-----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, ROzAvB6MmCSLjD4g8aTTOHDtuSBpJemzAUdRQr+AptFpQBvQKHuMNaTJYL2Y7KuC GVn+K2KcjbCM1vKGygp1zg== /in/edgar/work/0000929624-00-001440/0000929624-00-001440.txt : 20001018 0000929624-00-001440.hdr.sgml : 20001018 ACCESSION NUMBER: 0000929624-00-001440 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20001017 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTEST CORP CENTRAL INDEX KEY: 0001116467 STANDARD INDUSTRIAL CLASSIFICATION: [3825 ] IRS NUMBER: 931226054 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-40744 FILM NUMBER: 741632 BUSINESS ADDRESS: STREET 1: 678 ALMANOR AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087318778 MAIL ADDRESS: STREET 1: 678 ALMANOR AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 S-1/A 1 0001.txt AMENDMENT NO. 3 TO FORM S-1 As filed with the Securities and Exchange Commission on October 17, 2000 Registration No. 333-40744 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- AMENDMENT NO. 3 TO FORM S-1 UNDER THE SECURITIES ACT OF 1933 ------------------- ARTEST CORPORATION (Exact name of registrant as specified in its charter) California 7389 93-1226054 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
678 Almanor Avenue Sunnyvale, California 94085 (408) 731-8778 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) ------------------- Jen Kao President and Chief Executive Officer Artest Corporation 678 Almanor Avenue Sunnyvale, California 94085 (408) 731-8778 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- Copies to: Donald J. Bouey, Esq Christopher L. Kaufman, Esq. L. Christopher Vejnoska, Esq. Bradley S. Fenner, Esq. Elizabeth H. Lefever, Esq. Michael R. Fassler, Esq. Christina Chiaramonte, Esq. Latham & Watkins Leonard A. Ho, Esq. 135 Commonwealth Drive Brobeck, Phleger & Harrison LLP Menlo Park, California 94025 One Market (650) 328-4600 Spear Street Tower San Francisco, California 94105 (415) 442-0900
------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date 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 of 1933, 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, check the following box. [_] ------------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Proposed Proposed Maximum Title of Each Class Maximum Aggregate Amount of of Securities to be Amount to be Offering Price Offering Registration Registered Registered(1) per Share(2) Price(1)(2) Fee - ------------------------------------------------------------------------------- Common Stock, $0.001 value per share....... 5,750,000 $11.00 $63,250,000 $16,698.00(3) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Includes 750,000 shares of common stock which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). (3) Full amount previously paid. ------------------- 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, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with a United States and Canadian offering of the registrant's common stock and one to be used in a concurrent international offering of the registrant's common stock. The international prospectus will be identical to the U.S. prospectus except that the international prospectus will have a different front cover page and underwriting section. The U.S. prospectus is included herein and is followed by the alternate front cover page and underwriting section to be used in the international prospectus, each of which has been labeled "Alternative Page for International Prospectus." ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information contained in this prospectus is not complete and may be + +changed. We may not sell these securities until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +prospectus is not an offer to sell securities, and we are not soliciting + +offers to buy these securities, in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 17, 2000 [LOGO] Artest Corporation 5,000,000 Shares Common Stock Artest Corporation is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "ARTE." We anticipate that the initial offering price will be between $9.00 and $11.00 per share. -------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 9. --------------
Per Share Total ------ ----- Public Offering Price............................................. $ $ Underwriting Discounts and Commissions............................ $ $ Proceeds to Artest Corporation.................................... $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Artest Corporation has granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of its common stock to cover over- allotments. Robertson Stephens CIBC World Markets The date of this Prospectus is , 2000 [Edgar description of artwork] Inside Front Cover Graphic that depicts the phases of our test services with accompanying descriptive text. Inside Back Cover Pictures that depict our staff conducting our test services and consulting with a customer with accompanying descriptive text. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 2000 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 9 Cautionary Note on Forward-Looking Statements............................ 21 Use of Proceeds.......................................................... 22 Dividend Policy.......................................................... 22 Capitalization........................................................... 23 Dilution................................................................. 24 Selected Financial Data.................................................. 26 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 28 Business................................................................. 39 Management............................................................... 50 Certain Transactions and Relationships with Related Parties.............. 60 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Available for Future Sale......................................... 68 United States Tax Consequences to Non-United States Holders of Common Stock.................................................................. 70 Underwriting............................................................. 73 Legal Matters............................................................ 76 Experts.................................................................. 76 Where You Can Find Additional Information................................ 76 Index to Financial Statements............................................ F-1
--------------------- Our trademarks, service marks and trade names include Artest(TM), IP Test(TM), Test IP(TM) and our logos. This prospectus contains other trademarks, service marks and trade names owned by other companies. 3 PROSPECTUS SUMMARY The following summary highlights information which we present more fully elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements that describe risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. Our Business We are an independent United States-based provider of comprehensive test services to the semiconductor industry. We provide a broad selection of software and hardware development services that test analog, digital, mixed- signal and high-performance integrated circuits that are used primarily in the communications and networking industries. Integrated circuits, or ICs, are electronic circuits in which millions of transistors may be fabricated on a single piece of silicon or other semiconductor material. Mixed-signal ICs are electronic circuits that convert real-world analog signals, such as sound and radio waves, into digital signals, such as those stored on compact discs. Analog systems are based on continuous data or events. A digital device simulates or approximates continuous analog experiences. High performance ICs are either digital or mixed-signal ICs capable of processing sufficient information to be utilized in communications products, including cellular telephones, cable and satellite set-top boxes, modems and fax machines. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. The production process of an IC consists of hundreds of individual steps, which can be grouped into three broad categories: design, fabrication and test. Design encompasses the laying out of circuit components and interconnections. Fabrication includes the process where patterns are formed on the wafer and transistors are created and connected to form the desired circuitry. The third stage consists of testing for manufacturing defects. Traditionally, the semiconductor industry has been composed primarily of companies, known as integrated device manufacturers, which design, fabricate and test ICs in their own fabrication facilities. Each of the steps of IC production has become increasingly complex and the semiconductor industry has begun to outsource various aspects of the production process, including test. The trend to outsource aspects of the production process is also due to the escalating cost of fabrication facilities, the desire to reduce time-to-market and time-to-volume, the increased cost associated with the production of complex ICs and general downward pricing pressure on semiconductors. We believe that these trends will continue due to the increased demand for complex ICs that is being driven in part by the communications and networking industries. According to Semiconductor Business News, spending on outsourced test services is growing by more than 40% per year and is expected to reach $2.0 billion in 2001. The testing of an IC is a complex process that requires increasingly sophisticated engineering and production expertise and test equipment. These tests require the development of software programs that are customized to the IC and the test equipment. Our test services combine our internally developed software test programs and test hardware with industry standard automated test equipment which provides our customers with an advanced, cost-effective solution. For example, our solution utilizes reusable software that can be quickly customized to our customers' specifications which improves our customers' time-to-market. In addition, our solution generally reduces the test execution times which lowers our customers' production costs. 4 We have been providing test services to the semiconductor industry since 1997. Our top six customers during the nine months ended September 30, 2000 were Micro Linear Corporation, Philips Semiconductors, Inc., Vitesse Semiconductor Corporation, Fairchild Semiconductor Corporation, GlobeSpan, Inc. and MMC Networks, Inc. Over this period, these customers represented 94% of our revenues with Micro Linear representing 40% and Philips representing 27%. During this nine-month period, for the first time in our operating history, Philips was not our largest customer. We began receiving purchase orders from Philips in June 1998 when it acquired VLSI Technology, Inc., our largest customer for the years 1997, 1998 and 1999. Philips may not continue to use our services when its VLSI products reach the end of their life cycle. Also, Fairchild acquired Micro Linear's power management business in September 2000. A substantial portion of the revenues we received from Micro Linear during this nine-month period were derived from Micro Linear's power management business. Therefore, Fairchild's acquisition of Micro Linear's power management business could result in decreased sales of our services to Micro Linear. Our goal is to be the leading supplier of a comprehensive selection of advanced test services. Key aspects of our strategy to accomplish this goal are as follows: . target selected new customers in the complex analog, digital and mixed- signal IC markets; . continue to develop our intellectual property and improve our reusable, proprietary software; . pursue strategic acquisitions of IC test operations; . increase penetration of existing customers; and . expand our geographic presence and scope of services. Artest Corporation was incorporated in California in November 1996. We will reincorporate in Delaware prior to the closing of this offering. Our Address Our principal executive offices are located at 678 Almanor Avenue, Sunnyvale, California 94085 and our telephone number is (408) 731-8778. 5 The Offering Common stock offered by Artest................ 5,000,000 shares Common stock outstanding after this offering.. 24,279,567 shares Use of proceeds............................... For repayment of approximately $8.0 million of existing indebtedness, with the remaining proceeds to be used for capital expenditures, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ ARTE
