferred Stock could be converted on the record date for the vote or consent of shareholders and shall vote with holders of the Common Stock upon any matter submitted to a vote of shareholders, except for the election of directors and those matters required by law to be submitted to a class vote or pursuant to the protective provisions set forth herein. The right of the holders of Series A Preferred Stock to vote, as a separate class, to elect the Series A Director Designee shall expire on the closing date of the Corporation's initial public offering. 7. (b) Holders of the outstanding shares of Common Stock shall be entitled to elect the remaining directors of the Corporation. 5. Conversion. The holders of the Series A Preferred Stock shall ---------- have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. ---------------- (i) Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of this Corporation or any transfer agent for such shares, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $8.00 (subject to adjustment for any splits, dividends, subdivisions, combinations, reclassifications and the like with respect to such shares) (the "Series A Purchase Price") by the Conversion Price at the time in effect for such share. The initial Conversion Price per share shall be the Series A Purchase Price. The Conversion Price shall be subject to the adjustments set forth below. (ii) Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock as determined from time to time, (a) at the then effective Conversion Price immediately upon the closing of an underwritten public offering covering this Corporation's Common Stock at a minimum gross offering price of $9.00 per share (subject to adjustment for any splits, dividends, subdivisions, combinations, reclassifications and the like with respect to such shares) in which this Corporation receives $20,000,000 or more in net proceeds after deduction of expenses relating to such offering; or (b) upon this Corporation's receipt of the written consent of the holders of at least two-thirds of the then outstanding shares of Series A Preferred Stock to the conversion of all then outstanding Series A Preferred Stock under this Section. (iii) No fractional shares of Common Stock shall be issued upon conversion of Series A Preferred Stock. Any fractional share of Common Stock (based on the aggregate number of shares of Series A Preferred Stock the holder is converting at the time) shall be redeemed for the then effective Conversion Price payable as promptly as possible whenever funds are legally available therefor. (b) Mechanics of Conversion. Before any holder of Series A ----------------------- Preferred Stock shall be entitled to convert the same into shares of Common Stock, he or it shall surrender the certificate therefor, duly endorsed, at the office of this Corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to this Corporation at such office that he elects to convert the same. This Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock a certificate or certificates for the number of shares of Common Stock to which he or it shall be entitled as aforesaid. Such 8. conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. If the conversion is in connection with an underwritten offering of securities pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering shares of Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price. ------------------------------- (i) Adjustments to Conversion Price Upon Certain Public --------------------------------------------------- Offerings. In the event of an underwritten public offering covering this - --------- Corporation's Common Stock at a gross offering price to the Corporation of less than $12.00 per share (subject to adjustment for any splits, dividends, subdivisions, combinations, reclassifications and the like with respect to such shares), the Conversion Price shall be adjusted in accordance with the following table (each of which per share price shall be subject to adjustment for any splits, dividends, subdivisions, combinations, reclassifications and the like with respect to such shares): EFFECTIVE PUBLIC OFFERING PRICE PER SHARE ("OFFERING PRICE") CONVERSION PRICE - -------------------------------------------------- ---------------- Greater than $11.00 but less than $12.00 $7.75 (except as set in (c)(ii) below) Greater than $10.00 but less than or equal to $11.00 $7.10 Less than or equal to $10.00 $6.80 (ii) Notwithstanding the foregoing, the Conversion Price with respect to an Offering Price greater than $11.00 per share but less than $12.00 per share shall be determined as follows: if such offering with such valuation is consummated within one year from the original issuance of the Series A Preferred Stock, the Conversion Price shall be $7.75 per share. If such offering with such valuation is consummated more than one year from such original issuance date, the Conversion Price shall be $7.60 per share. 9. (iii) Adjustments for Stock Dividends, Subdivisions, ---------------------------------------------- Combinations or Consolidation of Common Stock. In the event of a dividend on - --------------------------------------------- shares of Common Stock paid in shares of Common Stock or in the event the outstanding shares of Common stock shall be subdivided (by stock split or otherwise), into a greater number of shares, the Conversion Price then in effect shall, concurrently with the record date of such stock dividend or the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (iv) Adjustments for Other Distributions. In the event ----------------------------------- this Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of this Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of this Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 5 with respect to the rights of the holders of the Series A Preferred Stock. (v) Adjustments for Reorganization, Reclassification, ------------------------------------------------- Exchange and Subdivisions. If the shares of Common Stock issuable upon - ------------------------- conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or property whether by reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or securities or other property equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before such event; and, in any such case, appropriate adjustment (as determined by the board of directors) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the Series A Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares 10. of stock or other property thereafter deliverable upon the conversion of the Series A Preferred Stock. (d) No Impairment. This Corporation will not, by amendment of ------------- its Amended and Restated Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. (e) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Conversion Price pursuant to this Section 5, this Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any; of other property which at the time would be received upon the conversion of Series A Preferred Stock. (f) Notices of Record Date. In the event that this Corporation ---------------------- shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up, then, in connection with each such event, this Corporation shall send to the holders of the Series A Preferred Stock: 11. (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of Series A Preferred Stock at the address for each such holder as shown on the books of this Corporation. (g) Reservation of Stock Issuable Upon Conversion. This --------------------------------------------- Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, this Corporation will take such corporate action as may, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (h) Notices. Any notices required by the provisions of this ------- Section 5 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this Corporation. 6. Protective Provisions. This Corporation will not, without first --------------------- obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the total number of shares of Series A Preferred Stock then outstanding: (a) Amend the Amended and Restated Articles of Incorporation (other than to create a class or series of securities junior in preference and priority to the Series A Preferred Stock), or change the rights, preferences or privileges of, or increase the authorized number of shares of, Series A Preferred Stock or amend this Corporation's Bylaws or increase the number of authorized directors on the Board of Directors; or 12. (b) Authorize, create or issue shares of any class or series of stock having any rights, preferences or privileges, with respect to liquidation, conversion or redemption, on a parity with any such rights, preferences or privileges of the Series A Preferred Stock; or (c) Authorize, create or issue shares of any class or series of stock having any rights, preferences or privileges superior to any such rights, preferences or privileges of the Series A Preferred Stock; or (d) Reclassify or recapitalize any outstanding shares of securities of this Corporation into shares having rights, preferences or privileges on a parity with or superior to any such rights, preferences or privileges of Series A Preferred Stock; or (e) Offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights (other than the issuance of securities junior in preference and priority to the Series A Preferred Stock); or (f) Agree to merge or consolidate this Corporation with or into any other corporation, or sell, transfer, or lease all or substantially all of the assets of this Corporation or liquidate, dissolve or wind-up this Corporation; or (g) Declare a dividend or repurchase or redeem any shares of capital stock, except upon a redemption of shares of Series A Preferred Stock pursuant to Section 3 of these Articles or a repurchase at cost pursuant to Section 7(i) of these Articles or the repurchase of up to 2,375,000 shares of Common Stock at a price not greater than $8.00 per share in accordance with the Series A Preferred Stock and Warrant Purchase Agreement dated as of the original issue date of the Series A Preferred Stock. 7. Approval of Certain Repurchases of Common Stock. Each holder of ----------------------------------------------- an outstanding share of Series A Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the California General Corporation law, to distributions made by this Corporation in connection with (i) any repurchases of shares of Common Stock at cost issued to or held by service providers upon termination of their services pursuant to pre-existing agreements providing for the right of repurchase between this Corporation and such person or (ii) the repurchase of up to 2,375,000 shares of Common Stock at a price not greater than $8.00 per share in accordance with the Series A Preferred Stock and Warrant Purchase Agreement dated as of the original issue date of the Series A Preferred Stock. 8. No Reissuance of Series A Preferred Stock. No share or shares of ----------------------------------------- Series A Preferred Stock acquired by this Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be 13. cancelled, retired and eliminated from the shares which the Corporation shall be authorized to issue, provided this Corporation complies with the terms of these Articles of Incorporation. ARTICLE V The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. This Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in the California Corporations Code with respect to actions for breach of duty to this Corporation and its shareholders. 3. The foregoing amendment has been approved by the board of directors of said Corporation. 4. The foregoing amendment was approved by the holders of the requisite number of shares of said Corporation in accordance with Sections 902 and 903 of the California Corporations Code; the total number of outstanding shares of the existing sole class entitled to vote with respect to the foregoing amendment was 9,984,178 shares of Common Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock. There were no shares of Preferred Stock outstanding. 14. IN WITNESS WHEREOF, the undersigned have executed this certificate on January __, 1996. _____________________________________________ Stanley L. Leopard, Chief Executive Officer _____________________________________________ Terence J. Griffin, Secretary The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. Executed at Milpitas, California, on January____,1996. _____________________________________________ Stanley L. Leopard, Chief Executive Officer _____________________________________________ Terence J. Griffin, Secretary 15. EX-3.03 4 BYLAWS, AS AMENDED EXHIBIT 3.03 RESTATED BYLAWS OF INSYNC SYSTEMS, INC. ARTICLE I Offices Section 1. Principal Executive Office. The principal executive office of -------------------------- the corporation shall be fixed and located at such place as the Board of Directors shall by resolution determine. The Board of Directors is hereby granted full power and authority to change said principal executive office from one location to another. Section 2. Other Offices. Other business offices may at any time be ------------- established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II Meetings of Shareholders Section 1. Place of Meetings. All annual or other meetings of ----------------- Shareholders shall be held at the principal executive office of the corporation, or at any other place within or without the State of California which may be designated either by the Board of Directors or by the written consent of all persons entitled to vote thereat and not present at the meeting, given either before or after the meeting and filed with the Secretary of the corporation. Section 2. Annual Meetings. The annual meetings of Shareholders shall be --------------- held on the first Monday of February of each year at 11 a.m. or at such other date or time as may be set by the Board. At such meetings, Directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the Shareholders. Written notice of each annual meeting of Shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the Shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the Shareholder at the address of that Shareholder appearing on the books of the corporation or given by the Shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that Shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the Shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the Shareholder on written demand of the Shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any Shareholders' meeting, executed by the Secretary, Assistant Secretary or any transfer agent of the corporation giving the notice, shall be prima facie ----------- evidence of the giving of such notice. Such notices shall specify: (a) the place, the date, and the hour of such meeting; (b) those matters which the Board, at the time of the mailing of the notice, intends to present for action by the Shareholders; (c) if Directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (d) the general nature of a proposal, if any, to take action with respect to approval of (i) a contract or transaction in which a Director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code; and (e) such other matters, if any, as may be expressly required by statute. Section 3. Special Meetings. Special meetings of the Shareholders, for the ---------------- purpose of taking any action permitted by the Shareholders under the General Corporation Law and the Articles of Incorporation of this corporation, may be called at anytime by the Chairman of the -2- Board or the President, or by the Board of Directors, or by one or more Shareholders holding not less than ten percent of the votes at the meeting. Upon request in writing that a special meeting of Shareholders be called for any proper purpose, directed to the Chairman of the Board, President, Executive Vice President, or Secretary by any person (other than the Board) entitled to call a special meeting of Shareholders, the Officer forthwith shall cause notice to be given to Shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty- five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of Shareholders. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. In addition to the matters required by items (a) and, if applicable, (c) of the preceding Section, notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 4. Quorum. The presence in person or by proxy of the persons ------ entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The Shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 5. Adjourned Meeting and Notice Thereof. Any Shareholders' ------------------------------------ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 4 above. When any Shareholders' meeting, either annual or special, is adjourned for forty-five (45) days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place thereof at the meeting at which such adjournment is taken. Section 6. Voting. Unless a record date for voting purposes be fixed as ------ provided in Section 1 of Article V of these Bylaws, then, subject to the provisions of sections 702 through 704, inclusive, of the Code (relating to voting of shares held by a fiduciary, in the name of a corporation, or in joint ownership), only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or, if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of Shareholders is held, shall be -3- entitled to vote at such meeting, and such day shall be the record date for such meeting. Such vote may be viva voce or by ballot; provided, however, that all --------- elections for Directors must be by ballot upon demand made by a Shareholder at any election and before the voting begins. If a quorum is present, except with respect to election of Directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the Shareholders, unless the vote of a greater number or voting by classes is required by the Code or the Articles of Incorporation. Any Shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of Directors, may vote them against the proposal; but, if the Shareholder fails to specify the number of shares which the Shareholder is voting affirmatively, it will be conclusively presumed that the Shareholder's approving vote is with respect to all shares which the Shareholder is entitled to vote. Subject to the requirements of the next sentence, every Shareholder entitled to vote at any election for Directors shall have the right to cumulate his votes and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principle among as many candidates as he shall think fit. No Shareholder shall be entitled to cumulative votes unless the name of the candidate or candidates for whom such votes would be cast has been placed in nomination prior to the voting and any Shareholder has given notice at the meeting prior to the voting of such Shareholder's intention to cumulate his votes. The candidates receiving the highest number of votes of shares entitled to be voted for them, up to the number of Directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. Section 7. Validation of Defectively Called or Noticed Meetings. The ---------------------------------------------------- transactions of any meeting of Shareholders, either annual or special, however called and noticed, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, or who, though present, has, at the beginning of the meeting, properly objected to the transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of Shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2 of Article II of these Bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meets. Section 8. Action Without Meeting. Directors may be elected without a ---------------------- meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of Directors, provided that, without notice except as hereinafter set forth, a Director may be elected at any time to fill a vacancy not filled by the Directors by the -4- written consent of persons holding a majority of the outstanding shares entitled to vote for the election of Directors. Any other action which, under any provision of the California General Corporation Law may be taken at a meeting of the Shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all Shareholders' entitled to vote have been solicited in writing, (a) Notice of any proposed Shareholder approval of (i) a contract or other transaction with an interested Director, (ii) indemnification of an agent of the corporation as authorized by Section 15 of Article III of these Bylaws, (iii) a reorganization of the corporation as defined in section 181 of the Code, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (b) Prompt notice shall be given of the taking of any other corporate action approved by Shareholders without a meeting by less than unanimous written consent, to those Shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2 of Article II of these Bylaws. Unless, as provided in Section 1 of Article V of these Bylaws, the Board of Directors has fixed a record date for the determination of Shareholders entitled to notice of and to give such written consent, the record date for such determination (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Any Shareholder giving a written consent, or