The number of shares of our common stock outstanding after this offering is based on the number of shares outstanding as of September 30, 2000, and includes the conversion of all outstanding shares of our preferred stock into common stock effective on completion of this offering, and excludes: . 3,984,000 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2000 at a weighted average exercise price of $2.71 per share, 715,000 of which were granted on June 15, 2000 at a weighted average exercise price of $8.00 per share and became fully vested and immediately exercisable on June 30, 2000; and . 736,433 shares of common stock reserved for issuance under our stock option plans as of September 30, 2000. -------------------- Except as set forth in our financial statements, the notes to our financial statements or as otherwise specified in this prospectus, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option to purchase up to an additional 750,000 shares of our common stock; . assumes an initial public offering price of $10.00 per share, the midpoint of the range shown on the cover of this prospectus; . reflects the conversion of all of our outstanding preferred stock into our common stock effective on the closing of this offering; and . reflects our reincorporation in Delaware prior to the closing of this offering. 6 Summary Financial Data The summary financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and the related notes included elsewhere in this prospectus. The summary statement of operations data for the years ended December 31, 1997, 1998 and 1999 are derived from our audited financial statements included in this prospectus. The summary balance sheet data as of September 30, 2000 and the summary statement of operations data for the nine months ended September 30, 1999 and 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on a basis consistent with the audited financial statements appearing 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 data. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of results we will experience for a full year. Summary financial data for each of the last five years has not been presented as we were founded in November 1996, opened our first facility in May 1997 and began operations in September 1997. Our statement of operations data for 1997 is of limited comparative value because it covers four months of operations. Additionally, our historical statement of operations are not necessarily indicative of results to be expected for any subsequent period.
Nine Months Year Ended December 31, Ended September 30, ------------------------- ------------------- 1997 1998 1999 1999 2000 ------- ------- ------- --------- --------- (in thousands, except share data) Statements of Operations Data Revenues........................ $ 1,042 $ 3,413 $ 7,994 $ 5,911 $ 12,770 Cost of revenues................ 724 2,573 3,648 2,471 7,486 ------- ------- ------- --------- --------- Gross profit.................... 318 840 4,346 3,440 5,284 Operating expenses: Selling, general and administrative............... 694 1,352 1,621 1,081 2,215 Research and development...... -- -- -- -- 367 Amortization of stock-based compensation................. -- -- 219 71 1,247 ------- ------- ------- --------- --------- Total operating expenses..... 694 1,352 1,840 1,152 3,829 ------- ------- ------- --------- --------- Income (loss) from operations... (376) (512) 2,506 2,288 1,455 Other income (expense), net..... 761 629 354 204 (20) ------- ------- ------- --------- --------- Income before provision for income taxes................... 385 117 2,860 2,492 1,435 Provision for income taxes...... 169 70 1,230 1,071 865 ------- ------- ------- --------- --------- Net income...................... $ 216 $ 47 $ 1,630 $ 1,421 $ 570 ======= ======= ======= ========= ========= Net income per share(1): Basic......................... $ 0.04 $ 0.01 $ 0.31 $ 0.27 $ 0.11 ======= ======= ======= ========= ========= Diluted....................... $ 0.01 $ 0.00 $ 0.07 $ 0.07 $ 0.03 ======= ======= ======= ========= ========= Shares used for net income per share(1): Basic......................... 5,240 5,240 5,241 5,240 5,254 ======= ======= ======= ========= ========= Diluted....................... 15,740 21,055 21,927 21,549 21,909 ======= ======= ======= ========= ========= Other Data EBITDA(2)....................... $ 570 $ 1,534 $ 5,078 $ 4,008 $ 5,628 Depreciation.................... $ 175 $ 1,075 $ 1,674 $ 1,209 $ 2,459 Capital expenditures............ $ 5,441 $ 1,942 $ 3,816 $ 2,398 $ 12,794
- -------- (1) No pro forma net income per share is presented for the year ended December 31, 1999 and the nine months ended September 30, 2000 because the amounts would be the same as diluted net income per share for those periods. (2) EBITDA is defined as income before interest, income tax, depreciation and amortization. We present EBITDA because we believe EBITDA is a widely accepted indicator of an entity's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of our operating performance or other combined operations or cash flow data prepared in accordance with U.S. GAAP, or as an alternative to cash flows as a measure of liquidity. Our computation of EBITDA may differ from similarly titled computations of other companies. 7
As of September 30, 2000 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) Balance Sheet Data Cash and cash equivalents......................... $ 9,056 $ 9,056 $47,843 Working capital................................... 8,023 8,023 46,811 Total assets...................................... 36,486 36,486 73,023 Long-term debt, net of current portion............ 9,606 9,606 3,355 Convertible preferred stock....................... 14,000 -- -- Retained earnings................................. 2,463 2,463 2,463 Total stockholders' equity........................ 17,995 17,995 62,496
The pro forma balance sheet data gives effect to the automatic conversion of all 14 million shares of our Series A convertible preferred stock into shares of our common stock effective on the closing of this offering. The pro forma as adjusted balance sheet data, further gives effect to our receipt of the estimated net proceeds from the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, repayment of a portion of our bank facilities and the release of restricted cash upon repayment of a portion of these facilities, as if this offering had been completed on September 30, 2000. The pro forma and pro forma as adjusted financial data do not necessarily represent what our financial position would have been on September 30, 2000 or project our financial position for any future period or date. 8 RISK FACTORS You should carefully consider the risks described below in analyzing an investment in our common stock. If any of the events described below occurs, our business, results of operations and financial condition would likely suffer, the trading price of our common stock could fall and you could lose all or part of the money you paid for our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those identified below as well as those discussed elsewhere in this prospectus. Risks Related to Our Business Because we depend on a small number of customers for a substantial portion of our revenues, the loss of one or more of our significant customers could reduce our revenues and profitability. We anticipate that for the foreseeable future we will continue to be primarily dependent on a small number of customers for most of our revenues. Currently, our largest customer, Micro Linear, accounted for approximately 40% of our revenues in the nine months ended September 30, 2000. Our largest customer for the years 1997, 1998 and 1999, Philips' predecessor, VLSI Technology, Inc., accounted for approximately 27% of our revenues in the nine months ended September 30, 2000, 60% in 1999, 43% in 1998 and 82% in 1997. The percentage of our revenues derived from Philips has been declining in 2000, and we expect it to continue to decrease in the future as the Philips' VLSI products that we have tested reach the end of their product life cycle. Our top three customers accounted for approximately 75% of our revenues in the nine months ended September 30, 2000, 85% in 1999, 83% in 1998 and 95% in 1997. In the nine months ended September 30, 2000, our three largest customers were Micro Linear, Philips and Vitesse. In 1999, our three largest customers were Philips, Vitesse and MMC. The variation in the composition of our largest customers has been minimal over the last three years, with existing customers rotating into and out of these rankings as our customers' testing needs change. These needs may increase or decrease as our customers move toward more complex and more integrated ICs, producing products with differing life cycles. Also, these variations may result as new customers with significant testing needs begin using our services. Our ability to retain customers and to add new customers is important to our ongoing success. The loss of one or more of our significant customers, for any reason, or reduced orders from any of our significant customers, without significant replacement customers or orders, would reduce our revenues and our profitability. We may lose business from our customers who are acquired if the acquiring entity decides to internally test its products or outsource its test needs to another company. If any of our customers is acquired by an entity or develops a new product that causes it to change its testers to ones that we do not own or have access to, we could lose that customer's new business. For example, since our inception, we have been testing large volumes of ICs for VLSI. However, in 1999, Philips acquired VLSI. Philips conducts the majority of its testing internally and is a large company with aggregate testing needs that currently exceed our testing resources. In addition, Philips is requiring that many of VLSI's new ICs be tested on different testers than we have used in the past. We do not possess the test equipment or personnel resources to accommodate all of Philips' testing needs. We own or operate a few of the testers that are necessary to test Philips' ICs, but such testers may not be completely compatible with Philips' future test requirements. We anticipate that as the products we test for VLSI reach the end of their life cycle, we will no longer be receiving new purchase orders for testing these or other products for Philips. If many of our customers change their tester preferences to testers that we do not own or operate or are acquired by an entity that performs testing internally, we will lose our ability to maintain or increase orders from these customers. In September 2000, Fairchild acquired the power management business of Micro Linear, currently our largest customer. A substantial portion of the revenues we received from Micro Linear during the nine-month period ended September 30, 2000 was derived from Micro Linear's power management business. Therefore, Fairchild's acquisition of Micro Linear's power management business could result in decreased sales of our services to Micro Linear. The loss of Micro Linear, or Philips as a customer, or any other major customer could have an adverse impact on our revenues. 9 Most of our customers buy our services on a purchase order basis and are not contractually obligated to us on a long-term basis, which could cause our results of operations to vary. We primarily sell our test services on a purchase order basis. This means that the majority of our customers are not obligated, pursuant to any long-term contractual commitment or otherwise, to purchase any minimum amount of our test services or to provide us with binding orders for any future period. We are highly sensitive to variability in demand for our test services by our customers and it is difficult for us to forecast the demand for our services and our revenues for any future period. For example, we make test equipment and personnel expenditures in anticipation of increased future sales, and our results of operations may be less than we expect if we make capital expenditures without a corresponding increase in revenues. Additionally, because most of our expenses, particularly equipment depreciation, employee compensation and rent, are fixed, a delay or a cancellation of a significant order by any of our customers could cause our quarter-to-quarter and year-to- year results of operations to vary significantly. Further, we may not be able to capture all potential revenue in a given period if our customers' demand for quick-turnaround services exceeds our capacity during that period. We expect that future revenues in any quarter will continue to be substantially dependent on orders placed within that quarter even if we are able to increase the percentage of our services sold on a long-term contract basis. Therefore, we do not believe that period-to-period comparisons of our results of operations are necessarily meaningful and they should not be relied upon as an indication of future performance. Because we may be unable to obtain test equipment or replacement parts when we require them, we could lose our customers' business or be unable to manage our growth. Our operations and expansion plans are highly dependent upon our ability to obtain a significant amount of new test equipment and replacement parts for our test equipment from a limited number of suppliers who are located principally in the United States, Europe and Japan. The market for capital equipment used in semiconductor testing is characterized by periods of intense demand, limited supply and long delivery cycles. From time to time, increased demand for this equipment causes lead times to extend beyond those normally met by the equipment vendors. In general, particular ICs can only be tested by a limited number of specially configured testers. Customers may specify the tester on which their ICs may be tested and if we are unable to obtain these testers or replacement parts for these testers, we could lose those customers' business. Additionally, if we are unable to obtain the equipment we order, or replacement parts, in a timely manner or if the installation of such equipment or parts is disrupted, we may be unable to fulfill our customers' orders which would negatively impact our reputation, business, results of operations and financial condition. Generally, we have no binding supply agreements with our equipment suppliers and we acquire our equipment on a purchase order basis, which exposes us to substantial risks of being unable to obtain the equipment we want, when we want it and at a price we consider reasonable. For example, increased demand for the test equipment required in our business may prevent us from obtaining the test equipment we need and may cause an increase in the price of such equipment, which could result in greater capital expenditures. We may not be able to maintain or increase our customer base if we do not retain our current key personnel. We do not carry key person life insurance on our key personnel and none of our employees, including Jen Kao, our President and Chief Executive Officer, is bound by an employment agreement. Our future performance depends on the continued service of our key personnel, including our senior management and in particular, Mr. Kao. We are highly dependent upon the sales efforts of Mr. Kao. The loss of Mr. Kao's services, or one or more of our other key personnel, could adversely impact our sales efforts and our ability to grow our business and maintain or increase the size of our customer base. 10 We may lose our competitive advantage if we cannot attract, hire, train and retain sufficient engineering and other skilled technical personnel that we need. In order to maintain our competitive advantage and grow our business, we will need to attract, hire, train and retain sufficient engineering and other skilled technical personnel in the areas of test engineering, test development and product engineering services. We believe that competition for qualified engineering and technical personnel in these areas will continue to be intense. We are actively searching for qualified engineers who are in short supply, and we will need to significantly increase our technical staff to support the growth of our business. In addition, new employees frequently require training before they achieve desired levels of productivity and such training time may adversely affect our productivity. If we fail to attract, hire, train and retain sufficient engineering and other skilled technical personnel or if our competitors successfully recruit our engineering and technical employees, we may be required to spend more time and money to recruit employees, which could harm our profitability. Because we may not be able to develop or access leading technology, our operating results and our competitive position could be adversely affected. The semiconductor test market is characterized by complex technology and rapid technological change. We must be able to offer our customers test services capable of testing ICs that use advanced technology. If we fail to develop advanced test services or, where necessary, to buy those developed by others in a timely manner, our business could be adversely affected. For example, we could lose existing customers or their new business, and we could fail to attract new customers demanding technologically advanced test services. To date, we have not experienced adverse effects from a decrease in the demand for test services on earlier generation products. If technological advances lead to rapid or significant price declines on earlier generation products, our business could be harmed. Advances in technology also could affect gross margins on our test services for ICs included in earlier generation products that must be sold for lower prices, meaning that customers are more sensitive to test prices. Rapid technological change also affects the equipment used to test our customers' new, more sophisticated ICs. If we incorrectly anticipate the technological developments in the IC industry and obtain the wrong test equipment or fail to understand market requirements for test equipment, we will be less competitive and our asset utilization will decrease. In order to remain competitive, we must be able to quickly upgrade or migrate our test equipment to respond to changing technological requirements. If we fail to respond to such changing technical requirements, our ability to maintain or attract customers and grow our business may be adversely affected. Our profitability could be adversely affected if we cannot maintain high capacity utilization rates and generate revenues in excess of our high fixed costs. As a result of the capital intensive nature of our business, our operations are characterized by high fixed costs. Consequently, if we insufficiently utilize our capacity of installed equipment our profitability could be materially and adversely affected. Capacity utilization rates may be affected by a number of factors and circumstances, including: . installation of new equipment in anticipation of future business; . overall industry conditions; . the cyclical and seasonal nature of the semiconductor industry and fluctuations in customer orders; . operating efficiencies; . mechanical failure or malfunction of our test equipment; . disruption of our operations due to expansion of operations or relocation of equipment; or . fire or other natural disasters. 11 For example, during the first two quarters of 1998, our capacity utilization rates were adversely impacted by a decrease in demand for our test services resulting from a downturn in the overall semiconductor industry. Any inability on our part to maintain or increase capacity utilization rates could result in lower revenues and profit margins. A decrease in the average selling price for communications and networking equipment may lead to downward price pressures on ICs, which may reduce our revenues and gross margins. A significant percentage of our revenues is derived from customers who provide ICs used in communications and networking equipment. Any decline in the average selling price of communications and networking equipment places significant pressure on the prices of the components that are used in this equipment. If the average selling prices of ICs in communications and networking equipment decreases, resulting pricing pressure on services provided by us could increase, which may significantly reduce our revenues and gross profit margins. If we experience unpredictable delays in our revenue stream due to lengthy sales and test implementation cycles, the delays may reduce our revenues and harm our operating results. Sales of our test services often require us to engage in a lengthy sales effort followed by a lengthy test implementation cycle, and any increase in these periods or delays in customer procurement could substantially harm our results of operations and financial condition. Our sales efforts may have to include significant education of prospective customers regarding the use and benefits of our services. A customer's decision to purchase our test and engineering services is discretionary, may involve a significant commitment of their resources and is influenced by its design cycles. As a result, the sales cycle for our services varies and could range from one month to six months for purchase order test services and from three months to in excess of one year for one-year or multi-year contractual commitments. In addition, prior to our commencing test services for a customer, the customer must complete its own test implementation cycle. This cycle, which begins with the prototype phase and concludes with the production phase, can range from one to three months. Any increase in the amount of time associated with these phases may delay or reduce our revenues and harm our operating results. Because we may have difficulty obtaining additional capital to finance future purchases of technically advanced test equipment, we may not achieve our projected expansion plans. To grow our business, maintain our competitive technical position and meet the needs of new customers, we intend to increase our test capacity by purchasing additional advanced test equipment. Purchasing advanced test equipment and employing new employees to operate this equipment will require substantial expenditures. These expenditures will likely be made in advance of increased sales. We cannot assure you that our revenues will increase after we make these expenditures. Our failure to increase our revenues after these expenditures could have a material adverse effect on our results of operations and financial condition. We expect the net proceeds from this offering, combined with our cash flow from operations and our equipment lines of credit, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that we may need to obtain additional debt or equity financing to fund our capital expenditures. Additional equity financing may result in dilution to the holders of our common stock. If additional debt financing is required, such financing may: . increase our vulnerability to adverse general economic and industry conditions; . limit our ability to pursue our growth plan; . limit our flexibility in planning for, or reacting to, changes in our business and our industry; . require us to dedicate a substantial portion of our cash flow from operations to payments on our debt; and . further limit our ability to pay dividends or require us to seek consents for the payment of dividends. 