the Shareholder's proxyholders, or a transferee of the shares or a personal representative of the Shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 9. Proxies. Every person entitled to vote for Directors, or on ------- any other matter, shall have the right to do so either in person or by one or more agents authorized by a written -5- proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Shareholder or the Shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. Section 10. Inspectors of Election. In advance of any meeting of ---------------------- Shareholders, the Board of Directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, the Chairman of any such meeting may, and on the request of any Shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more Shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any Shareholder or a Shareholder's proxy shall, be filled by appointment by the Board of Directors in advance of the meeting, or at the meeting by the Chairman of the meeting. The duties of such inspectors shall be as prescribed by section 707 of the General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all Shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability, and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act, or certificate of a majority is effective in all respects as the decision, act, or certificate of all. Any report of certificate made by the inspectors of election is prima ----- facie - ----- -6- evidence of the facts stated therein. ARTICLE III Directors Section 1. Powers. Subject to the provisions of the Code and any ------ limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the Shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. Section 2. Number and Qualification of Directors. The authorized ------------------------------------- number of Directors shall be no fewer than four (4) no more than seven (7). The exact number of authorized Directors shall be seven (7) until changed, within the limits specified above, by a Bylaw amending this section, duly adopted by the Board of Directors or by the Shareholders. The indefinite number of Directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of Directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized Directors to a number greater than two (2) times the stated minimum number of Directors minus one (1). No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director's term of office expires. Section 3. Election and Term of Office. The Directors shall be --------------------------- elected at each annual meeting of Shareholders, but if any such annual meeting is not held or the Directors are not elected thereat, the Directors may be elected at any special meeting of Shareholders held for that purpose. All Directors shall hold office until their respective successors are elected, subject to the General Corporation Law and the provisions of these Bylaws with respect to vacancies on the Board. Section 4. Vacancies. A vacancy or vacancies in the Board of --------- Directors shall be deemed to exist (i) in the event of the death, resignation or removal of any Director, (ii) if the Board of Directors by resolution declares vacant the office of a Director who has been declared of unsound -7- mind by an order of court or convicted of a felony, (iii) if the authorized number of Directors is increased, or (iv) if the Shareholders fail, at any meeting of Shareholders at which any Director or Directors are elected, to elect the number of Directors to be elected at that meeting. Vacancies in the Board of Directors, except for a vacancy created by the removal of a Director, may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the Shareholders. A vacancy in the Board of Directors created by the removal of a Director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of the holders of all outstanding shares entitled to vote. The Shareholders may elect a Director or Directors at any time to fill an vacancy or vacancies not filled by the Directors. Any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any Direct may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the Board of Directors accepts the resignation of a Director tendered to take effect at a future time, the Board or the Shareholders shall have the power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of Directors shall have the effect prior to the expiration of his term of office. Section 5. Place of Meeting. Regular meetings of the Board of ---------------- Directors shall take place within or without the state which has from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board may be held either at a place so designated or at the principal executive office. Section 6. Organization Meetings. Immediately following each annual --------------------- meeting of Share holders, the Board of Directors shall hold a regular meeting at the place of said annual meeting, or at such other place as shall be fixed by the Board of Directors, for the purpose of organization, election of Officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 7. Other Regular Meetings. Other regular meetings of the ---------------------- Board of Directors shall be held without call at such times and places as determined by the Board of Directors by resolution duly adopted. Notice of all such regular meetings of the Board of Directors hereby dispensed with. -8- Section 8. Special Meetings. Special meetings of the Board of ---------------- Directors for any purpose or purposes shall be called at any time by the Chairman of the Board, the President, the Executive Vice President, or by any two (2) Directors. Written notice of the time and place of special meetings shall be delivered personally to each Director or communicated to each Director by telephone, or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records or is not so shown upon the records of the corporation or, if it is not, at the place at which the meetings of the Directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive office of the corporation is located at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered, personally or by telephone, as above provided, it shall be so delivered at least forty-eight (48) hours prior to the time of the holding of the meeting. Such mailing, telegraphing, or delivery, personally or by telephone, as above provided, shall be due, legal, and personal notice to such Director. If the meeting is not to be held at the principal executive office of the corporation, the notice shall state the date, place, and hour of the meeting and the general nature of the business to be transacted. Section 9. Action Without Meeting. Any action by the Board of ---------------------- Directors may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of such Directors. Section 10. Action at a Meeting: Quorum and Required Vote. Presence --------------------------------------------- of a majority of the authorized number of Directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the Directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a Director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of Directors), the Articles of Incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of a Director, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 11. Validation of Defectively Called or Noticed Meetings. ---------------------------------------------------- The transactions of any -9- meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before of after the meeting, each of the Directors not present or who, though present, has, prior to the meeting or at its commencement, protested the lack of proper notice to him, signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 12. Adjournment. A quorum of the Directors may adjourn any ----------- Directors' meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum a majority of the Directors present at any Directors' meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the Board. Section 13. Notice of Adjournment. If the meeting is adjourned for --------------------- more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the Directors who were not present at the time of adjournment. Otherwise, notice of the time and place of holding an adjourned meeting need not be given to absent Directors if the time and place be fixed at the meeting adjourned. Section 14. Fees and Compensation. Directors and members of --------------------- committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board. This Section 14 shall not be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. Section 15. Indemnification of Agents of the Corporation and Purchase --------------------------------------------------------- of Liability Insurance. - ---------------------- (a) The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its Directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 15, a "Director" or "officer" of the corporation includes any person (i) who is or was a Director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a Director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (b) The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than Directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other -10- amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 15, an "employee" or "agent" of the corporation (other than a Director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (c) Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 15(a) or for which indemnification is permitted pursuant to Section 15(b) following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 15. (d) The indemnification provided by this Section 15 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of Shareholders or disinterested Directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. (e) The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 15. (f) No indemnification or advance shall be made under this Section 15, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the Shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -11- ARTICLE IV Officers Section 1. Officers. The Officers of the corporation shall be a -------- Chairman of the Board, a President, one or more Executive Vice Presidents, one or more Senior Vice Presidents, a Secretary, a Chief Technical Officer, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, one or more Advisory Directors, one or more Assistant Secretaries, one or more Assistant Chief Financial Officers, and such other Officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two (2) or more offices. Although the corporation may have, at the discretion of the Board of Directors, one or more Vice Presidents, such Vice Presidents shall not be deemed to be Officers of this corporation unless specifically designated as such by the Board of Directors. Section 2. Election. The Officers of the corporation, except such -------- Officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually be the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. Subordinate Officers, Etc. The Board of Directors may ------------------------- appoint, and may empower the Chairman of the Board or the President to appoint, such other Officers as the business of the corporation may require, each of whom shall hold office, for such period, have such authority, and perform such duties as are provided in the Bylaws or as the Board of Directs may from time to time determine. Section 4. Removal and Resignation. Any Officer may be removed, ----------------------- either with or without cause, by the Board of Directors at any regular or special meeting thereof or, except in case of an Officer chosen by the Board of Directors, by any Officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights of an Officer under any contract of employment. Any Officer may resign at any time by giving written notice to the Board of Directors, to the President, or to the Secretary of the corporation, without prejudice, however, to the rights of the corporation under any contract to which such Officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. -12- Section 6. Chairman of the Board. The Chairman of the Board shall be --------------------- the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and Officers of the corporation. The Chairman of the Board shall, if present, preside at all meetings of the Board of Directors and the Shareholders and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. Section 7. Office of the President. In the absence of the Chairman ----------------------- of the Board, the Officer or Officers holding the Office of the President shall perform all the duties of the Chairman of the Board as prescribed in Section 6 of this Article IV. In addition, the Officer or Officers holding the Office of the President of the corporation shall have such other powers and perform such other duties as from time to time may be assigned to the Officer or Officers holding the Office of the President by the Board of Directors or prescribed by the Bylaws. The Board of Directors may in its discretion divide the functions of the Office of the President between different Officers. Section 8. Executive Vice Presidents. In the absence of both the ------------------------- President and the Chairman of the Board, the Executive Vice Presidents, in the order of their rank as fixed by the Board of Directors, or if not ranked, the Executive Vice President designated by the Board of Directors, shall perform all the duties of the President and of the Chairman of the Board, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President and the Chairman of the Board. The Executive Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them by the Board of Directors or the Bylaws. Section 9. Chief Technical Officer. The Chief Technical Officer ----------------------- shall be the Chief Technical Officer of the corporation and shall have general supervisory and executive responsibility for the corporation's research, development, and implementation of technology. The Chief Technical Officer shall have such other powers and perform such other duties as from time to time may be prescribed for him by the Board of Directors or the Bylaws. Section 10. Chief Financial Officer. The Chief Financial Officer ----------------------- shall be the Chief Financial Officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus, and shares. Any surplus, including earned surplus, paid-in surplus, and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account. The books of account shall at all reasonable times be open to inspection by any Directors. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to -13- the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the Chairman of the Board and Directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. Section 11. Senior Vice Presidents. Senior Vice Presidents shall have ---------------------- such powers and perform such duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws. Section 12. Secretary. The Secretary shall record or cause to be --------- recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the Board of Directors may order, a Book of Minutes of actions taken at all meetings of Directors and Shareholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors' meetings, the number of shares present or represented at Shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the Shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the Shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 13. Advisory Directors. The Board of Directors may appoint ------------------ one or more Advisory Directors who shall, upon invitation of the Board of Directors, attend meetings of the Board of Directors. Advisory Directors shall make themselves available to the Board of Directors for advice and consultation but shall not be members of the Board of Directors and shall not have the power to vote on matters brought before the Board of Directors. Advisory Directors shall have such other powers and perform such other duties as may be prescribed by the Board of Directors. ARTICLE V Committees Section 1. Committees of Directors ----------------------- -14- The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. Section 2. MEETINGS AND ACTION OF COMMITTEES --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of these bylaws, with such changes in the context of these bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE VI Miscellaneous -15- Section 1. Record Date. The Board of Directors may fix a time in the ----------- future as a record date for the determination of the Shareholders entitled to notice of and to vote at any meeting of Shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only Shareholders of record on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or Bylaws. If the Board of Directors does not so fix a record date, then the record date for determining Shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 2. Inspection of Corporate Records. The accounting books and ------------------------------- records, the record of Shareholders, and minutes of proceedings of the Shareholders and the Board and committees of the Board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any Shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a Shareholder or as the holder of such voting trust certificate. Such inspection by a Shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. A Shareholder or Shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14A with the United States Securities and Exchange Commission relating to the election of Directors of the corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of Shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation upon written demand and upon the tender of its usual charges, a list of the Shareholders' names and addresses, who are entitled to vote for the election of Directors, and their shareholdings, as of the most recent records date for which it has been compiled or as of a date specified by the Shareholder subsequent to the date of demand. The list shall be made available on or before the latter of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every Director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the -16- corporation. Such inspection by a Director may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 3. Checks, Drafts. Etc. All checks, drafts, or other orders ------------------- for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 4. Annual and Other Reports. The Board of Directors of the ------------------------ corporation shall cause an annual report to be sent to the Shareholders not later than one hundred twenty (120) days after the close of the fiscal or calendar year and at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of Shareholders to be held during the next fiscal year and in the manner specified in Section 2 of Article II of these Bylaws for giving notice to Shareholders of the corporation. Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized Officer of the corporation that such statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record as determined as provided in section 605 of the Code. A Shareholder or Shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three (3)-month, six (6)-month, or nine (9)-month period of the current fiscal year ended more the date of the request and a balance sheet of the corporation and, in addition, if no annual report for the last fiscal has been sent to Shareholders, the annual report for the last fiscal year. The corporation shall use its best efforts to deliver the statement to the person making the request within thirty (30) days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months, and they shall be exhibited at all reasonable times to any Shareholder demanding an examination of them or a copy shall be mailed to such Shareholder. The corporation shall, upon the written request of any Shareholder, mail to the Shareholder a copy of the last annual, semiannual, or quarterly income statement which it has prepared and a balance sheet as of the end of the period. The quarterly income balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any dependent accountants engaged by the corporation or the certificate of an authorized Officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. Section 5. Contracts, Etc., How Executed. The Board of Directors, ----------------------------- except as in the -17- Bylaws otherwise provided, may authorize any Officer or Officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors, no Officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 6. Certificate for Shares. Every holder of shares in the ---------------------- corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the president or the Executive Vice President and by the Chief Financial Officer or an Assistant Chief Financial Officer or the secretary or any Assistant secretary, certify the number of shares and the class or series of shares owned by the Shareholder. In case any Officer, transfer agent, or registrar who has signed a certificate shall have ceased to be such Officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an Officer, transfer agent, or registrar at the date of issue. Any or all of the signatures on the certificate may be facsimile. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or the Bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed, or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction, or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any other reasonable requirements imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of sections 9104 and 9405 of the California Commercial Code. Section 7. Representation of Shares of Other Corporations. The ---------------------------------------------- President, the Chairman of the Board, or the Executive Vice President and the Secretary or any Assistant Secretary of this corporation are authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said Officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such Officers in person or by any other person authorized so to do by -18- proxy or power of attorney duly executed by said Officers. Section 8. Inspection of Bylaws. The corporation shall keep in its -------------------- principal executive office in California, or if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any Shareholder), the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the Shareholders at all reasonable times during office hours. Section 9. Construction and Definitions. Unless the context ---------------------------- otherwise requires, the general provisions, rules of construction, and definitions contained in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VI Amendments Section 1. Power of Shareholders. New Bylaws may be adopted or these --------------------- Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of Shareholders entitled to vote such shares, except as otherwise provided by law or by the Articles of Incorporation. Section 2. Power of Directors. Subject to the right of Shareholders ------------------ as provided in Section 1 of this Article VI to adopt, amend, or repeal Bylaws, Bylaws, other than a Bylaw or amendment thereof changing the authorized number of Directors (except to fix the exact number of authorized Directors pursuant to a Bylaw providing for a variable number of Directors), may be adopted, amended, or repealed by the Board of Directors. -19- CERTIFICATE OF SECRETARY ------------------------ I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of Insync Systems, Inc.; and 2. That the foregoing Bylaws, comprising 17 pages, constitute the Bylaws of said corporation as duly adopted by the Board of Directors of the corporation on April 24, 1997. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the corporation as of the 29th day of August, 1997. ___________________________________________ Terence J. Griffin, Secretary -20- EX-4.01 5 SPECIMEN OF COMMON STOCK CERTIFICATE EXHIBIT 4.01 NUMBER________________ INSYNC SYSTEMS, INC. SHARES A CALIFORNIA CORPORATION INCORPORATED IN CALIFORNIA AUGUST 30, 1989 CAPITAL STOCK 54,000,000 SHARES COMMON STOCK 50,000,000 SHARES, PAR VALUE $.01 PREFERRED STOCK 4,000,000, PAR VALUE $.01 THIS CERTIFIES THAT *NAME* is the record holder of *SHARES* fully paid and nonassessable Shares of the Common Stock of Incync Systems, Inc. a California corporation, transferable only on the books of the corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this certificate properly endorsed or assigned. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Articles of Incorporation and the Bylaws of said corporation and any amendments thereto, to all of which the holder(s) of this certificate, by acceptance hereof, assent(s). The shares represented by this certificate are subject to the legends affixed to the back of this certificate. A statement of all of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes and/or series of shares of stock of the corporation and upon the holders thereof may be obtained by any shareholder upon request and without charge, at the principal office of the corporation, and the corporation will furnish any shareholder, upon request and without charge, a copy of such statement. _____________________________________ ____________________________________ Terence J. Griffin, CFO and Secretary Stanley L. Leopard, Chairman and CEO FOR VALUE RECEIVED____________________ HEREBY SELLS, ASSIGNS, AND TRANSFERS UNTO__________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT__________________, ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION THE PREMISES. DATED_____________, 19___ IN PRESENCE OF _______________________________________ (Witness) (Stockholder) ________________________ (Stockholder) NOTICE: THE SIGNATURE ON THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER. EX-4.02 6 REGISTRATION RIGHTS AGREEMENT DATED 1/19/96 EXHIBIT 4.02 INSYNC SYSTEMS, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT This Amended and Restated Registration Rights Agreement (the "AGREEMENT") is made effective as of January 19, 1996 by and among Insync Systems, Inc., a California corporation (the "COMPANY"), the individuals and entities listed on the Schedule of New Holders attached hereto (the "NEW HOLDERS"), and the individuals and entities on the Schedule of Prior Holders attached hereto (the "PRIOR HOLDERS"). RECITALS -------- WHEREAS, the Prior Holders, who are parties to the Registration Rights Agreement dated April 17, 1995 (the "PRIOR AGREEMENT"), now wish their registration rights to be defined by this Agreement and to terminate the Prior Agreement upon the effectiveness of this Agreement; WHEREAS, the New Holders desire to be granted the rights and bound by the obligations provided herein; WHEREAS, pursuant to the Prior Agreement, the consent of a majority in interest of the Prior Holders is required before the Company may grant registration rights covering additional shares; WHEREAS, pursuant to the Prior Agreement, the consent of a majority in interest of each of the following classes of Prior Holders is required to amend the Prior Agreement: (i) holders of Common Stock of the Company that was subject to a registration rights agreement prior to April 17, 1995; (ii) holders of -------- securities that, when originally issued, were (x) Subordinated Convertible Promissory Notes of the Company and (y) subject to a prior registration rights agreement; (iii) holders of securities that, when originally issued, were (x) Series B Preferred Stock of the Company and (y) subject to a prior registration rights agreement and (iv) all Prior Holders as one class; and WHEREAS, the undersigned Prior Holders now wish to consent to the grant of registration rights to the New Holders, and to the amendment and restatement of the Prior Agreement in it entirety to read as set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall ------------------- have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission or any other ---------- federal agency at the time administering the Securities Act. "HOLDER" shall mean (i) any person holding Registrable Securities ------ originally issued to such person or (ii) any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 2.8 hereof or in accordance with the corresponding provision of the registration rights agreement controlling the Registrable Securities on the date of such transfer. "REGISTRABLE SECURITIES" shall mean any Common Stock of the Company which ---------------------- has become subject to the terms of this Agreement pursuant to Section 2.2 hereof including any Common Stock issued or issuable pursuant to any conversion, stock split, stock dividend, recapitalization, or similar event so long as such Common Stock has not been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses, except as otherwise stated --------------------- below, incurred by the Company in complying with Section 2.1 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and disbursements of one counsel for all Holders. "RESTRICTED SECURITIES" shall mean the securities of the Company whose --------------------- certificates are required to bear legends indicating that such securities have not been registered under the Securities Act. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any -------------- similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SELLING EXPENSES" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth under "Registration Expenses" all reasonable fees and disbursements of counsel for any Holder. -2- 2. REGISTRATION. ------------ 2.1 COMPANY REGISTRATION. -------------------- (a) Notice of Registration. If at any time or from time to time ---------------------- the Company shall determine to register any of its Common Stock, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Rule 145 transaction, or (iii) a registration in which the only equity security being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities which are specified in a written request or requests, made within 10 days after receipt of such written notice from the Company, by any Holder; provided, however, that any Holder requesting the inclusion of Registrable Securities which are not, at such time, Common Stock of the Company must also delivery with such request such further instruments as may be necessary to effect the conversion of such Registrable Securities into Common Stock of the Company prior to registration. (b) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 2.1(a)(i). In such event the right of any Holder to registration pursuant to Section 2.1 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such under writing (the "PARTICIPATING HOLDERS") shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2.1, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the total number of shares of Registrable Securities held by Participating Holders to be included in such registration shall determined as follows: (i) Preferred Shareholder's Registration Rights Agreement. ----------------------------------------------------- If, prior to the time of such registration, an agreement governing the registration rights of holders of Series A Preferred Stock of the Company issued after January 15, 1996 (and the securities issued or issuable upon the conversion of such stock) has been entered into by the Company and the initial -3- purchasers of such stock (the "SERIES A REGISTRATION RIGHTS AGREEMENT"), and if the Series A Registration Rights Agreement remains in effect at the time of such registration, the aggregate number of Registrable Securities to be included in such registration by Participating Holders and the allocation of such included Registrable Securities among the Participating Holders shall be determined by the applicable terms of the Series A Registration Rights Agreement, including any amendments thereto. (ii) Default Cutback. If no Series A Registration Rights --------------- Agreement exists or is in force at the time of such registration, the managing underwriter may limit the number of shares of Registrable Securities to be included in the offering, (1) in the case of the Company's initial public offering, to zero and, (2) in the case of any other offering, to an amount no less than 5% of all shares to be included in such offering. In case of any such limitation under this Section 2(b)(ii), the Company shall so advise all Participating Holders and other holders proposing to distribute their securities through such underwriting and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all the Participating Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Participating Holder. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to any Participating Holder to the nearest 100 shares. If any Participating Holder disapproves of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to 180 days after the effective date of the registration statement relating thereto, or such other shorter period of time as the under writers may require. (c) Right to Terminate Registration. The Company shall have the ------------------------------- right to terminate or withdraw any registration initiated by it under this Section 2.1 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 2.2 SECURITIES COVERED BY THIS AGREEMENT; CONSENT OF PRIOR HOLDERS. -------------------------------------------------------------- (a) Prior Holders. The undersigned Prior Holders, New Holders ------------- and the Company hereby consent to the amendment and restatement of the Prior Agreement to entirely replace its terms with those of this Agreement. Pursuant to the amending provision of the Prior Agreement, at such time as a majority in interest of Prior Holders in each of the following classes consents by executing this Agreement, all such signatories as well as all other Prior Holders shall be deemed to be parties to this Agreement, and all securities subject to the Prior Agreement held by all Prior Holders shall be deemed to be Registrable Securities: (i) holders of Common Stock of the Company that was subject to a registration rights agreement prior to April 17, 1995; (ii) holders of -------- securities that, when originally issued, were (x) Subordinated Convertible Promissory Notes of the -4- Company and (y) subject to a prior registration rights agreement; (iii) holders of securities that, when originally issued, were (x) Series B Preferred Stock of the Company and (y) subject to a prior registration rights agreement and (iv) all Prior Holders as one class. At such time as this Agreement becomes effective as to all Prior Holders, the Prior Agreement shall be terminated, the provisions thereof shall be of no further force and effect, and it shall be deemed to be null and void. (b) New Holders. The Company hereby grants, the New Holders ----------- hereby accept the grants of, and the undersigned Prior Holders hereby consent to the granting of, the registration rights provided for herein to the New Holders. The registration rights granted to the New Holders hereunder shall become effective and the Common Stock held by the New Holders along with Common Stock issuable upon conversion of other securities held by the New Holders as of the date hereof shall be deemed to be Registrable Securities at such time as a majority in interest of all Prior Holders consents to such grants by executing this Agreement. 2.3 EXPENSES OF REGISTRATION. All Registration Expenses incurred in ------------------------ connection with all registrations pursuant to Section 2.1 shall be borne by the Company. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and all other registration expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 2.4 REGISTRATION PROCEDURES. In the case of each registration, ----------------------- qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred twenty (120) days or until the distribution described in the registration statement has been completed, whichever first occurs; (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 2.5 INDEMNIFICATION. --------------- (a) The Company will indemnify each Holder, each of its officers, directors, shareholders and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, -5- losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act of 1933, the Securities Exchange Act of 1934, state securities law or any rule or regulation promulgated under the such laws applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, directors, shareholders, partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, and if the Final Prospectus would have cured the defect giving rise to the loss, liability, claim or damage. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to -6- the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this subsection 2.5(b) shall be limited in an amount equal to the initial public offering price of the shares sold by such Holder, unless such liability arises out of or is based on willful misconduct by such Holder. (c) Each party entitled to indemnification under this Section 2.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 2.6 INFORMATION BY HOLDER. The Holder or Holders of Registrable --------------------- Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 2.7 RULE 144 REPORTING. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use all reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended; (b) File with the Commission in a timely manner all reports and other -7- documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (at any time after it has become subject to such reporting requirements); and (c) So long as the Holder owns any Restricted Securities to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration . 2.8 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company ------------------------------- to register securities granted under Section 2.1 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by a Holder provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws and all agreements restricting such transfer, (ii) such transferee acquires at least 20,000 shares of Registrable Securities (iii) written notice is promptly given to the Company and (iv) such transferee agrees to be bound by the provisions of this Agreement. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any constituent partner or retired partner of a Holder which is a partnership, or an affiliate of a Holder which is a corporation, or a family member or trust for the benefit of a Holder who is an individual, without compliance with item (ii) above, provided written notice thereof is promptly given to the Company and the transferee agrees to be bound by the provisions of this Agreement. 2.9 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant ---------------------------------- to Section 2.1 of this Agreement shall terminate three (3) years after the Company's initial public offering (other than [a] an offering relating solely to employee benefit plans; or [b] an offering relating solely to a Commission Rule 145 transaction). 3. STANDOFF AGREEMENT. Except as set forth below, in connection with the ------------------ Company's first two public offerings of the Company's securities, each Holder agrees, upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as may be requested by the underwriters, provided that the officers and directors of the Company who own stock of the Company also agree to such restrictions. The Holders agree that the Company may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of -8- this Section 3. 4. AMENDMENT. --------- (a) Any provision of this Agreement may be amended or the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of each of: (i) the Company, (ii) Holders of a majority of all Registrable Securities then outstanding, voting as one class, (iii) Holders of a majority of Registrable Securities then outstanding which, when originally purchased, were (x) Common Stock of the Company and (y) subject to a registration rights agreement prior to April 17, 1995, (iv) Holders of a majority of Registrable Securities then outstanding which, when originally purchased, were (x) Subordinated Convertible Notes of the Company and (y) subject to a prior registration rights agreement, and (v) Holders of a majority of Registrable Securities then outstanding which, when originally purchased, were (x) Series B Preferred Stock of the Company and (y) subject to a prior registration rights agreement. Notwithstanding the above provisions, no such amendment or waiver shall reduce the aforesaid number of securities, the Holders of which are required to consent to any waiver or amendment, without the consent of the Holders of all Registrable Securities. Any amendment or waiver effected in accordance with this subsection 4(a) shall be binding upon each Holder of Registrable Securities at the time outstanding, each future holder of all such securities, and the Company. (b) Except as expressly provided herein, no Section of this Agreement may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 5. GOVERNING LAW. This Agreement and the legal relations between the ------------- parties arising hereunder shall be governed by and interpreted in accordance with the laws of the State of California. The parties hereto agree to submit to the jurisdiction of the federal and state courts of the -9- State of California with respect to the breach or interpretation of this Agreement or the enforcement of any and all rights, duties, liabilities, obligations, powers, and other relations between the parties arising under this Agreement. 6. ENTIRE AGREEMENT. This Agreement constitutes the full and entire ---------------- understanding and agreement between the parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon the successors, assigns, heirs, executors and administrators of the parties hereto. 7. NOTICES, ETC. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery to the party to be notified or three (3) days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Holder, at such address as such Holder shall have furnished the Company in writing in accordance with this Section 7 or (b) if to the Company, at its principal office. 8. COUNTERPARTS. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -10- The foregoing agreement is hereby made effective as of the date first written above. "COMPANY" INSYNC SYSTEMS, INC. a California corporation By:_________________________________ Stanley L. Leopard, Chairman and Chief Executive Officer "PRIOR HOLDER" _________________________________ Name of Prior Holder By:_________________________________ Authorized Signatory Title:_________________________________ "NEW HOLDER" _________________________________ Name of New Holder By:_________________________________ Authorized Signatory Title:_________________________________ (SIGNATURE PAGE TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT) -11- SCHEDULE OF NEW HOLDERS ----------------------- Name Relation to Company - ---- ------------------- Stanley L. Leopard Chairman and Chief Executive Officer Frank R. Balma Office of the President and Chief Operating Officer Brent D. Elliot Office of the President and Chief Technical Officer Melody R. Leopard Former Spouse of Mr. Leopard Frederick T. Hecht as Trust For The Benefit of the Children of Trustee For The Stanley Mr. Leopard L. Leopard 1994 Irrevocable Trust A. Grant Elliot and Parents of Brent D. Elliot Sharon A. Elliot as Trustees of the A. Grant Elliot and Sharon A. Elliot Inter Vivos Trust Don M. Lyle Director W. Lee Shevel Director Russell G. Redenbaugh Director Pullbrite, Inc. Holder of Convertible Promissory Note -12- SCHEDULE OF PRIOR HOLDERS ------------------------- Pensco Pension Services, Inc. Phil & Joan Chang FBO Vince C. Affinito Steven Chang John C. & Edna L. Aikens Shirley Chen Woodley A. Allen Allen D. Clark and Dianne M. Clark William H. Annesley, III Closefire Limited Vedona Anstalt Ronald S. Cohn Robert B. Arthur Stuart Davidson Astrophel Limited Evelyne Desbrow Pensco Pension Services, Inc. Robert C. and Phyllis J. FBO Enrique Barrera A/C BA-049 Doricott Trustees of the Robert C. and Phyllis J. Doricott Revocable Living Byron L. Bertsch Trust under Revocable Living Trust Agreement Dated August 21, 1979, as Amended John R. Bertucci Painewebber as Custodian for Thomas J. Buono & Mary R. Buono, Tenants Edward F. Dugan, IRA by the Entirety Edward F. Dugan Michael Canizales Joseph E. Dworak Walter M. Cardinet & Nancy Cardinet In Community Property EAG Enterprises Prestige World Travel, Inc. MP & P/S Trust Robert J. Elliot & Jill FBO Lori A. Carstens Keechler Elliot, Trustees, Elliot Family Trust Dated 3-6-92 VA FBO Robert J. Elliot & Jill Keechler Jim Tarr & Lori Carstens Trustees, Prestige Elliot World Travel Inc., MP Pen & P/S Trust FBO Jim Tarr A. Grant Elliot and Sharon A. Elliot Revocable Inter Vivos Trust Dated 4-7-87 Tsai Chun Chiang Marc Ely -13- Reginald G. Huff, III Lawrence Bennett & Harriette B. Farber, JTWROS JAG Investments David F. Firth Greg E. Johnson & Sharon I. Johnson, Robert Foster Tenants by the Entirety Gloria Friedman Carl E. and Leah M. Jonson, JTWROS Amba Gale Kevin L. Kaldestad GA Pogue P/S fbo Susan Rho Arthur Kellar George Brothers Investment Partnership Charles D. Kleinow Smith Barney SEP Custodian Rainer K. Kraus as Trustee for Bill Greenhalgh for the Rainer K. Kraus Trust Dated 10/4/95 Polly Guth Ag Edwards & Sons Inc. Custodian For Rainer K. Kraus Rollover IRA Account Jeffrey E. Hanhausen Douglas A. Kristjanson Hapna Foundation Lawrence Scott Kuechler Thomas Hardy Lamar G. Lay John G. Harkness and Stephanie Harkness, Trustees Under The Harkness Family Trust David Lustig Dated July 7, 1982 Douglas L. Martin Self Emp. Profit Sharing Michael & Roberta Hesser Retirement Trust, Douglas C. Martin Trustee Mary S. Hirt Paul E. Martin Paul Hirt Richard Martinez Eric K. Hoffner Thomas M. McGovern Carleton C. Hoffner, Jr. Robert K. Merrill Charles E. Horner Sabina M. Merrill -14- Pensco Pension Services, Inc. FBO Robert K. Merrill Larry Vaughn Ronald W. Miller as Trustee of the Ronald W. Kelly R. White Miller Trust Dated 11-28-90 Ronald W. Miller Tamzen B. White David F. Williams, Jr. Vinutha Mohan John A. Winkel/Winkel Family Trust Vinh C. Nguyen, MD Woodcock Foundation Niloufar Pahlavi Jim E. Wyant Shahram Pahlavi Peter and Kathleen Yaholkovsky Michael R. and Pamela H. Pauletich John Richard Powell and Lynne L. Powell, Tenants In Common Robert & Sandra Powers Russell G. Redenbaugh Russell K. Redenbaugh Janet G. Redenbaugh Murray L. Sackman & Marianne M. Karmel, JTWROS Alfred L. & Janice Sahagun Glenn W. Saunders, Jr. Matthew J. Sheedy Lewis Stock Barbara Tiffany John G. Tyndall, III -15- EX-4.03 7 AMENDED AND RESTATED 1993 STOCK OPTION PLAN EXHIBIT 4.03 INSYNC SYSTEMS. INC. -------------------- AMENDED AND RESTATED -------------------- 1993 STOCK OPTION PLAN ---------------------- 1. Purpose and Definitions. ----------------------- (a) The 1993 Stock Option Plan (the "Option Plan" or the "Amended and Restated Option Plan") of INSYNC Systems, Inc., a California corporation (the "Company"), is hereby amended and restated in its entirety. The Option Plan shall provide for the issuance of incentive stock options ("ISOs") and nonqualified stock options ("NSOs"). The Option Plan was originally dated August 9, 1993 for reference purposes. This amendment and restatement is effective as of April 2, 1995. (b) The Option Plan's purpose is to promote the long-term success of the Company by attracting, motivating and retaining key executives, employees, officers, directors, and consultants (the "Participants"). The Option Plan seeks to balance Participants' and shareholder interests by providing incentives to the Participants in the form of stock options which offer rewards for achieving the Company's long-term strategic and financial objectives. (c) The Option Plan is intended to give Participants an opportunity to purchase shares of Company Stock (as defined in Section 3 below) pursuant to (i) options which may qualify as incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) nonstatutory stock options ("NSOs"). (d) The term "Affiliates" as used herein means parent or subsidiary corporations, as such terms are defined in Section 424(e) and (f) of the Code, including parents or subsidiaries which become such after adoption of the Option Plan. 2. Administration of the Plan. -------------------------- (a) The Option Plan shall be administered by the Company's Board of Directors (the "Board") until such time that the Company offers its shares in a Public Offering. The period extending up to the Public Offering shall be referred to as the "Private Term" and any subsequent period until the options expire as the "Public Term." The term "Public Offering" means a public offering of the Company's common stock of the same series as underlies options issued under the Option Plan, which is registered on Form S-1 promulgated by the Securities and Exchange Commission (or any successor form adopted after the date of the Option Plan), is firmly underwritten pursuant to an agreement with one or more nationally recognized or regionally recognized underwriting firms, and results in gross aggregate proceeds, before deducting underwriting discounts and expenses, of at least $10 million payable to the Company and to the Company's shareholders. (b) In the event the Company offers its shares in a Public Offering, the Option Plan will be administered by a committee consisting entirely of directors qualifying as "disinterested persons" as such term is defined in Rule 16b-3 promulgated by the Securities and Exchange Commission (the "Committee"). The Committee shall consist of at least two persons. Members of the Committee shall serve at the pleasure of the Board. From and after the date on which the Stock is registered under Section 12(g) of the Securities Exchange Act of 1934 (the "1934 Act Effective Date") whether before or after completion of a Public Offering, none of the members of the Committee shall receive, while serving on the Committee, or with respect to any member of the Committee appointed after the 1934 Act Effective Date, during the lesser of (i) the one year period preceding appointment to the Committee and (ii) the period commencing on the 1934 Act Effective Date and terminating on the date of appointment to the Committee, a grant or award of equity securities under [x] the Option Plan or [y] any other plan of the Company or its Affiliates under which the participants are entitled to acquire Stock (including restricted Stock), stock options, stock bonuses, related rights or stock appreciation rights of the Company or any of its Affiliates, other than pursuant to transactions in any such other plan which do not disqualify a director from being a disinterested person under Rule 16b-3. (c) The Board or the Committee may from time to time determine which employees and consultants of the Company or of its Affiliates shall be granted options under the Option Plan, the terms thereof (including without limitation determining whether the option is an incentive stock option and the times at which the options shall become exercisable), and the number of shares for which an option or options may be granted. (d) If the Company has a right of first refusal to purchase Stock whether pursuant to Section 9 of this Option Plan or otherwise, the certificates therefor shall have imprinted or typed thereon a legend or legends summarizing or referring to such right. (e) The Board or the Committee shall have the sole authority, in its absolute discretion, to adopt, amend and rescind such rules and regulations, consistent with the provisions of the Option Plan, as, in its opinion, may be advisable in the administration of the Option Plan, to construe and interpret the Option Plan, the rules and regulations, and the instruments evidencing options granted under the Option Plan and to make all other determinations deemed necessary or advisable for the administration of the Option Plan. All decisions, determinations and interpretations of the Board or the Committee shall be binding on all Participants in the Option Plan. 3. Stock Subject to the Plan. ------------------------- (a) "Stock" shall mean Common Stock of the Company or such stock as may be changed as contemplated by Section 3(c) below. Stock shall include shares drawn from either the Company's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including without limitation shares repurchased by the Company in the open market. (b) Options may be granted under the Option Plan from time to time to eligible persons to purchase an aggregate of up to 2,900,000 shares of Stock. Stock options awarded pursuant to the Option Plan which are forfeited, terminated, surrendered or cancelled for any reason prior to -2- exercise shall again become available for grants under the Option Plan (including any option cancelled in accordance with the cancellation/re-grant provisions of Section 6(e) herein). (c) If there shall be any change in the Stock subject to the Option Plan, including Stock subject to any option granted hereunder, through merger, consolidation, recapitalization, reorganization, reincorporation, stock split, reverse stock split, stock dividend, combination or reclassification of the Company's Stock or other similar events, an appropriate adjustment shall be made by the Board or the Committee in the number of shares and/or the option price with respect to any unexercised shares of Stock. Consistent with the foregoing, in the event that the outstanding Stock is changed into another class or series of capital stock of the Company, outstanding options to purchase Stock granted under the Option Plan shall become options to purchase such other class or series and the provisions of this Section 3(c) shall apply to such new class or series. (d) the Company may grant options under the Option Plan in substitution for options held by employees of another company who become employees of the Company as a result of merger or consolidation. The Company may direct that substitute options be granted on such terms and conditions as deemed appropriate by the Board or the Committee. (e) the aggregate number of shares approved for issuance pursuant to the Option Plan may not be exceeded without amending the Option Plan and obtaining shareholder approval within twelve months of such amendment. 4. Eligibility. ----------- Persons who shall be eligible to receive stock options granted under the Option Plan shall be those employees, directors, and consultants as the Board or the Committee in its discretion determines should be awarded such incentives given the best interests of the Company; provided, however, that (i) ISOs may only be granted to employees of the Company and its Affiliates and (ii) any person holding capital stock possessing more than 10% of the total combined voting power of all classes of Stock of the Company or any Affiliate shall not be eligible to receive ISOs unless the exercise price per share of Stock is at least 110% of the fair market value of the Stock on the date the option is granted. 5. Exercise Price for Options Granted under the Plan. ------------------------------------------------- (a) All ISOs and NSOs will have per share exercise prices as determined by the Board, subject to the following: (i) NSOs shall not be granted at exercise prices per share less than 85% of the per-share fair market value of the Stock on the date of grant. (ii) ISOs shall not be granted at exercise prices per share less than 100% of such fair market value. -3- (iii) No ISOs or NSOs shall be granted under the Option Plan to any person possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate at exercise prices per share less than 110% of such fair market value. (iv) The exercise prices of all ISOs or NSOs granted under the Option Plan shall be subject to adjustment to the extent provided in Section 3(c), above. (b) Fair market value of the Common Stock on the grant date shall be determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its fair market value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Board of Directors deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the Nasdaq National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its fair market value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, or; (ii) In the absence of an established market for the Common Stock, the fair market value thereof shall be determined in good faith by the Board of Directors. 6. Terms and Conditions of Options. ------------------------------- (a) Each option granted pursuant to the Option Plan shall be evidenced by a written stock option agreement (the "Option Agreement") executed by the Company and the person to whom such option is granted. The option agreement shall designate whether the option is an ISO or an NSO. (b) The term of each ISO and each NSO shall be no more than 10 years, except that the term of each ISO issued to any person possessing more than 10% of the voting power of all classes of stock of the Company or any Affiliate shall be no more than 5 years. (c) In the case of ISOs, the aggregate fair market value (determined as of the time such option is granted) of the Stock as to which ISOs are exercisable for the first time by such individual during any calendar year (under this Option Plan and any other plans of the Company or its Affiliates, if any) shall not exceed the amount specified in Section 422(d) of the Code, or any successor provision in effect at the time an ISO becomes exercisable. -4- (d) Notwithstanding the designation of an option as an ISO in an Option Agreement, such designations, to the extent that the aggregate fair market value: (i) of Stock subject to a Participant's ISO granted by the Company, any Parent or Subsidiary, which (ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess options shall be treated as NSOs. For purposes of this Section 6(d), ISOs shall be taken into account in the order in which they were granted, and the fair market value of the Stock shall be determined as of the time the option with respect to such Stock is granted. (e) The Option Agreement may contain such other terms, provisions and conditions regarding vesting, repurchase or other similar provisions, to the extent consistent with the Option Plan, as may be determined by the Board or the Committee. If an option, or any part thereof, is intended to qualify as an ISO, the Option Agreement shall contain those terms and conditions which the Board or the Committee determine are necessary to so qualify under Section 422 of the Code. Should any provision of the Option Plan or the Option Agreement of any option intended to qualify as an ISO conflict with the Code such that the option would not so qualify, the Option Plan or Option Agreement, as the case may be, shall be deemed automatically modified to the minimum extent necessary in order for such option to so qualify. (f) The Board or the Committee shall have full power and authority to effect at any time and from time to time, with the consent of the affected Participants, the cancellation of any or all outstanding options under the Option Plan and to grant in substitution new options under the Option Plan covering the same or different numbers of shares of Stock with the same or different exercise prices. (g) As a condition to option grants under the Option Plan, the Participant agrees to grant the Company the repurchase rights contained in Section 9 of this Option Plan. (h) All options must become exercisable for Participants at least twenty percent (20%) per year over the first five years from the date they are granted. Except as otherwise provided herein or in the Option Agreement, an exercisable option may be exercised at any time before the earlier of (i) the expiration date of the option or (ii) 120 months after the date of grant. (i) In the event of termination of a Participant's status as an employee or consultant of the Company (but not in the event of a Participant's change of status from employee to consultant (in which case a Participant's ISO shall automatically convert to an NSO on the ninety-first (91st) day following such change of status) or from consultant to employee), such Participant may exercise his or her options, to the extent the Participant was entitled to exercise such options at the date of such termination, during the period of time determined by the Board. Such period of time shall be at least 30 days. In the case of ISOs, such period shall be no longer than 90 days. In the case of NSOs, such period of time shall be no longer than 180 days. However, in the case of all ISOs and NSOs granted prior to -5- the date on which this Amended and Restated Option Plan is adopted by the Board, such period of time shall be 30 days. In no event shall options be exercisable later than the expiration date set forth in the Option Agreement relating to such options. To the extent that a Participant was not entitled to exercise an option at the date of such termination, or if Participant does not exercise such option to the extent so entitled within the time specified herein, such option shall terminate. (j) In the event of termination of a Participant's status as an employee or consultant of the Company as a result of his or her disability, a Participant may, but only within twelve (12) months from the date of such termination, or, in the case of options granted before the Board adopts this Amended and Restated Option Plan, six (6) months, (and in no event later than the expiration date of the term of such options as set forth in the Option Agreement), exercise the options to the extent otherwise exercisable at the date of such termination; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an ISO such ISO shall automatically convert to an NSO on the day three months and one day following such termination. To the extent that Participant is not entitled to exercise the options at the date of termination, or if Participant does not exercise such options to the extent so entitled within the time specified herein, the options shall terminate. (k) In the event of the death of a Participant, the options may be exercised at any time within twelve (12) months or, in the case of options granted before the Board adopts this Amended and Restated Option Plan, six (6) months, following the date of death (but in no event later than the expiration of the term of such options), by the Participant's estate or by a person who acquired the right to exercise the options by bequest or inheritance, but only to the extent that the Participant was entitled to exercise the options at the date of death. If, after death, the Participant's estate or a person who acquired the right to exercise the options by bequest or inheritance does not exercise the options within the time specified herein, the options shall terminate. (l) No fractional shares shall be issued under the Option Plan, whether by initial grants or any adjustments to the Option Plan. 7. Use of Proceeds. --------------- Cash proceeds realized from the sale of Stock under the Option Plan shall constitute general funds of the Company. 