12 If we are not able to obtain additional debt or equity financing on acceptable terms, if and when needed, we may not be able to fund our expenditures, develop or enhance our services, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements. We have made acquisitions, and may engage in future acquisitions, that may, if not integrated effectively with our operations, adversely impact our results of operations, dilute our stockholders or cause us to incur debt or assume contingent liabilities. In October 1999, we acquired the San Diego mixed-signal test equipment of Fairchild Semiconductor Corporation and in April 2000, we acquired the mixed- signal and radio frequency test equipment of Micro Linear. As part of our business strategy, we may make additional investments in or purchase complementary companies, services, technologies or a customer's turnkey test operations that we believe would be advantageous to the development of our business. We could have difficulty in assimilating the purchased operations and hired personnel. In addition, we may not be able to retain the key personnel or optimize our use of the services and technology of the purchased company or operations. These or other difficulties could disrupt our ongoing business, divert our management and employees, increase our expenses and result in a failure to realize the expected benefits of these acquisitions. Furthermore, we may issue equity securities to pay for any future purchases, investments or acquisitions, which could be dilutive to our existing stockholders. We may also incur debt, which may contain covenants that could restrict our growth strategy, assume contingent liabilities, incur amortization expenses related to intangible assets or incur write-offs in connection with acquisitions, any of which could harm our business and results of operations. If we do not integrate these or future acquisitions effectively with our operations, we could fail to achieve the benefits we expected and our gross profits and profitability would be adversely affected. Because we may not be successful in maintaining our existing, or establishing additional, long-term contractual agreements or other long-term relationships with customers, our revenues and future business opportunities that are important for the expansion of our business may be adversely affected. In connection with our purchase of assets from Fairchild and Micro Linear, we entered into written agreements requiring us to provide each company set services for three-year terms at prices no higher than the maximum prices set in the agreements. These agreements also provide that we may perform additional services for these parties at their request. These agreements are non-exclusive and these parties are free to enter into similar or more favorable agreements with our competitors. Each of these agreements may be terminated at the will of either party at the end of the initial three-year term. We may not be able to sell services in addition to those required under the agreements and, at the expiration of these agreements, we may not be able to offer competitive test services in order for the relationships to expand and be extended. Any failure to expand or maintain our relationships with Fairchild and Micro Linear could adversely affect the percentage of our revenues we receive from long-term contracts as opposed to purchase orders which would increase our fixed expenses without a corresponding increase in revenues. Additionally, as part of our business strategy, we intend to enter into additional agreements similar to those with Fairchild and Micro Linear. If we fail to enter into new long-term relationships, we may not gain access to opportunities that are important for the expansion of our business, including the ability to jointly market products or collaborate or cooperate with these companies. We may be unable to implement our business strategy because of liabilities that could decrease our cash reserve. As part of our Micro Linear agreement, we are responsible for packaging ICs after volume production wafer sort. Because we do not perform packaging in- house, we currently subcontract this packaging function to a third-party assembly house and must pay that third party the full fee for its packaging services even if we are not paid by Micro Linear. If Micro Linear does not pay us for these charges for any reason, our cash reserves would be reduced and we may be delayed in implementing or unable to implement our business strategy. In 13 addition, we may enter into agreements under which we subcontract packaging or assembly services for other customers. If we are not paid as expected for these services, our cash reserves would be reduced and we may be delayed in implementing or unable to implement our business strategy. If we are unable to manage our anticipated expansion effectively, we may be unable to implement our business strategy. We intend to increase the scope of our operations domestically and internationally and to increase our headcount substantially. We had a total of 10 employees at December 31, 1997, 21 employees at December 31, 1998, 34 employees at December 31, 1999 and 101 employees at September 30, 2000. In addition, we plan to continue to hire a significant number of employees during the remainder of this year. This growth has placed, and our anticipated growth in the future will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force. If we are unable to effectively manage our anticipated future growth, we may not be able to implement our business strategy and grow our business as planned. We may experience reduced or negative revenue growth if we cannot attract, hire, train and retain sufficient sales personnel to support our direct sales approach. Selling our services requires a sophisticated, direct sales approach targeted at the senior management of our prospective customers in the semiconductor industry. To date, we have relied heavily upon, and we will continue to rely upon, our senior management team to sell our services. Our ability to achieve significant revenue growth in the future will largely depend on our success in attracting, hiring, training and retaining sufficient additional direct sales personnel and their ability to establish relationships with new customers and maintain relationships with our existing customers. We believe that the competition for qualified technical sales personnel will continue to be intense. In addition, due to the complex nature of semiconductor test services, new sales personnel frequently require training before they achieve desired levels of productivity and this training time may adversely affect our productivity. If we are unsuccessful in hiring or training sufficient direct sales personnel or if the personnel are unable to establish relationships with new customers and maintain relationships with our existing customers, our sales may decrease. If we expand our operations into Asia, our profitability could be reduced due to additional operational and financial risks we will face. In order to grow our business, we believe that we may need to expand our operations internationally, specifically targeting operations in Asia. If we expand our business to include operations in Asia, we will face a number of additional challenges and risks, which could increase our costs, reduce our profitability and require significant management attention. For example, if we commence operations in Asia, we may confront the following challenges: . new competition from companies located in Asia; . compliance with a wide variety of foreign laws and regulatory environments with which we are not familiar, resulting in unanticipated costs and delays; . general economic conditions in Asian markets, such as the downturn experienced by many Asian countries in 1998; . potentially adverse tax consequences, including restrictions on repatriations and earnings; . potentially inadequate protection of our trademark and other intellectual property in Asia due to the uncertainty of laws and enforcement relating to the protection of intellectual property; . tariffs, export controls and other trade barriers; 14 . currency exchange rate fluctuations; and . longer accounts receivable payment cycles than in the U.S. We may experience difficulty selling our services due to problems associated with our customers' international business operations. Many of our customers sell their products outside of North America and manufacture their products in Asia, particularly in Taiwan. Our customers are subject to risks of economic and political instability in the countries where they manufacture and sell their products, including the risk of conflict between Taiwan and the People's Republic of China. If this instability affects any of our customers, it could also materially and adversely affect our business, particularly if this instability impacts the sales of products manufactured by our customers. A substantial decrease in the demand for our customers' products due to international economic instability could have a material adverse effect on our business, results of operations and financial condition. Decreases in demand for, or sale of, our customers' products, likely would lead to decreases in the number of products containing ICs being manufactured, which in turn would result in a decline in the demand for our test services. Other factors associated with foreign commerce that could affect our customers' operations and revenues include the following: . changes in tax laws, tariff, freight rates and other trade barriers; . foreign exchange rate fluctuations; . timing and availability of export licenses; and . inadequate protection of intellectual property rights in some countries. If these risks affect any of our customers, our expansion plans could be delayed and our revenues could be adversely affected. Because the testing process is complex and therefore prone to "bugs," operator error and test equipment malfunction, our business may be harmed. IC testing is a complex process involving sophisticated computer software and test equipment. We develop software test programs which we use to test our customers' ICs. We also develop conversion software programs which enable us to test ICs on different types of testers. Similar to most software programs, these software programs are complex and may contain programming errors or "bugs." The testing process also is subject to operator error by our employees who operate our test equipment and related software. In addition, the test equipment may malfunction. To date, we have not experienced any significant defect or bug in our test or conversion software, operator error or malfunction in our test equipment. If we do experience these conditions, however, they could: . reduce our production quality; . increase our costs; . divert our resources; or . damage or destroy our customer relationships. If we are unable to adequately protect our proprietary technology, our ability to be competitive in our industry will be harmed. Our ability to compete successfully and achieve future growth in revenues will depend, in part, on our ability to protect our proprietary technology and the proprietary technology of our customers entrusted to us. We seek to protect our proprietary technology and know-how through the use of non-disclosure agreements and by limiting access to and distribution of proprietary information. We have no patents or copyrights for our 15 proprietary techniques, and we rely primarily on trade secret protection in the form of non-disclosure and proprietary rights assignment agreements with our key employees and non-disclosure agreements with many of our customers. Our competitors may develop, patent, copyright or gain access to similar intellectual property, including know-how and technology. In addition, our non- disclosure agreements may not be adequate to protect our proprietary technology or that of our customers. Additionally, as part of our growth strategy we intend to enter into international markets, and the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Any inability to protect our proprietary technology or that of our customers could have a material adverse effect on any competitive advantage we may have. Because we may be subject to intellectual property rights disputes, our ability to offer our services could be adversely affected. Our ability to compete successfully will depend, in part, on our ability to operate without infringing the intellectual property rights of others. As the number and coverage of patents, copyrights and other intellectual property rights in our industry increases, we believe that companies in our industry may face more frequent patent infringement claims. Although there are no pending or threatened intellectual property lawsuits against us, we may face litigation or patent infringement claims in the future. In the event that any valid claim is made against us, we could be required to: . stop using and selling services or processes for which we do not have intellectual property rights; . pay substantial damages; . develop non-infringing technologies; or . attempt to acquire licenses to use the infringed technology. Additionally, litigation may be necessary to protect our technology against patent infringement claims and determine the validity and scope of the proprietary rights of our competitors. Intellectual property law is evolving and we may not be successful in litigating to protect our technology or determining the proprietary rights of others. Intellectual property litigation could result in substantial costs and diversion of management and other resources. If any infringement claim is asserted against us, we may be required to seek to obtain a license of the other party's intellectual property rights, which may not be available to us on reasonable terms or at all. Should any of the disputes described above occur, our reputation could be harmed and our business could be materially and adversely affected. Our customer base may be negatively affected due to conflicts of interest among our customers. The semiconductor industry is highly competitive and many of our customers directly compete with each other. There is a risk that we may alienate a customer by working too closely or extensively with one or more of its competitors. If we are forced to limit our service relationship with any large customer or otherwise decrease or refocus our customer base to prevent the alienation of one or more customers, our ability to attract and maintain customers will be reduced. The quality of our services and our reputation could suffer if we do not maintain a controlled room environment for our operations. Our testing operations take place in areas where temperature and humidity are strictly controlled. If we are unable to control our testing environment for any reason including power outages, our test equipment may become nonfunctional or may malfunction and the quality of our services could suffer. If we experience prolonged interruptions in our operations due to problems related to the test room environment, we could lose customers to our competitors and our business could be harmed. 16 Fire, earthquake or other calamity at one of our facilities or at one of our customers' sites could adversely affect our testing operations. We conduct our testing operations at a limited number of facilities and these facilities are located on or near fault lines. Additionally, a number of our customers' and their suppliers' sites are similarly located. Any damage caused by earthquakes may adversely affect our financial condition as our insurance policies do not cover losses due to earthquakes. A fire, earthquake or other calamity resulting in significant damage at any of our facilities would have, and at any of our significant customers' or its suppliers' sites could have, a material adverse effect on our business, results of operations and financial condition. While we maintain insurance policies covering some losses, including losses due to fire, these policies are limited in coverage and they may not sufficiently cover all of these potential losses. Risks Related to the Semiconductor Test Industry Because the semiconductor industry is seasonal and cyclical and subject to significant downturns, some customers may perform tests internally in response to an industry downturn which could adversely affect our results of operations. Our semiconductor test business is directly related to the market conditions in the semiconductor industry. The semiconductor industry is seasonal and cyclical and, in the past, has experienced significant downturns because of production overcapacity and reduced unit demand. For example, the volume of our test services decreased during the first two quarters of 1998 compared to the last quarter of 1997 because of reduced industry-wide demand and seasonality. One result of this reduction was that our customers who manufacture integrated devices increased the volume of services they performed internally, including test, which further decreased their external demand for our services. Our business depends in significant part on the test requirements of semiconductor companies for independent outsourced test program development and test services. The market for semiconductors is characterized by: . rapid technological change; . evolving industry standards; . intense competition; and . fluctuations in end-user demand. Any future downturn in the semiconductor industry is likely to adversely affect our sales volume and profitability. We may not be able to compete successfully because the semiconductor industry is competitive and diverse. The semiconductor test service industry is very competitive and diverse and requires us to be capable of testing increasingly complex semiconductors as quickly as our competitors. The industry is comprised of both large multi- national companies and smaller independent test-houses. We believe that we face substantial competition from the internal capabilities of many of our current and potential customers who manufacture integrated devices and from large assembly houses which offer production test services. Our largest competitors include Amkor Technologies, Inc., ASE Test Limited, ASAT, Ltd., ChipPAC Inc., ST Assembly Test Services Ltd. and Siliconware Corporation. These companies offer services in the United States, overseas or both in the United States and overseas. We also face competition from smaller independent test-houses such as Multitest Design and Test, Inc. and Viko Test Lab, which do not provide as wide an array of services. Many of our competitors and potential competitors have significantly longer operating histories, larger installed bases of test equipment, greater name recognition and significantly greater technical, financial, manufacturing, marketing and other resources than we do. In addition, a number of these competitors have 17 long-established relationships with our customers and potential customers. We believe it is likely that additional competitors will enter the market for most, if not all, of the services which we will offer. In addition, we believe all of our competitors or potential competitors all have sufficient resources to attempt to compete directly with us in the future. In addition, many integrated device manufacturers have greater financial and other resources than we do and may rely on their own internal sources for test and assembly services due to: . their desire to realize higher utilization of their own existing test capacity; . their unwillingness to disclose proprietary technology; . the guaranteed availability of their own test capacity; and . their possession of more advanced test equipment. Historically, we have been dependent on outsourcing of test services by integrated device manufacturers. Our customers who manufacture integrated devices continually evaluate our services against their own in-house test and assembly services. As a result, at any time, these integrated device manufacturers may decide to shift a portion or all of their outsourced test and management of assembly services to their own internal services. Any such shift or a slowdown in this trend to outsource is likely to adversely affect our business, results of operations and financial condition. Furthermore, we cannot assure you that we will be able to compete successfully in the future against our existing or potential competitors. Because our success is partly dependant on growth in the markets that use semiconductors, our growth strategy may be slowed down if the markets in which our customers sell their products shrink or do not grow. Our success depends in large part on the continued growth of the markets that use semiconductors, particularly the communications and networking equipment industries. Any decline in the demand for semiconductors in any of the following markets could materially harm our business: . communications; . networking; . high-performance computing; . video and audio; or . graphics and imaging. Slower growth in any of the other markets in which semiconductors are sold may also materially harm our business. Many of these markets are characterized by rapid technological change and intense competition. As a result, semiconductors sold by our customers may face severe price competition, become obsolete over a short time period or fail to gain market acceptance. Any of these occurrences could materially harm our business by decreasing the demand for our test services. Risks Related to This Offering Our common stock has never been publicly traded, and a trading market may not develop for our stock. Prior to this offering, there has not been a public market for our common stock. A trading market may not develop for our common stock. The initial price of our common stock in this offering will be determined by negotiations between representatives of the underwriters and us and may not be indicative of prices that will prevail in the future. As a result, the trading price of our common stock may decline and you might lose all or a part of your investment. 