8. Amendment, Suspension or Termination of the Plan. ------------------------------------------------ (a) The Board may at any time suspend or terminate the Option Plan, and may amend it from time to time in such respects as the Board may deem advisable provided that (i) such amendment, suspension or termination complies with all applicable state and federal requirements and requirements of any stock exchange on which the Stock is then listed, including any applicable requirement that the Option Plan or an amendment to the Option Plan be approved by the shareholders, and (ii) the Board -6- shall not amend the Option Plan to increase the maximum number of shares subject to ISOs under the Option Plan or to change the description or class of persons eligible to receive ISOs under the Option Plan without the consent of the shareholders of the Company sufficient to approve the Option Plan in the first instance. The Option Plan shall terminate on the earlier of (i) ten (10) years from the latest date on which the Option Plan or an amendment thereto is approved by the Company's shareholders or (ii) the date on which no additional shares of stock are available for issuance under the Option Plan. (b) Any amendment or termination of the Option Plan shall not affect options already granted, and such options shall remain in full force and effect as if this Option Plan had not been amended or terminated, unless mutually agreed otherwise between the optionee and the Board, which agreement must be in writing and signed by the Participant and the Company. 9. Repurchase. ---------- If a holder of options who is an employee at the date of grant terminates employment at any time during the Private Term, with or without cause, the Company shall have a freely assignable option exercisable at any time within three months following the date of termination to repurchase any shares held as a consequence of the exercise of the options before or after termination. The Company may exercise its options at any time during the three- month period by delivering to the holder a written notice of exercise (the "Notice of Exercise"). The Company's Notice of Exercise shall set forth the Company's intention to repurchase the shares and shall contain a statement of the repurchase price, in accordance with the following provisions of this Section 9. The Company's statement of the repurchase price shall be final and binding upon the holder, unless within thirty days following the date of the Notice of Exercise the holder shall deliver to the Company a written notice objecting to the statement and setting forth in reasonable detail the basis for the objection (an "Objection Notice"). If the holder issues an Objection Notice, the parties shall meet promptly thereafter to resolve their differences, and in the absence of a resolution of the matter within an additional thirty days following the date of the Objection Notice, either party may elect to submit the matter of the repurchase price to arbitration in accordance with the provisions of the Option Agreement. Upon the earliest of (i) the lapse of thirty days following the issuance of a Notice of Objection without an intervening Objection Notice, (ii) a written agreement between the Company and the holder as to the proper repurchase price or (iii) a final award in arbitration, the Company or its assignee shall pay the repurchase price to the holder and title to the repurchased shares shall pass to the Company or its assignee, as the case may be. Notwithstanding the foregoing, the Company shall be entitled to withdraw its Notice of Exercise at any time up to the date when shares are actually purchased by the Company or its assignee. All shares issued upon the exercise of options shall be legended to reflect the existence of this option, which will be binding on the original optionee and any subsequent holder of the shares other than the Company or any assignee acquiring the shares following a Notice of Exercise. The repurchase price shall be the higher of the original exercise price or fair market value as of the date of termination, as determined by the Board of Directors of the Company. If the Company or its assignee does not exercise the right of repurchase within the three-month period, the holder of the shares shall be entitled to retain the shares free and clear of any and all claims by the Company pursuant to this Section 9 and shall be entitled to have the legend which refers -7- to the Company's option to repurchase the shares removed from the certificate representing the shares. The Company shall have no repurchase rights once the Public Term begins. In the discretion of the Board or the Committee, the Company may or may not have repurchase rights with respect to options granted to persons who were not employees on the date of grant. 10. Right of First Refusal. ---------------------- At the discretion of the Board or the Committee at the time the options are granted, the transferability of shares issued pursuant to the exercise of options may be restricted such that they may not be transferred to a third party without first being offered to the Company at the same price and terms upon which the Participant proposes to sell them to the third party, or upon such other terms and conditions as the Board may deem appropriate. The Company must exercise its option to purchase such shares within 30 days of notice by the Participant that he or she proposes to sell the shares. The Company may assign its rights under this paragraph to any person, including shareholders in the Company. The Company will have no purchase right pursuant to this paragraph once the Public Term begins. 11. Assignability of Options and Rights. ----------------------------------- Each option granted pursuant to this Option Plan shall, during the Participant's lifetime, be exercisable only by the Participant, and neither the option nor any right to purchase Stock shall be transferred, assigned or pledged by the Participant, by operation of law or otherwise, other than by will upon a beneficiary designation executed by the optionee and delivered to the Company or the laws of descent and distribution. 12. Payment Upon Exercise. --------------------- Payment of the purchase price upon exercise of any option or right to purchase Stock granted under this Option Plan shall be made by giving the Company written notice of such exercise, specifying the number of such shares as to which the option is exercised. Such notice shall be accompanied by payment of an amount equal to the Option Price of such shares. Such payment may be (i) cash, (ii) check drawn against sufficient funds, (iii) delivery to the Company of the Participant's promissory note, in which event the Participant must be an employee or director of the Company, (iv) other Stock which (x) in the case of Stock acquired upon exercise of options have been owned by the Participant for more than six months on the date of surrender and (y) have a fair market value on the date of surrender equal to the aggregate exercise price of the Stock as to which said options shall be exer cised, (v) such other consideration as the Board, in its sole discretion, determines and is consistent with the Option Plan's purpose and applicable law, or (vi) in any combination of the foregoing. Any Stock used to exercise options shall be valued in accordance with procedures established by the Board. Any note used to exercise options to purchase Stock shall be a full recourse, interest-bearing obligation secured by shares in the Company and containing such terms as the Committee shall determine. If a note is used to exercise options, the optionee agrees to execute such further documents as the Company may deem necessary or appropriate in connection with issuing the note, perfecting a security interest in the -8- stock purchased with the note and any related terms the Company may propose. Such further documents may include, without limitation, a security agreement, an escrow agreement, and an assignment separate from certificate. If accepted by the Committee in its discretion, such consideration also may be paid through a broker-dealer sale and remittance procedure pursuant to which the Participant (a) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (b) shall provide written directives to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. 13. Withholding Taxes. ----------------- (a) Shares of Stock issued hereunder shall be delivered to a Participant only upon payment by such person to the Company of the amount of any withholding tax required by applicable federal, state, local or foreign law. The Company shall not be required to issue any Stock to a Participant until such obligations are satisfied. 14. Ratification. ------------ This Option Plan and all options issued under this Option Plan shall be void unless this Option Plan is approved or ratified by (i) the Board; and (ii) a majority of the votes cast at a shareholder meeting at which a quorum representing at least a majority of the outstanding shares of Stock is (either in person or by proxy) present and voting on the Option Plan within twelve months of the date this Option Plan is adopted by the Board. No ISOs shall be exercisable prior to the date such shareholder approval is obtained. 15. Corporate Transactions. ---------------------- (a) For the purpose of this Section 15, a "Corporate Transaction" shall include any of the following shareholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company's incorporation; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; or (ii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. -9- (b) Upon the occurrence of a Corporate Transaction, if the surviving corporation or the purchaser (the "Surviving Corporation"), as the case may be, does not assume or provide a substitute for the obligations of the Company under the Option Plan, then irrespective of the vesting provisions contained in individual option agreements, all outstanding options shall immediately become fully vested and exercisable, including for shares of Stock as to which such options would not otherwise be vested and exercisable. (c) To the extent that the Option Plan is unaffected and assumed by the Surviving Corporation or its parent company, a Corporate Transaction shall have no effect on outstanding options, and these options shall continue in effect according to their terms. Each outstanding option under this Option Plan which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to the Participant in connection with the consummation of such Corporate Transaction had such person exercised the option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under this Option Plan following the consummation of the Corporate Transaction shall be appropriately adjusted. Furthermore, if the Participant's status as an employee of the Company or employee of the Surviving Corporation, as applicable, is terminated by the Successor Corporation as a result of an Involuntary Termination (as defined below) other than for Cause (as defined below) within twelve months following a Corporate Transaction, the Participant shall fully vest in and have the right to exercise all his or her outstanding options, including for shares of Stock as to which such options would not otherwise be vested or exercisable. Thereafter, the option shall remain exercisable in accordance with Sections 6(i) through (k) above. For purposes of this section, any of the following events shall constitute an "Involuntary Termination": (i) a significant reduction of the Participant's duties, authority or responsibilities, relative to the Participant's duties, authority or responsibilities as in effect immediately prior to the Corporate Transaction, or the assignment to Participant of such reduced duties, authority or responsibilities; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to the Participant immediately prior to the Corporate Transaction; (iii) a reduction in the base salary of the Participant as in effect immediately prior to the Corporate Transaction; (iv) a material reduction in the kind or level of employee benefits, including bonuses, to which the Participant was entitled immediately prior to the Corporate Transaction with the result that the Participant's overall benefits package is sig nificantly reduced; (v) the relocation of the Participant to a facility or a location more than fifty (50) miles from the Participant's then present location, without the Participant's express written consent; (vi) any purported termination of the Participant by the Surviving Corporation which is not effected for disability or for Cause, or any purported termination for which the grounds relied upon are not valid; (vii) or any act or set of facts or circumstances which would, under California case law or statute constitute a constructive termination of the Participant. -10- For purposes of this section, "Cause" shall mean (i) any act of personal dishonesty taken by the Participant in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Participant, (ii) the conviction of a felony, (iii) a willful act by the Participant which constitutes gross misconduct and which is injurious to the Surviving Corporation, and (iv) following delivery to the Participant of a written demand for performance from the Surviving Corporation which describes the basis for the Surviving Corporation's belief that the Participant has not substantially performed his duties, continued violations by the Participant of the Participant's obligations to the Surviving Corporation which are demonstrably willful and deliberate on the Participant's part. (d) The grant of options under this Option Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 16. Loans or Guarantee of Loans. --------------------------- (a) The Board or the Committee may, in its absolute discretion, assist any Participant in the exercise of options granted under this Option Plan, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom by (i) authorizing the extension of a loan from the Company to such Participant, (ii) permitting the Participant to pay the exercise price for the Stock in installments over a period of years or (iii) authorizing a guarantee by the Company of a third party loan to the Participant. The terms of any loan, installment method of payment or guarantee (including the interest rate and terms of repayment) will be upon such terms as the Board or the Committee specifies in the applicable option or issuance agreement or otherwise deems appropriate under the circumstances. Loans, installment payments and guarantees may be granted with or without security or collateral (other than to Participants who are not employees, in which event the loan must be adequately secured by collateral other than the purchased shares). However, the maximum credit available to the Participant may not exceed the exercise or purchase price of the acquired shares of Stock plus any Federal and State income and employment tax liability incurred by the Participant in connection with the acquisition of such shares of Stock. (b) The Board or the Committee may, in its absolute discretion, determine that one or more loans extended under this financial assistance program shall be subject to forgiveness by the Company in whole or in part upon such terms and conditions as the Board or the Committee may deem appropriate. 17. Regulatory Approvals. -------------------- The obligation of the Company with respect to common shares issued under the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies or stock exchanges as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of common shares under the Plan until such time as any legal requirements or regulations have been met relating to the issuance of common shares, to their registration or qualification under the -11- Securities Exchange Act of 1934, if applicable, or any applicable state securities laws, or to their listing on any stock exchange at which time such listing may be applicable. 18. No Employment/Service Rights. ---------------------------- Neither the action of the Company in establishing this Option Plan, not any action taken by the Board or the Committee hereunder, nor any provision of this Option Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Company (or any parent, subsidiary or affiliated corporation) for any period of specific duration, and the Company (or any parent, subsidiary or affiliated corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. 19. Information to Participants. The Company shall provide to each --------------------------- Participant, not less frequently than annually, copies of annual financial statements. The Company shall also provide such statements to each individual who acquires Stock pursuant to the Option Plan while such individual owns such Stock. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. 20. Miscellaneous Provisions. ------------------------ (a) The right to acquire Stock or other assets under this Option Plan may not be assigned, encumbered or otherwise transferred by any Participant except as specifically provided herein. (b) The provisions of this Option Plan shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. (c) The provisions of this Option Plan shall inure to the benefit of, and be binding upon, the Company and its successors or assigns, whether by Corporate Transaction or otherwise, and the Participants, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. (d) The Participants shall have no dividend rights, voting rights or any other rights as a stockholder with respect to any options under the Option Plan prior to the issuance of a stock certificate for such Stock. -12- EX-4.04 8 1997 STOCK PLAN AND STOCK OPTION AGMT EXHIBIT 4.04 INSYNC SYSTEMS, INC. 1997 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: -------------------- . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. The Plan also provides for automatic grants of Nonstatutory Stock Options to Outside Directors. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall ------------- be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a committee of Directors appointed by the Board --------- in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. ------------ (g) "Company" means Insync Systems, Inc., a California corporation. ------- (h) "Consultant" means any person, including an advisor, engaged by ---------- the Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- (o) "Inside Director" means a Director who is an Employee. --------------- (p) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. ------ (t) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding ----------------------- Options are surrendered in exchange for Options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or -------------- Stock Purchase Right. (w) "Optionee" means the holder of an outstanding Option or Stock -------- Purchase Right granted under the Plan. (x) "Outside Director" means a Director who is not an Employee. ---------------- (y) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (z) "Plan" means this 1997 Stock Plan. ---- (aa) "Restricted Stock" means shares of Common Stock acquired pursuant ---------------- to a grant of Stock Purchase Rights under Section 11 of the Plan. (bb) "Restricted Stock Purchase Agreement" means a written agreement ----------------------------------- between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. -3- (cc) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (dd) "Section 16(b)" means Section 16(b) of the Exchange Act. ------------- (ee) "Service Provider" means an Employee, Director or Consultant. ---------------- (ff) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 14 of the Plan. (gg) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (hh) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is (a) 200,000 Shares, (b) the number of Shares reserved but unissued under the Company's 1993 Stock Option Plan (as amended and restated) (the "1993 Plan") as of the date of shareholder approval of this Plan and any Shares returned to the 1993 Plan as a result of termination of options under the 1993 Plan, plus (c) an annual increase to be added on January 1 of each year equal to the lesser of (i) 500,000 shares, (ii) 2.5% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under -------- the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. The Plan may be ------------------------------ administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator -------------- determines it to -4- be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify ---------- transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Grants to Outside Directors. All grants of Options to --------------------------- Outside Directors made pursuant to Section 12 of the Plan shall be automatic and nondiscretionary. (v) Other Administration. Other than as provided above, the -------------------- Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; -5- (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 16(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's ---------------------------------- decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may ----------- be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. ----------- (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options -6- shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 750,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 750,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 14. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 14), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 20 of the Plan, the Plan shall ------------ become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to -------------- be issued -7- pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is --------------------------------- granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; -8- (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an ------------------------------------------------- Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent -9- that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service ---------------------- Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, ----------------- the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to ----------------- buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either ------------------ alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the -10- Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines ----------------- otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 14 of the Plan. 12. Automatic Option Grants to Outside Directors. All grants of Options -------------------------------------------- to Outside Directors pursuant to this Section shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (a) All Options granted pursuant to this Section shall be Nonstatutory Stock Options and, except as otherwise provided herein, shall be subject to the other terms and conditions of the Plan. (b) No person shall have any discretion to select which Outside Directors shall be granted Options under this Section or to determine the number of Shares to be covered by such Options. (c) Each person who first becomes an Outside Director following the effective date of this Plan, as determined in accordance with Section 7 hereof, shall be automatically granted an Option to purchase [_____] Shares (the "First Option") or the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. -11- (d) Each Outside Director shall be automatically granted an Option to purchase [_____] Shares (a "Subsequent Option") on the date of the Company's annual meeting of the stockholders each year; provided he or she is then an Outside Director and, if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (e) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option granted before the Company has obtained shareholder approval of the Plan in accordance with Section 20 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 20 hereof. (f) The terms of each Option granted pursuant to this Section shall be as follows: (i) the term of the Option shall be ten (10) years. (ii) Notwithstanding any other provision of the Plan or the cessation of the Outside Director's status as a Service provider, an Option granted to an Outside Director pursuant to this Section 12 shall continue to vest and become exercisable pursuant to Section 12(f)(iv), and shall remain exercisable for the term set forth in Section 12(f)(i). (iii) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (iv) subject to Section 14 hereof, the Option shall vest and become exercisable as to 25% of the Shares subject to the Option on the first anniversary of its date of grant, and as to 1/48th of the Shares subject to the Option each month thereafter, such that all Shares subject to the Option shall be vested and exercisable four (4) years from the date of grant of the Option. 13. Non-Transferability of Options and Stock Purchase Rights. Unless -------------------------------------------------------- determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. -12- 14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or ------------------------------------------------------------------ Asset Sale. ---------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company -------------------- with or into another corporation, or the sale of substantially all of the assets of the Company (a "Merger"), each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation (the "Successor Corporation"). Following such assumption or substitution in connection with a Merger, if the Optionee's status as an Employee or employee of the Successor Corporation, as applicable, is terminated by the Successor Corporation as a result of an Involuntary Termination (as defined below) other than for Cause (as defined below) within twelve months following a Merger, the -13- Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock , including Shares as to which Optionee would not otherwise be vested or exercisable. Thereafter, the Option or Stock Purchase Right shall remain exercisable in accordance with Sections 10(b) through (d) above. For purposes of this section, any of the following events shall constitute an "Involuntary Termination": (i) a significant reduction of the Employee's duties, authority or responsibilities, relative to the Employee's duties, authority or responsibilities as in effect immediately prior to the Merger, or the assignment to Employee of such reduced duties, authority or responsibilities; (ii) a substantial reduction of the facilities and perquisites (including office space and location) available to the Employee immediately prior to the Merger; (iii) a reduction in the base salary of the Employee as in effect immediately prior to the Merger; (iv) a material reduction in the kind or level of employee benefits, including bonuses, to which the Employee was entitled immediately prior to the Merger with the result that the Employee's overall benefits package is significantly reduced; (v) the relocation of the Employee to a facility or a location more than fifty (50) miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Successor Corporation which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; (vii) or any act or set of facts or circumstances which would, under California case law or statute constitute a constructive termination of the Employee. For purposes of this section, "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Successor Corporation, and (iv) following delivery to the Employee of a written demand for performance from the Successor Corporation which describes the basis for the Successor Corporation's belief that the Employee has not substantially performed his duties, continued violations by the Employee of the Employee's obligations to the Successor Corporation which are demonstrably willful and deliberate on the Employee's part. In the event that the Successor Corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which Optionee would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in connection with a Merger, the Administrator shall notify the Optionee in writing that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the Merger, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the Merger, -14- the consideration (whether stock, cash, or other securities or property) received in the Merger by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Merger is not solely common stock of the Successor Corporation or its Parent, the Administrator may, with the consent of the Successor Corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the Successor Corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Merger. 15. Date of Grant. The date of grant of an Option or Stock Purchase Right ------------- shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 16. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder -------------------- approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 17. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the ---------------- exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being -15- purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 18. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 20. Shareholder Approval. The Plan shall be subject to approval by the -------------------- shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -16- INSYNC SYSTEMS, INC. 1997 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- [OPTIONEE'S NAME AND ADDRESS] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: ---------------- This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. Termination Period: ------------------ This Option may be exercised for ninety (90) days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for one year after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT --------- 1. Grant of Option. The Plan Administrator of the Company hereby grants --------------- to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term in ----------------- accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an ------------------ exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 3. Method of Payment. Payment of the aggregate Exercise Price shall be ----------------- by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to ---------------- this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. --------------------- (i) Nonstatutory Stock Option. The Optionee may incur ------------------------- regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. -3- (ii) Incentive Stock Option. If this Option qualifies as an ---------------------- ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. --------------------- (i) NSO. If the Optionee holds NSO Shares for at least one --- year, any gain realized on disposition of the Shares will be treated as long- term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one --- year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by ------------------------------- reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES --------------------------------- -4- AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: INSYNC SYSTEMS, INC. _______________________________ ______________________________________ Signature By _______________________________ ______________________________________ Print Name Title _______________________________ Residence Address _______________________________ -5- CONSENT OF SPOUSE ----------------- The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _______________________________________ Spouse of Optionee -6- EXHIBIT A --------- 1997 STOCK PLAN EXERCISE NOTICE Insync Systems, Inc. 1463 Centre Point Drive Milpitas, CA 95035 Attention: Secretary 1. Exercise of Option. Effective as of today, ________________, 199__, the ------------------ undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Insync Systems, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement dated _____________, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $_____________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the ------------------- full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has ---------------------------- received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the --------------------- appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 14 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer ---------------- adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are ------------------------------- incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER: INSYNC SYSTEMS, INC. ______________________________ ___________________________________ Signature By ______________________________ ___________________________________ Print Name Its Address: Address: - ------- ------- ______________________________ 1463 Centre Point Drive ______________________________ Milpitas, CA 95035 ___________________________________ Date Received -2- EX-4.05 9 1997 EMPLOYEE STOCK PURCHASE PLAN EHHIBIT 4.05 INSYNC SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1997 Employee Stock Purchase Plan of Insync Systems, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean Insync Systems, Inc. and any Designated ------- Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings ------------ only, exclusive of payments for commissions, overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been --------------------- designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the -------- Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering --------------- Period. (i) "Exercise Date" shall mean the last day of each Purchase Period. ------------- (j) "Fair Market Value" shall mean, as of any date, the value of ----------------- Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twelve ---------------- (12) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twelve months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1998. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. ---- (m) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period --------------- commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (o) "Reserves" shall mean the number of shares of Common Stock covered -------- by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges ----------- and the Nasdaq System are open for trading. 3. Eligibility. ----------- (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, ---------------- overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before October 31, 1998. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a -3- subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. ------------------ (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any -4- withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each --------------- eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 5,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19) on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier with drawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on -------- which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. ---------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. -5- (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. ------------------------- Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 250,000 shares, plus an annual increase to be added on January 1 of each year equal to the lesser of (i) 200,000 shares, (ii) 1% of the outstanding shares on such date or (iii) a lesser amount determined by the Board, subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall deter mine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine -6- eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such partici pant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant ------- in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, --------------------------------------------------------------------- Merger or Asset Sale. -------------------- -7- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason -8- terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall -9- continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent ----------------------------------------------- permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- EXHIBIT A --------- INSYNC SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ______________________ hereby elects to participate in the Insync Systems, Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to pur chase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (up to 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): __________ _______________________________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the ---------------------------- Company in writing within 30 days after the date of any disposition of my ------------------------------------------------------------------------- shares and I will make adequate provision for Federal, state or other tax ------------------------------------------------------------------------- withholding obligations, if any, which arise upon the disposition of the ------------------------------------------------------------------------ Common Stock. The Company may, but will not be obligated to, withhold from ------------ my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)______________________________________________ (First) (Middle) (Last) _______________________________ _______________________________________ Relationship _______________________________________ (Address) -2- Employee's Social Security Number: _______________________________________ Employee's Address: _______________________________________ _______________________________________ _______________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ _______________________________________ Signature of Employee _______________________________________ Spouse's Signature (If beneficiary other than spouse) -3- EXHIBIT B --------- INSYNC SYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Insync Systems, Inc. 1997 Employee Stock Purchase Plan which began on ____________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically termi nated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ________________________________ ________________________________ ________________________________ Signature: ________________________________ Date:__________________________ EX-4.10 10 FORM OF EMPLOYEE AND AFFILIATE STOCK PLAN EXHIBIT 4.10 INSYNC SYSTEMS, INC.INSYNC SYSTEMS, INC. EMPLOYEE AND AFFILIATES-STOCK PURCHASE AGREEMENT ------------------------------------------------ 1. Parties. This agreement is between Insync Systems, Inc., a California ------- Corporation (the "Company") and the undersigned employee or affiliated person of the Company (the "Employee"). 2. Stock Subject to Agreement. This agreement applies to all stock of the -------------------------- Company acquired by the Employee on or after the date of this Agreement. 3. Option in Company- Termination of Employment. Upon the termination of the -------------------------------------------- Employees' employment for any reason other than his death, the company shall have the option to purchase any or all of the shares of stock of the Company which he then owns (the "option shares") . The period during which the Company may exercise this option shall begin on the date of termination of his employment (the "record date") and end 90 days after the record date. 4. Option in Company - Death Of Employee. Upon the death of the Employee, ------------------------------------- during or after the termination of his employment, the Company shall have the option to purchase any or all of the shares of stock of the Company which he then owns (the "option stock"). The period during which the Company may exercise this option shall begin on the date of his death (the "record date") and end 90 days after the company is notified of his death. 5. Option in Company - Transfer by Employee. Before the Employee may transfer, ----------------- voluntarily or involuntarily, any of the shares of -1- stock of the Company, the Company shall have the option to purchase any or all of the shares proposed to be transferred (the "option stock"). The period during which the Company may exercise this option shall begin on the date the Company is notified of the proposed transfer (the "record date") and end 90 days after the record date. The term "transfer" includes but is not limited to a sale, gift or pledge. Section 5 of this agreement shall not apply to stock which is option stock under section 4 of this agreement. 6. Exercise by Company. The Company shall exercise its option under this ------------------- agreement by notifying the Employee of its election to purchase a specified number of option shares. If the Company does not elect to purchase all of the option shares, the Company shall, before or upon the expiration of its option, so notify the shareholders of the Company on record on the record date. 7. Option in Shareholder. Each shareholder of the Company of record on the --------------------- record date (the "shareholder") shall have the option to purchase a portion of the option shares which the Company does not elect to purchase (the "remaining option shares") . The period during which a shareholder may exercise his option shall end 30 days after the Company notifies the Shareholders of its election. 8. Exercise by Shareholder. A shareholder shall exercise his option by ----------------------- notifying the Company and the employee of his election to purchase a specified number of time remaining option shares. A shareholder may purchase a portion of the remaining option shares based on the ratio of the number of shares of stock of the company owned by him on the record date to the number of shares of stock of -2- the Company owned by all shareholders an the record date. 9. Shares Not Purchased. After the end of the period during which the Company -------------------- and the Shareholders may exercise their options to purchase shares of stock of the Company proposed to be transferred by the Employee, but not more than 180 days after the Company is notified of the proposed transfer, the Employee may transfer the option shares which the Company and the Shareholders do not elect to purchase. 