18 Because the market price of our common stock may be volatile, you may lose all or part of your investment. The market price of our common stock is likely to be highly volatile in the future. Our common stock price may fluctuate significantly in response to factors such as: . quarterly variations in our operating results; . announcements of technological innovations; . changes in earnings estimates by analysts or our failure to meet such earnings estimates; . loss or addition of one or more significant customers; . announcements by us regarding significant acquisitions; . changes in our customer relationships or capital expenditure commitments; . additions or departures of key personnel; . future sales or issuances of our common stock or other securities; and . changes in federal, state or foreign regulations affecting the semiconductor industry. In addition, the stock markets in general, and the stocks of technology companies in particular, have experienced extreme price and volume fluctuations recently. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance, and you might lose all or a part of your investment. Future sales of securities by us or our existing shareholders may adversely affect the price of our common stock. Sales of substantial numbers of shares of our common stock in the public market following this public offering could adversely affect the market price of our shares. There will be 24,279,567 shares of common stock outstanding immediately following this public offering. In addition, as of September 30, 2000, there were outstanding options under our employee stock option plans for the purchase of a total of 3,984,000 shares of common stock. If these options are exercised and the shares of common stock are fully paid for, such shares would be freely tradable. In connection with this offering, each of our directors, executive officers, and substantially all of our security holders have agreed not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock or thereafter acquired, without the prior written consent of Robertson Stephens, Inc., subject to a number of exceptions, for a period of 180 days from the date of this prospectus. Purchasers of common stock in this offering will suffer immediate and substantial dilution because the initial public offering price is substantially higher than the book value per share. The initial public offering price is substantially higher than the book value per share of our common stock. As a result, you will experience immediate and substantial dilution in the pro forma net tangible book value per share of our common stock. This dilution will occur because our earlier investors paid substantially less than the initial public offering price in this offering when they purchased their shares of common stock. You will experience additional dilution upon exercise of outstanding stock options. 19 We have not declared cash dividends on our common stock and we have no intention of and are restricted from issuing such cash dividends in the foreseeable future. We have not declared or paid cash dividends on our common stock and we anticipate that any future earnings will be retained for investment in our business. Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, outstanding debt and contractual restrictions. In addition, current agreements with our lender prohibit the payment of cash dividends by us without receiving our lender's prior consent, and future agreements we may enter into with lenders may contain similar restrictions. Our management has significant influence over stockholder decisions and may be able to significantly influence matters related to our operations. Our officers and directors will control the vote of approximately 79.0% of the outstanding shares of common stock immediately following this offering, prior to the exercise of any outstanding options. As a result, they may be able to significantly influence all matters requiring approval by our stockholders, including the election of directors. If our management does not use its broad discretion over the use of the net proceeds from this offering effectively, you may lose all or a part of your investment. Our management has broad discretion as to the use of a portion of the net proceeds that we will receive from this offering for capital expenditures, working capital and general corporate purposes. Our management may not apply these funds effectively, and the net proceeds from this offering may not be invested to yield a favorable return. As a result, you might lose all or a part of your investment. Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a takeover. When we reincorporate in Delaware upon the closing of this offering, our certificate of incorporation and bylaws and Delaware law will contain provisions that might enable our management to resist a takeover. These provisions might discourage, delay or prevent a change in the control of Artest or a change in our management. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. Our certificate of incorporation will also provide that our board of directors may, without further action by our stockholders, issue shares of preferred stock in one or more series and establish the rights, preferences, privileges and restrictions of this preferred stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Our ability to issue preferred stock could also reduce the price that investors are willing to pay for our common stock and result in lower market prices for our common stock. While we have no present intention to issue shares of preferred stock, such issuance, 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 our outstanding voting stock. In addition, we will be subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 may have the effect of deterring hostile takeovers or delaying or preventing changes in control or in our management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. 20 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws, which involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, beliefs and assumptions. We use words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," "could," "should," "would," "continue," "pro forma," and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to a number of risks, uncertainties and other factors, a number of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. 21 USE OF PROCEEDS The net proceeds to us from the sale of the 5,000,000 shares of common stock offered hereby are estimated to be approximately $44,500,000 assuming an initial public offering price of $10.00 per share, the midpoint of the range shown on the cover of the prospectus, and deduction of the underwriting discounts and commissions and estimated offering expenses payable by us. We currently estimate that we will use the net proceeds from this offering as follows: . approximately $8.0 million to repay existing indebtedness outstanding at September 30, 2000, including accrued interest; . between approximately $14 million and $20 million on capital expenditures for existing facilities and equipment over the next 12 months; and . the remainder for working capital and general corporate purposes. Our existing indebtedness includes three credit facilities we have established with California Bank and Trust, formerly Sumitomo Bank of California. The first line of credit was established in November 1997 as a non- revolving $6.5 million equipment line of credit. The interest rate on this line of credit ranges between 7.10% to 7.30%. All borrowings against this equipment line of credit mature within five years. The second loan agreement was entered into in August 1999 and provides us with a $2.0 million secured equipment line of credit. All borrowings against this line bear interest at a rate equal to the effective prime rate, which was 9.50% at September 30, 2000, and mature within five years. The third loan agreement was entered into in July 2000 and provides us with a $4.0 million secured equipment line of credit. All borrowings against this line bear interest at a rate equal to the effective prime rate minus one-half percent, which was 9.0% at September 30, 2000, and mature within five years. The $8.0 million of debt to be repaid does not include the promissory note related to the equipment purchase agreement with Micro Linear Corporation. All three lines of credit were established for the purchase of test equipment. In addition to the purposes listed above, we also may use a portion of the net proceeds to acquire or make investments in additional businesses, products and technologies or establish joint ventures or strategic partnerships that we believe will complement our current and future business. These acquisitions or investments could be material. We are not currently engaged in any negotiations, commitments or agreements with respect to any acquisitions or investments. Pending such uses, we intend to invest the net proceeds in short- term, investment-grade, interest-bearing securities. See "Risk Factors--Our management has discretion as to the use of the net proceeds from this offering." DIVIDEND POLICY We have never declared or paid dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account many factors, including our earnings, financial condition, capital requirements, outstanding debt and contractual restrictions. In addition, current agreements with our lender prohibit the payment of cash dividends by us without receiving our lender's prior consent. 22 CAPITALIZATION The following table summarizes our cash and cash equivalents and our capitalization as of September 30, 2000: . on an actual basis; . on a pro forma basis to reflect the conversion of all our outstanding Series A convertible preferred stock into 14 million shares of common stock upon the closing of this offering; and . on a pro forma as adjusted basis giving effect to the conversion of all of our outstanding Series A convertible preferred stock into 14 million shares of common stock upon the closing of this offering and our receipt of the estimated net proceeds from the issuance and sale of 5,000,000 shares of common stock at an assumed initial public offering price of $10.00 per share, the mid-point of the range on the front cover of the prospectus, less estimated underwriting discounts and offering expenses payable by us and repayment of our equipment lines. The number of shares outstanding as of September 30, 2000 excludes: . 3,984,000 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2000 at a weighted average exercise price of $2.71 per share, 715,000 of which were granted on June 15, 2000 at a weighted average exercise price of $8.00 per share and became fully vested and immediately exercisable on June 30, 2000; and . 736,433 shares of common stock reserved for issuance under our stock option plans as of September 30, 2000. This table should be read with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the accompanying notes appearing elsewhere in this prospectus.
September 30, 2000 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands, except share data) Cash and cash equivalents...................... $ 9,056 $ 9,056 $47,843(1) ======= ======= ======= Long-term debt obligations, net of current portion...................................... $ 9,606 $ 9,606 $ 3,355(2) ------- ------- ------- Stockholders' equity: Preferred stock; no par value, 14,000,000 shares authorized, issued and outstanding, actual; $0.001 par value, 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted................................... 14,000 -- -- Common stock, no par value, 24,000,000 shares authorized, 5,279,567 shares issued and outstanding, actual; $0.001 par value, 24,000,000 shares authorized, 19,279,567 shares issued and outstanding, pro forma; $0.001 par value, 90,000,000 shares authorized, 24,279,567 shares issued and outstanding, pro forma as adjusted......... 2,350 19 24 Additional paid-in capital................... -- 16,331 60,826 Deferred stock compensation.................. (818) (818) (818) Retained earnings............................ 2,463 2,463 2,463 ------- ------- ------- Total stockholders' equity................ 17,995 17,995 62,495 ------- ------- ------- Total capitalization.................... $27,601 $27,601 $65,850 ======= ======= =======
- -------- (1) Includes approximately $9.0 million of cash and cash equivalents, approximately $44.5 million in net proceeds from this offering and approximately $2.25 million of restricted cash which becomes unrestricted upon our repayment of approximately $8.0 million in debt with the net proceeds of this offering. (2) The amount reflects the repayment of approximately $8.0 million in debt with the net proceeds of this offering of which $6.25 million is classified as long-term debt. 23 DILUTION If you invest in our common stock, your investment will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of September 30, 2000, was approximately $15.8 million, or $0.83 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all of our outstanding Series A convertible preferred stock into shares of our common stock. After giving effect to the issuance and sale of 5,000,000 shares of our common stock in this offering at an assumed initial public offering price of $10.00 per share, the midpoint of the range shown on the cover of the prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2000, would have been $60.3 million, or $2.49 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.66 per share to existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $7.51 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share.................. $10.00 Pro forma net tangible book value per share as of September 30, 2000......................................................... $0.83 Increase per share attributable to new investors............... 1.66 ----- Pro forma as adjusted net tangible book value per share after the offering....................................................... 2.49 ------ Dilution per share to new investors.............................. $ 7.51 ======
The following table summarizes, as of September 30, 2000, on a pro forma as adjusted basis, the total number of shares of common stock outstanding and the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $10.00 per share before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders.. 19,279,567 79.4% $14,065,147 22.0% $ 0.73 New investors.......... 5,000,000 20.6 50,000,000 78.0 10.00 ---------- ----- ----------- ----- Totals............... 24,279,567 100.0% $64,065,147 100.0% ========== ===== =========== =====
The above computations are based on the number of shares of common stock outstanding as of September 30, 2000 and exclude: . 3,984,000 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 2000 at a weighted average exercise price of $2.71 per share, 715,000 of which were granted on June 15, 2000 at a weighted average exercise price of $8.00 per share and became fully vested and immediately exercisable on June 30, 2000; and . 736,433 shares of common stock reserved for issuance under our stock option plans as of September 30, 2000. To the extent that any of these options are exercised, there would be further dilution to new investors. If we assume that the 3,984,000 shares subject to outstanding options are exercised at a weighted average exercise price of $2.71 per share, the dilution per share to new investors would be $7.48. In addition, the shares purchased and total consideration would be 28,263,567 and $74,861,787, respectively. For additional 24 information regarding these shares, see "Capitalization," "Management--Benefit Plans," and Note 6 of Notes to Financial Statements. If the underwriters' over allotment option is exercised in full, the number of shares of common stock held by new investors will increase to 5,750,000 shares, or 23.0% of the total number of shares of common stock outstanding after this offering. 25 SELECTED FINANCIAL DATA You should read the selected financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and the related notes included elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the selected balance sheet data as of December 31, 1998 and 1999 are derived from our audited financial statements included in this prospectus. The selected balance sheet data as of December 31, 1997 are derived from our audited financial statements not included in this prospectus. The selected balance sheet data as of September 30, 2000 and the selected statement of operations data for the nine months ended September 30, 1999 and 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on a basis consistent with the audited financial statements appearing 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 data. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of results we will experience for a full year. Selected financial data for each of the last five years has not been presented as we were founded in November 1996, opened our first facility in May 1997 and began operations in September 1997. Our statement of operations data for 1997 is of a limited comparative value because it covers four months of operations. Additionally, our historical statement of operations are not necessarily indicative of results to be expected for any subsequent period.