10. Purchase Price. The price per share at which option shares may be -------------- purchased by the Company and Shareholders shall he set annually by the Board of Directors, which shall consider those facts which in their discretion best approximate the fair market value of said stock. The Board shall set a per share value and an appropriate discount rate for the total shares which do not equal more that 25% of the outstanding shares of stock of the Company. Such price shall include a value for "goodwill" of the Company which will take into account increases in business- growth, reputation in the community, work in progress, promotion activity outstanding, and increased networking relationships as an asset of the business. The fixed price set forth by the Board shall be binding on the Employees for all purposes of this Agreement. In the event that the Board has not determined a stock value within 12 months prior to the exercise date, any Shareholder may request that a study be undertaken to arrive at a new fixed price to be determined by the Board of Directors. If the Board fails to meet within 15 days after the shareholder's request for a valuation to -3- arrive at a new fixed price then the matter will be submitted at the direction of the Board to arbitration or appraisal such arbitration or appraisal to be effected in accordance with this Article. Within ten (10) days the Board shall select whether arbitration or appraisal value shall be used and select 1 arbitrator or appraiser. The selling Shareholder shall give written notice to the Board of Directors of the acceptability of the appointed person. If the Shareholder fails to notify the Board of the appointment of its arbitrator or appraiser, as aforesaid, within or by the time above specified, then the person appointed by the Board shall act. If the Shareholder objects to said person appointed then the arbitrator or appraiser chosen by the Board shall within tan (10) days appoint a second arbitrator or appraiser and the two by mutual agreement shall appoint a third. In the event the selecting arbitrators are unable to agree upon such appointment within ten (10) days after the time aforesaid, then any party, on behalf of all, may request such appointment of the arbitrators or appraisers be made by the United States District Judge for the District in which San Jose, California is located. In the event of the failure, refusal or inability of any arbitrators or appraisers to act, a new arbitrators or appraisers shall be appointed in his stead, and the decision of the arbitrators or appraisers so chosen shall be given within a period of thirty (30) days after his appointment. The decision of the arbitrators or appraisers so appointed and acting hereunder concur shall in all cases be binding and conclusive upon -4- the parties. Each party shall pay one-half (1/2) of the fees and expenses. All hearings and proceedings held and all investigations and action taken by the arbitrators or appraiser(s) shall take place in San Jose, California. All arbitration proceedings shall be conducted in accordance with the applicable rules of the American Arbitration Association then in effect. Any award rendered therein shall be final and binding on all parties and judgment may be entered thereon in any court having jurisdiction thereof. The arbitrator (s) may, in their discretion, declare a "winner" in the arbitration. The appraisal shall be conclusively binding on all of the parties concerned. In the event the Corporation can legally make a redemption of the terminated Shareholders share, the Shareholder may assign to the Corporation any right and duty herein provided at a price determined by the mutual agreement of the Shareholders where the Shareholders are able to mutually agree an a price. 11. Closing. The purchase price shall be paid by the purchaser to the employee ------- and the shares of stock to be purchased shall be delivered by the Employee to the purchaser not more than 30 days after the end of the period during which the shareholders may exercise their options. The closing shall take place at the main office of the Company unless the Employee and the purchaser agree otherwise. 12. Installment Purchase. At the election of the purchaser, 80% of the -------------------- purchase price may be deferred and paid in four (4) annual installments each equal to 20% of the purchase price. Interest -5- shall be paid annually on the unpaid balance at the rate of 7%. The debt of the purchaser shall be reflected in a note and secured by the shares of stock which the purchaser has not yet paid for. Certificates will be issued when payments are completed. 13. Termination of Provisions. The provisions of this Section shall terminate ------------------------- and cease to have effect upon the earliest to occur of (i) the consummation of a firm commitment underwritten public offering pursuant to an effective registration statement under the securities Act of 1933, as amended (the "Act") covering the offer and sale of the Company's common stock, (ii) the date upon which the company becomes a reporting company under either section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended, or (iii) the closing date of a sale of assets or merger of the Company or other acquisition transaction pursuant to which the shareholders of the Company receive securities of a buyer whose shares are publicly traded. 14. Capital Changes. If, from time to time during the term of this agreement: --------------- (a) there is any stock dividend or liquidating dividend to cash and/or property, stock split, or other change an the character or amount of any of the outstanding securities of the Company; or (b) there is any liquidation or consolidation or merger of the Company with another corporation; then, except as otherwise expressly provided herein, in such event, any and all new, substituted or additional securities, or other property, other than cash, to which Purchaser is entitled by reason -6- of Purchaser's ownership of the shares shall be immediately subject to this agreement and be included in the word "shares" for all purposes with the same force and effect as the shares presently subject to the purchase option, right of first refusal and other terms of this Agreement. While the aggregate option price shall remain the same after each such event, the option price per share upon execution of 'the purchase option shall be appropriately adjusted. In the event of any cash divided or liquidating distribution made with respect to the shares, the Company may apply the amounts thereof against any indebtedness owed by Purchaser to the company. 15. Securities Law Compliance. -------------------------- (a) Exemption from Registration. The shares have not been registered under the Act and are being issued to purchaser in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit arrangements such as this agreement. Purchaser hereby acknowledges receipt of a copy of this agreement. The shares have not been qualified under the California Corporate Securities Law of 1968 and a-re being issued to purchaser in reliance upon the exemption from qualification provided by section 25102 (f) of the Corporations Code. (b) Investment Representations. As an inducement to the Company to issue the shares to purchaser, and in order to establish the suitability of purchaser for such an investment, purchaser hereby represents and warrants to the company as follows; -7- (i) investment Intent. Purchaser is aware of and familiar with the Company's business affairs and financial condition and has acquired sufficient information about the company to reach a knowledgeable and informed decision to acquire the shares. Purchaser is acquiring the shares for investment for his own account, not for resale, without any intention of or view toward or for participant, directly or indirectly, in a distribution of the shares or any portion thereof. (ii) Representatives. Purchaser has consulted with such professional advisors (the "representatives"), if any, as purchaser has seen fit in connection with this proposed investment. (iii) Experience. Purchaser and Purchaser's representative, if any, have such knowledge and experience in financial and business matters that Purchaser is capable of evaluating the merits and risks of investment in the shares, (iv) Risks. Purchaser understands that an investment in the Company is speculative, that any possible profits therefrom are uncertain, and the Purchaser must bear the economic risks of the investment in the Company for an indefinite period of time. Purchaser is able to bear these economic risks and to hold the shares for an indefinite period. (v) Information. Purchaser and Purchaser's representative, if any, have received all information and data -8- with respect to the Company which Purchaser or Purchaser's representative have requested and have deemed relevant in connection with an evaluation of the merits and risks of this investment in the Company, and do not desire any further information or data with respect to the Company prior to the purchase of the shares. (vi) Domicile. Purchaser is a bona fide resident and domiciliary, not a temporary transient resident, of and Purchaser's principal residence is the State of California, and Purchaser does not have any present intention of moving his principal residence from California. (vii) Legends. Purchaser understands and agrees that (i) the legends set forth in Section 16 will be placed on the certificates evidencing the shares and on the certificates issued to transferees; (ii) the stock records of the Company will be noted with respect to such restrictions; and (iii) the Company will not be under any obligation to register the Shares or to comply with any exemption available for sale of the shares without registration. (viii) Restrictions on Resale. Purchaser understands that, under relevant securities law requirements, additional restrictions on the transferability of the shares will apply, unless Company, in its discretion, otherwise determines. Purchaser understands that the shares must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. The -9- Company is under no obligation to so register the shares . Purchaser understand that Rule 701 and Rule 144 of the Securities and Exchange Commission permit limited public resale of securities acquired in non- public offering subject to satisfaction of certain conditions Purchaser understands. that the Company may not be satisfying, and is not obligated to satisfy, any requirement or Rule 144 at such time as Purchaser might wish to sell any of the shares, and if so, Purchaser might be precluded from selling any of the shares under Rule 144. Purchaser further understand that 90 days after the company becomes subject to the reporting requirements under Section 13 or Section 15(d) of the Securities Exchange Act of 9134, the shares issued under Rule 701 may be resold by a person who is not an affiliate of the Company without compliance with many of such Rule 144 conditions (such as the current public information, holding period, volume limitation and notice filing requirements) and by a person who is an affiliate of the Company without any holding period requirements (subject to the other limitations set forth in the Agreement). (c) Further limitations on Disposition. Without in any way limiting the representations set forth above, Purchaser further agrees that Purchaser shall in no event make any disposition of any portion of the shares unless and until: (i) (A) there is in effect a registration statement under the Act covering such proposed disposition and such -10- disposition is made in accordance with said registration statement; or (B) (1) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, (2) Purchaser shall have furnished the Company with an opinion of the Purchaser's counsel to She effect that such disposition will not require registration of such shares under the Act and. (3) such opinion of the Purchaser's counsel shall have been concurred in by counsel for the Company and the Company shall have advised Purchaser of such concurrence; and (ii) the shares proposed to be transferred are no longer subject to the purchase option and there has been compliance 'With the right of first refusal provisions contained in Section 3. 16. Legends an Shares. Each certificate representing the shares shall have ---------------- conspicuously printed on it the following legends: (a) "THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") I OR THE SECURITIES LAWS OF VARIOUS STATES AND HAVE BEEN ISSUED AND SOLD PURSUANT TO AN EXEMPTION FROM THE ACT I AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY THE HOLDER THEREOF AT ANY TIME EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT COVERING THESE SHARES, OR (2) UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT THESE SHARES MAY BE -11- TRANSFERRED WITHOUT REGISTRATION." (b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER OR HIS PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." (c) Any legend required to be placed thereon by the California Commissioner of Corporations or required by the applicable blue sky laws of any state . 17. Valuation of shares. Purchaser understands that the shares have been ------------------- valued by the board of directors for the purpose of this sale, and that the Company believes this valuation represents a fair attempt to reaching an accurate appraisal of their worth. Purchaser also understands, however, that the Company can give no assurances that such price is in fact the fair market value of the shares and that it is possible that the Internal Revenue services would successfully assert that the value of the shares on the date of purchase is substantially greater than so determined. If the Internal Revenue Service were to succeed in a determination that the shares had value greater than the purchase price, the additional value would constitute ordinary income as of the date of its receipt. The additional taxes (and interest) due would be payable by purchaser, and there is no provision for the company to reimburse purchaser for that tax liability. Purchaser assumes all responsibility for such potential tax liability. -12- 18. Section 83(b) Election. ---------------------- (a) Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code") taxes as ordinary income the difference between the amount paid for the shares and the fair market value of the shares as of the date any restrictions of the shares lapse. In this context, "restriction" means the right of the Company to buy back the shares pursuant to the purchase option. In the event the Company has registered under the Securities Exchange Act of 1934, "restriction" with respect to officer, directors and 10% shareholders also means the six-month period after the purchase of the share during which sales of certain securities by such officers, directors, and 10% shareholders would give rise to liability under Section 16(b) of the Exchange Act. Purchaser understands that he may elect to be taxed at the time the shares are purchased rather than when and as the purchase option or six-month section 16(b) period expires, by filing an election under Section 83(b) of the Code with the Internal Revenue Service within thirty (30) days after the date of purchase. Even if the fair market value of the share equals the amount paid for the shares (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. Purchaser understand that failure to make this filing in a timely manner will result in the recognition of ordinary income by Purchaser, as the purchase option lapses or after the lapse of the six-month section 16(b) period, on any difference between the purchase price and the fair market value of the shares at the time such restrictions lapse. -13- PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83 (b) EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON PURCHASER'S BEHALF, (b) If Purchaser makes any tax election relating to the treatment of the shares under the Code, at the time of such election Purchaser shall promptly notify the Company of such Election. 19. Market Lock Up. -------------- (a) Lock up Period. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Act, including the Company's initial public offering, Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option of the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any of the shares without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by he Company or such underwriters; provided, however, that in no event shall such period exceed one hundred eighty (180) days. This section 7(c) shall only remain in effect for the two year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to be in force and effect. (b) Limitation. Purchaser shall be subject to the market lock -14- up provisions of this Section 7 (c) provided and only if the officers and directors of the Company are also subject to similar arrangements. (c) Stop Transfer. In order to enforce the provisions of this paragraph the Company may impose stop-transfer instructions with respect to the shares until the spend of the applicable lock up period. 20. Employment at Will. The parties acknowledge that Purchaser's employment ------------------ relationship with the Company is at the will of either party, unless otherwise agreed in writing, and that nothing in this Agreement shall effect in any manner whatsoever the right or power of Purchaser or the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment for any reason, with or without cause. This Agreement does not constitute an express or implied promise of continued employment for the vesting period or any other period. 21. Rights as a Shareholder. Subject to the provisions and limitations hereof, ----------------------- Purchaser may, during the term of this Agreement, exercise all rights and privileges of a shareholder of the company with respect to the Shares. 22. Additional Actions. The parties will execute such further instruments and ------------------ take such further action as may reasonably be necessary to carry out the intent of the agreement. 23. Notices. Any notice required or permitted hereunder shall be ------- given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post office, -15- by regular or certified mail with postage and fees prepaid, addressed, if to Purchaser, at his address set forth on the signature page hereto and, if to the Company, at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by tan days advance written notice to the other party. 24. Assignment. The Company may assign its rights and delegate ---------- its duties under this agreement. If any such assignment or delegation requires consent of the California Commissioner of Corporations, the parties agree to cooperate in requesting such consent. This agreement shall inure to the benefit of the successors and assigns of the company and, subject to the restrictions on transfer herein set forth, be binding upon purchaser, purchaser's heirs, executors, administrators, successors and assigns. 25. No Waiver. The failure of the company (or its assignees) in any instance --------- to exercise the purchase option or the failure of the company (or its assignees) in any instance to exercise the right of first refusal, shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Company and purchaser. No waiver of any breach or condition of this agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 26. Cancellation of Shares. If the Company (or its assignees) ---------------------- -16- shall make available, at the time and place and in the amount and form provided in this agreement, the consideration for the shares to be repurchased in accordance with the provisions of this agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the company (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this agreement. 27. Entire Agreement. This Agreement (constitutes the entire contract between ---------------- the parties hereto with regard to the subject matter hereof. 28. Governing Law. This agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. 29. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 30. Severability. If any provision of this Agreement is held by a court of ------------ competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired in any way and -17- shall be construed in accordance with the purpose and terms of this Agreement. 31. Amendments. This agreement may not be amended, modified or supplemented ---------- except by a writing executed by both parties. 32. Independent Counsel. Employee acknowledges that he has or has been advised ------------------- to have the benefit of independent legal counsel of his own choosing on reviewing this agreement. 33. Headings. The section headings contained in this agreement are included -------- for convenience of reference only and are not intended by the parties to be a part of or to affect the meaning or interpretation of this Agreement. THE VESTING OF SHARES PURSUANT TO THIS AGREEMENT IS EARNED BY CONTINUED EMPLOYMENT, AND THE COMPANY'S RIGHT TO REPURCHASE UNINVESTED SHARES UPON TERMINATION IS ABSOLUTE WHETHER THE TERMINATION IS VOLUNTARY OR INVOLUNTARY OR WITHOUT CAUSE. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. -18- EX-10.05 11 CONSULTING SERVICES AGREEMENT WITH KAIROS EXHIBIT 10.05 CONSULTING SERVICES AGREEMENT ----------------------------- THIS AGREEMENT is made effective as of the 1ST day of June, 1994 by and between INSYNC SYSTEMS, INC., a California corporation with offices at 2070 De LA Cruz boulevard, Santa Clara, CA (Insync"), and. KAIROS, INC., a Delaware corporation with offices at Suite 3222,1700 Market Street, Philadelphia, Pennsylvania ("Kairos"). RECITALS: --------- A. Kairos, Inc. practices various strategies and programs to help businesses design more competitive enterprises and is in the business of providing business design and consulting services. B. Insync desires to engage the services of Kairos, and Kairos desires to accept such engagement in providing to Insync a variety of design and consulting activities and advice, including the development of capabilities and design of business processes, on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the promises and the mutual covenants and conditions contained herein, the parties intending to be legally bound hereby, agree as follows: AGREEMENT 1. ENGAGEMENT. The Company hereby engages Kairos as an independent ---------- contractor to provide the business design and consulting services to Insync as se forth hereafter; and Kairos hereby accepts such engagement and agrees to perform such services, all in accordance with the terms and conditions set forth herein. 2. DUTIES OF KAIROS. Kairos shall provide such business design and ---------------- consulting services as described below and as set forth move particularly in the document "Becoming a Flexible Enterprise: Improving Business Processes in Insync" presented to Stan Leopard dated June 3, 1994 Exhibit A), previously delivered by Kairos to Insync. 3. COMPENSATION TO KAIROS. ---------------------- (a) For the engagement, Insync will pay to Kairos for services rendered hereunder not less than two hundred and seventy thousand ($270,000) Dollars. Our fee for the first phase of the project (the first six to eight months) will be $45,000 per month, We expect the total amount of the first phase to be $270,000. based on a six month project, but if we extend to eight months the $45,000/month fee will continue. The fee for this project is based on a planned return to Insync of one million dollars. Monthly payments will be according to the following schedule:
Month worked Fee - ------------ --- June $ 20,000 July $ 25,000 August $ 35,000 September 150,000 October $ 61,000 November $ 75,000 December $ 45,000 (If Phase I continued, etc.)
The professional fees for this project are based on a partnership" between Insync and Kairos in producing the results of the project and sharing as partners in the financial rewards of the results. We both agree that Kairos total fees and expenses for phase 1 of the project will be 50% of the improvement in financial results attributable to the project for either (1) the period from the beginning of the project through 12/31/95 or (2) a period equal to the time engaging in the project plus six months, whichever is longer. We distinguish fees as consisting of base fees and bonus fees. The base fees will be paid according to the schedule for phase I and will be specified for phase 2 at the beginning of that phase. Base fees are expected to be funded from financial improvements attributable to the project within ninety days of the project initiation. The bonus fees for phase I will be paid at the end of phase 1, with 50% of the bonus to be paid in warrants, up to a limit of 50,000 warrants, the rest in cash, with the value of the warrants to be determined later Bonus fee payout far phase 2 will be negotiated later. The bonus fees due will be determined by subtracting the base fees and expenses paid by Insync for phases I and 2 from the financial improvements of these phases of the project respectively. For example, Kairos will receive a phase I bonus payment that is 50% of the improvement in profitability that is attributable to the project minus the base fees of $270,000 and minus expenses incurred over the project. Insync agrees to pay within fifteen days of invoice date. (b) Out-of-pocket expenses for travel, lodging, meals and costs that are necessary for Kairos' performance of the work promised in the engagement (including but not limited to telephone and Fedex-type charges), will be billed separately and payable monthly in accordance with invoices delivered by Kairos to Insync, for the duration of the engagement. Such expenses will not exceed $ 10,000 per month without renegotiation between Kairos and Insync. 4. DURATION AND TERMINATION. This Agreement shall remain in effect until ------------------------ the services set forth in the letter shall have been performed. However, notwithstanding anything heretofore or hereafter, either party shall have the right to terminate this Agreement upon ten (10) days' written notice to the other party. On the date of effective termination, the compensation shall be prorated on the basis of work performed to the date of effective termination. Kairos shall refund any excess amount paid by Insync, or Insync shall pay any amount due Kairos, within fifteen (15) days of the date of effective termination. 5. NATURE OF RELATIONSHIP. In making and performing this Agreement, the ---------------------- parties are acting and shall act as independent contractors. Nothing in this Agreement shall be deemed to create an agency, joint venture or partnership relationship between the parties hereto. At no time shall either party make commitments or incur any charges or expenses for or in the name of the other party. 6. WAIVER. No waiver by either party of any violations or non- ------ performance by the other party of any of its obligations, agreements, or covenants hereunder shall be deemed to be a waiver of any subsequent violation or non-performance of the same or any other covenant, agreement or obligation, nor shall any forbearance by either party be deemed a waiver by such party of its rights or remedies with respect to such violation or non-performance. 7. BROKERAGE FEES. Both parties represent and warrant to each other that -------------- all negotiations relative to this Agreement have been carried on by then directly without the intervention of any person, firm or corporation. Each party will indemnify the other and hold such other party harmless against and in respect of any claims for brokerage or other commissions relative to this Agreement or the transactions contemplated hereby made by any person, firm or corporation claiming though it or them. 8. SEVERABILITY. If any provision of this Agreement or the application ------------ thereof, is adjudicated to be invalid or unenforceable such invalidity or unenforceability shall not affect any other provision of this Agreement which can be given effect without the invalid or unenforceable provision or application, and to this end, the provisions of this Agreement shall be severable. 9. TITLES AND LANGUAGE. The titles given the Sections and Paragraphs of ------------------- this Agreement are solely for convenience of reference and shall not be construed as having any bearing upon the interpretation or meaning of the provisions of this Agreement. The language of this Agreement shall be: construed to be language which the parties hereto have mutually chosen to express their intentions on the subject matter thereof, and no rule of strict construction shall be applied to such language as to any party hereto. 10. COUNTERPART EXECUTION. This Agreement may be executed in one or more --------------------- counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. FORCE MAJEURE. Neither Insync nor Kairos shall be deemed in default ------------- of any of its obligations under this Agreement if its performance of obligations hereunder are delayed or become impossible or impracticable by reason of any act of God, war, fire, earthquake, strike, sickness, accident, civil commotion, epidemic. act of government or of government agencies or officers, or any other cause beyond such party's control. Such performance of obligations shall be excused for the period of the delay and for a reasonable time thereafter. 12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. During the term of this ----------------------------------------- Agreement the parties may disclose to each other certain proprietary information, trade seats, technical data, and know-how, including but not limited to design drawings, processes, product plans or identities, and marketing or financial information, not generally known in the marketplace and, in the case of Kairos, certain proprietary strategies and programs, including certain research papers, graphics, charts, transparencies/foils, case studies, transcripts, research projects, video and/or auto tapes and magnetic reproductions of text/graphics (collectively, the "Confidential Information"), The parties agree that neither of them, nor any of their respective employees, agents, or representatives, will in any fashion or for any purpose, now or in the future, use, divulge, or disclose the Confidential Information, except to carry out the discussions concerning, and the undertaking of this Agreement. The parties further agree that they will take all reasonable measures to protect the confidentiality of, and avoid the present or future disclosure or use of the Confidential Information so as to prevent it from entering the public domain or falling into the possession of persons other than those authorized by this Agreement who have access to it. Only those employees or agents of the parties who are authorized to participate in discussions between the parties or who have been advised of its confidential nature shall be permitted to have access to the other party's Confidential Information: Insync principals are free to use the know-how they gain from this engagement for the benefit of Insync or other businesses in which they might engage. Insync, its agents, servants, principals and employees, now and forever more, shall likewise, in, addition to anything heretofore, refrain from doing any of the following acts with respect to Kairos' Confidential Information or related technology: a) communicate Kairos' Confidential Information or related technology to any person or entity, outside of Insync; b) use Kairos' Confidential Information or related technology for its private benefit or for the benefit of any person or entity, except as strictly contemplated by the terms of this Agreement; c) use Kairos' Confidential. Information or related technology to provide or sell business design services to any other person or entity, whether affiliated with Insync or not; d) use Kairos' Confidential Information or related technology in any way whatsoever which if so used or divulged, would either damage Kairos or aid or benefit a competitor of Kairos. e) exchange, transfer, sell, assign, incorporate or franchise for profit or in any other fashion, whether for profit or not, Kairos' Confidential Information and related technology with or to any other individual or entity, now or in the future. The terms of this section shall survive the completion and/or termination of this Agreement, and the parties acknowledge that the breach of any of this section's terms at any time hereafter will give rise to irreparable harm inadequately compensable in damages, Accordingly, the parties may seek and obtain injunctive relief against the breach or threatened breach of any of the within terms addition to any legal or equitable remedies which may be available. 13. NOTICES. All notices and other communications provided for in this ------- Agreement shall be given or made by telex, telecopy, telegraph, cable, certified or registered mail (return receipt requested), or delivered personally or by an internationally recognized overnight courier service to the address set forth below (or such other address as may be designated by any method permitted by this Paragraph 13). All such communications shall be deemed to have been duly given when transmitted by telex or telecopier (if a copy thereof is also mailed to the recipient, certified or registered mail, postage prepaid), or personally delivered or delivered by cable, telegraph or, internationally recognized overnight courier services, or five (5) days after mailing, postage prepaid, to the addresses set forth below: If to Insync: INSYNC: SYSTEMS INC. 2070 De La Cruz Boulevard Santa Clara CA 95050 Attn: Stan Leopard If to Kairos: KAIROS, INC. Suite 3222, 1700 Market Street Philadelphia, Pa. 19103 Attn: Russell G. Redenbaugh With additional to: RICHARD MAX BOCKOL, ESQ. #253 BalaPointe Centre 111 Presidential Blvd. Bala Cynwyd, Pa. 19004 14. GOVERNING LAW. This Agreement shall be construed and interpreted in -------------- accordance with the laws Of the Commonwealth of Pennsylvania without regard to its provisions concerning conflict of laws, 15. ARBITRATION. Any and all disputes between the parties arising out of ----------- the subject matter of this Agreement or the interpretation of the rights and duties of the parties as provided hereunder or the damages arising out of any breach of this Agreement by either party, shall be submitted to arbitration in Philadelphia, Pennsylvania, under the Commercial Arbitration Rules; of the American Arbitration Association. The decision of the arbitrator or arbitrators shall be final and binding upon the parties, and judgment on the arbitration award may be entered by any court of competent jurisdiction for purposes of enforcement of the award. The prevailing parry in the arbitration shall be entitled to an award of its reasonable attorneys' fees and expenses in connection with the arbitration. 16. AMENDMENTS. No amendments or additions to this Agreement shall be ---------- binding unless in writing and signed by both parties. 17. ENTIRE AGREEMENT. This instrument constitutes the entire agreement ---------------- between the parties and supersedes all prior understandings, previous negotiations, and any memoranda or understanding with respect to the subject matter hereof. 18. BINDING EFFECT. This Agreement shall be binding upon and shall inure -------------- to the benefit of the parties hereto and their respective successors and assigns. 19. DISCLAIMER. EXCEPT FOR THOSE WARRANTIES, IF ANY, SET FORTH IN THIS ---------- AGREEMENT, NEITHER INSYNC, NOR KAIROS MAKES ANY WARRANTIES EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF OR MECHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL INSYNC OR KAIROS BE LIABLE FOR THE OTHER PARTY'S LOSS OF PROFITS, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF PERFORMANCE OR NON-PERFORMANCE OF ANY PROVISION OF THIS AGREEMENT. IN WITNESS 0F, the parties have caused this Agreement to be executed as of The date written below. KAIROS, INC. Attest: /s/ Signature unreadable By: /s/ Russell G. Redenbaugh Secretary Signature Title: President Printed Name: Russell G. Redenbaugh Date: 7/6/94 INSYNC SYSTEMS, INC. Attest: /s/ Signature unreadable By: /s/ Stan Leopard Secretary Signature Title: Chairman Printed Name: Stan Leopard Date: 7/6/94 EX-10.07 12 EQUITY AGREEMENT EXHIBIT 10.07 EQUITY AGREEMENT This agreement is made on May 27, 1996, between Insync Systems, Inc., a California Corporation ("INSYNC") and Stanley Leopard, C.E.O. of Insync Systems, Inc. ("Leopard"). 1. RECITALS -------- INSYNC and Leopard desire to enter into a binding agreement to be co-investors in the purchase of one full-use Membership at Palo Alto Hills Golf and Country Club ("Membership") under the terms and conditions set forth herein. In consideration of the mutual promises set forth below in the body of this agreement, INSYNC and Leopard agree as follows: 2. TERMS ----- a. Both INSYNC and Leopard will each pay fifty percent (50%) of the total Membership purchase price of $100,000, including sales or other taxes (if any), and exclusive of periodic fees and/or dues. b. Both INSYNC and Leopard will each acquire a fifty percent (50%) equity interest in the Membership, which shall be issued in Leopard's name; however, for so long as both Parties continue to own their respective fifty percent (50%) equity interest in the Membership, Leopard shall have the sole and exclusive right to the use and enjoyment of the Membership privileges, and INSYNC shall have an equity interest only with no right to the use and enjoyment of the Membership privileges. c. Leopard shall be responsible for the payment of all periodic fees, dues, and/or costs resulting from or attributable to the ownership or use of the Membership, including but not limited to monthly dues, use fees and taxes. 3. TERMINATION ----------- Equity ownership in the Membership by both parties shall be retained until one of the following events occurs: a. In the event that Leopard desires to sell or otherwise transfer any portion of his equity interest in the Membership, the entire, undivided Membership shall be sold to the first bona-fide offeror willing and able to pay current market value for the Membership. Leopard shall be responsible for administering and effectuating the sale, as well as collecting the proceeds of the sale, and remitting to INSYNC its pro-rata share of the proceeds. 1 b. In the event that Leopard's employment with INSYNC terminates for any reason, voluntarily or involuntarily, Leopard shall have the right, at his option, to purchase INSYNC's equity interest in the Membership for a period of ninety (90) days following his termination date. Should Leopard exercise this right of first refusal, the price for the purchase of INSYNC's equity interest will be at the higher of INSYNC's cost less any transaction fees or current market value (net of transaction fees). If Leopard declines to exercise his right of first refusal to purchase INSYNC's equity interest within ninety (90) days of his termination, the entire, undivided Membership shall be sold to the first bona-fide offeror willing and able to pay current market value for the Membership. Leopard shall be responsible for administering and effectuating the sale, as well as collecting proceeds of the sale, and remitting to INSYNC its pro-rata share of the proceeds. c. Any sale of the entire Membership, or either Party's equity in the same, shall be at the current market value of the Membership or equity in the Membership as of the date of the sale. "Current market value" shall be determined as follows, in the following order: 1. The Parties shall first attempt to ascertain the sale price of comparable PAH Country Club memberships sold within the previous ninety (90) days, and "current market value" shall be the most recent sale price between a willing buyer and seller, less transfer fees at the Club's then current rate; 2. If no such sales occurred within the previous ninety (90) days, or if the Parties are not able to ascertain the sale price(s), then the Parties shall attempt in good faith to reach a mutual agreement on the "current market value" to be used; 3. If the Parties are unable to reach a mutual agreement on the "current market value," the most recent price of actual membership sale which can be determined shall be used in the calculation of Current Market Value. d. Upon the sale of the entire, undivided Membership to a third party, INSYNC shall bear all transaction fees associated with the sale, to expressly include all costs and fees payable to the Country Club as a result of such sale or transfer of ownership. INSYNC shall be entitled to any deduction or other tax benefit which may be realized from the payment of such transaction fee. INSYNC and Leopard will share pro- rata in all net proceeds of the sale, including any losses or profits from the sale. e. Each party shall be entitled/obligated to take fifty percent (50%) of any local, state, or federal tax benefit or liability incurred or realized as a result of the profit or loss from the sale of the Membership. 2 Executed on the date first written above in Milpitas, California. /s/ Stanley Leopard 5/21/96 - --------------------------------------------- ------------------ Stanley Leopard Date /s/ Terence J. Griffin 5-28-96 - --------------------------------------------- ------------------ Terence J. Griffin, Insync Systems, Inc. Date 3 EX-11.01 13 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.01 INSYNC SYSTEMS, INC. STATEMENT REGARDING COMPUTING PRO FORMA NET INCOME (LOSS) PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------- Net income (loss).............................. $(6,508) $ 310 Accretion of redeemable preferred stock........ (147) (74) ------- ------ Net income (loss) applicable to common shareholders.................................. $(6,655) $ 236 ======= ====== Weighted average common stock outstanding...... 5,317 5,109 Weighted average redeemable preferred stock outstanding................................... 2,089 2,353 Weighted average of warrants and options outstanding................................... -- 541 Common share equivalents for stock options and warrants issued at prices below the assumed initial public offering price during the twelve month period prior to the initial filing of the related registration statement.. 211 211 ------- ------ Total pro forma shares used in per share computation................................... 7,617 8,214 ======= ====== Pro forma net income (loss) per share.......... $ (0.87) $ 0.03 ======= ======
EX-23.01 14 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.01 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Board of Directors and Shareholders of Insync Systems, Inc. We consent to the use in this Registration Statement of Insync Systems, Inc. on Form S-1 of our reports dated September 16, 1997 (September 29, 1997 as to Note 13) and October 20, 1995 (January 2, 1996 as to Note 9) relating to the financial statements of Insync Systems, Inc. and Pullbrite, Inc., respectively, appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. Our audits of the financial statements of Insync Systems, Inc. referred to in our aforementioned report also include the financial statement schedule of Insync Systems, Inc., listed in Item 16.(b). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP San Jose, California September 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----