Nine Months Ended Year Ended December 31, September 30, ------------------------- --------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- (in thousands, except share data) Statements of Operations Data Revenues............................ $ 1,042 $ 3,413 $ 7,994 $ 5,911 $12,770 Cost of revenues.................... 724 2,573 3,648 2,471 7,486 ------- ------- ------- ------- ------- Gross profit........................ 318 840 4,346 3,440 5,284 Operating expenses: Selling, general and administrative.................. 694 1,352 1,621 1,081 2,215 Research and development.......... -- -- -- -- 367 Amortization of stock-based compensation.................... -- -- 219 71 1,247 ------- ------- ------- ------- ------- Total operating expenses....... 694 1,352 1,840 1,152 3,829 ------- ------- ------- ------- ------- Income (loss) from operations....... (376) (512) 2,506 2,288 1,455 Other income (expense), net......... 761 629 354 204 (20) ------- ------- ------- ------- ------- Income before provision for income taxes............................. 385 117 2,860 2,492 1,435 ------- ------- ------- ------- ------- Provision for income taxes.......... 169 70 1,230 1,071 865 ------- ------- ------- ------- ------- Net income.......................... $ 216 $ 47 $ 1,630 $ 1,421 $ 570 ======= ======= ======= ======= ======= Net income per share(1) Basic............................. $ 0.04 $ 0.01 $ 0.31 $ 0.27 $ 0.11 ======= ======= ======= ======= ======= Diluted........................... $ 0.01 $ 0.00 $ 0.07 $ 0.07 $ 0.03 ======= ======= ======= ======= ======= Shares used for net income per share(1) Basic............................. 5,240 5,240 5,241 5,240 5,254 ======= ======= ======= ======= ======= Diluted........................... 15,740 21,055 21,927 21,549 21,909 ======= ======= ======= ======= =======
- -------- (1) No pro forma net income per share is presented for the year ended December 31, 1999 and the nine months ended September 30, 2000 because the amounts would be the same as diluted net income per share for those periods. 26
December 31, September 30, ----------------------- ------------- 1997 1998 1999 2000 ------- ------- ------- ------------- (in thousands) Balance Sheet Data Cash and cash equivalents................ $ 8,897 $ 8,422 $11,626 $ 9,056 Working capital.......................... 8,938 8,830 10,757 8,023 Total assets............................. 19,434 20,500 24,477 36,486 Long-term debt, net of current portion... 1,257 3,984 3,825 9,606 Convertible preferred stock.............. 14,000 14,000 14,000 14,000 Retained earnings........................ 216 263 1,893 2,463 Total shareholders' equity............... 14,269 14,316 16,166 17,995
27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, intentions, estimates and projections about our industry. Our actual results may differ materially from those predicted in such forward- looking statements. Factors that could cause or contribute to such differences include but are not limited to those discussed in "Risk Factors" and elsewhere in this prospectus. Overview We are an independent United States-based provider of comprehensive semiconductor test services. We focus on complex ICs used primarily in the communications and networking industries. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our services include software test program and hardware development, prototype verification, characterization, volume production wafer sort and volume production final test. We were founded in November 1996 as a test services company, opened our first facility in Sunnyvale, California in May 1997 and began operations in September 1997. We have increased our capacity and revenue through two key strategies: . equipment purchases and sales efforts with existing and new customers; and . long-term customer relationships through which we purchase test equipment and hire personnel. The acquisition of customer facilities provides a cost-effective way to add engineering capabilities, capacity and revenue growth, while entering into a long-term relationship with the customer. In October 1999, we expanded our capabilities and capacity by opening a facility in San Diego, California by purchasing the San Diego mixed-signal test equipment from Fairchild and hiring a number of its employees. In May 2000, we opened an additional facility in San Jose, California, approximately doubling our capacity at the time, by purchasing the mixed-signal and radio frequency test equipment of Micro Linear and hiring a number of its employees. We entered into three-year services agreements with both Fairchild and Micro Linear. The agreements provide for the delivery of test and engineering services over the terms of the contracts if we maintain service, quality and price levels that are competitive in the industry. Revenues from these long-term contracts for the nine months ended September 30, 2000 represented 45% of total revenues and 34% of the revenues generated from these long-term contracts are from assembly management services. Through September 30, 2000, orders made under these long-term contracts have equaled, approximately, the required minimums under these long-term contracts. The gross profit percentages on long-term contracts are generally lower than the gross profit percentages on our test services that we perform under purchase orders, and an increase in revenues from long-term contracts as a percentage of total revenues could harm our gross profit percentages for a particular period. We sell the majority of our test services on a purchase order basis, which represented approximately 55% of our total revenues for the nine months ended September 30, 2000. Most of our expenses, particularly equipment depreciation, employee compensation and rent, are fixed. Therefore, a delay in a purchase by a customer or a cancellation of a significant purchase order by any of our large customers could cause our quarter-to-quarter and year-to-year results to vary significantly. We recognize revenues when our services are completed and no significant obligations remain. Our sales are subject to seasonality, with the largest portion of quarterly sales tied to IC purchasing patterns, which usually are lowest in the first quarter and highest in the fourth quarter of the calendar year. The 28 sales cycle for our services typically ranges from one month to six months for purchase order test services and from three months to in excess of one year for one-year or multi-year contractual commitments and includes a qualification period during which our customers evaluate and audit our test procedures. Due to the length of these sales cycles, we often order or invest in test equipment in advance of generating revenue from these investments. Accordingly, if sales of our services do not occur when we expect, we may be unable to adjust our purchases of equipment on a timely basis, and expenses may increase relative to revenues. Historically, a significant portion of our revenues has been derived from sales to relatively few customers. Our top three customers accounted for approximately 75% of our revenues in the nine months ended September 30, 2000, 85% in 1999, 83% in 1998 and 95% in 1997. Micro Linear, currently our largest customer, accounted for 40% of our revenues for the nine months ended September 30, 2000. Philips, as a result of its acquisition of VLSI, was our largest customer for the years 1997, 1998 and 1999 and accounted for approximately 27% of our revenues in the nine months ended September 30, 2000, 60% in 1999, 43% in 1998 and 82% in 1997. As we implement our strategy of increasing the penetration of existing customers and pursuing acquisitions of IC test operations, we believe our customer concentration will change. All of our revenues to date have been denominated in United States dollars and have substantially come from United States-based customers. In June 1999, Philips acquired VLSI and as a result of this acquisition became a new Artest customer. Although we own or operate a few of the testers necessary to test Philips' ICs, there can be no assurance that our testers will be completely compatible with Philips' future test requirements. As the VLSI products we test for Philips reach the end of their life cycle, we anticipate we may no longer receive new purchase orders for testing these or other products for Philips and this could adversely impact our revenues. In September 2000, Fairchild acquired Micro Linear's power management business. A substantial portion of the revenues we received from Micro Linear during the nine-month period ended September 30, 2000 were derived from Micro Linear's power management business. Therefore, Fairchild's acquisition of Micro Linear's power management business could result in decreased sales of our services to Micro Linear and this could adversely impact our revenues. Results of Operations The following table presents selected financial data for the periods indicated as percentages of our revenues.
Nine Months Year Ended Ended December 31, September 30, --------------------- -------------- 1997 1998 1999 1999 2000 ----- ----- ----- ------ ------ Revenues............................... 100.0 % 100.0 % 100.0% 100.0% 100.0 % Cost of revenues....................... 69.5 75.4 45.6 41.8 58.6 ----- ----- ----- ------ ------ Gross profit........................... 30.5 24.6 54.4 58.2 41.4 ----- ----- ----- ------ ------ Operating expenses: Selling, general and administrative ................................... 66.6 39.6 20.3 18.3 17.4 Research and development............. -- -- -- -- 2.9 Amortization of stock-based compensation....................... -- -- 2.7 1.2 9.8 ----- ----- ----- ------ ------ Total operating expenses.......... 66.6 39.6 23.0 19.5 30.1 ----- ----- ----- ------ ------ Income (loss) from operations.......... (36.1) (15.0) 31.4 38.7 11.3 Other income (expense), net............ 73.0 18.4 4.4 3.5 (0.1) ----- ----- ----- ------ ------ Income before provision for income taxes................................ 36.9 3.4 35.8 42.2 11.2 Provision for income taxes............. 16.2 2.1 15.4 18.1 6.8 ----- ----- ----- ------ ------ Net income............................. 20.7 % 1.3 % 20.4% 24.1% 4.4 % ===== ===== ===== ====== ======
29 Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 2000 Revenues. Our revenues consist of test services, including prototype verification, characterization, volume production wafer sort, volume production final test and rental of our IC test equipment. To date, our revenues have also included test software and hardware development that was often billed to customers in the form of non-recurring engineering charges. Revenues from non- recurring engineering services represented approximately 1% of our revenues, or $174,000, in the nine months ended September 30, 2000 and 10% of our revenues, or $578,000, in the nine months ended September 30, 1999. This decrease in the revenues from non-recurring engineering charges is due to a reduction in purchase orders for our engineering services. Revenues in the nine months ended September 30, 2000 were $12.8 million, an increase of $6.9 million, or 116.0%, over the nine months ended September 30, 1999. This increase in revenues primarily relates to revenues from our three- year services agreements with both Micro Linear and Fairchild. We did not have revenues from these customer arrangements for the nine months ended September 30, 1999 as these contracts commenced subsequent to September 30, 1999. Revenues also increased as a result of our ability to meet increased customer demand for our services through additional testers. In 2000, we began to generate revenues from assembly support services in connection with our operating agreement with Micro Linear. Pursuant to this agreement, we outsource these assembly support services to independent assembly subcontractors. Assembly support services have significantly lower gross margins than our test services and accordingly, our gross margins have decreased in the second and third quarter of 2000. However, providing assembly services requires little capital investment and we have offset part of this decrease in our gross margins by utilizing the additional capacity available from the test equipment we acquired from Micro Linear. For example, in the third quarter of 2000 we began to perform wafer sort services for one customer using the additional capacity available from the MicroLinear test equipment we purchased. Cost of Revenues and Gross Profit. Cost of revenues includes test equipment depreciation, employee compensation, facility rent, production supplies and assembly subcontracting. The purchase price of our principal test equipment, IC testers, ranges between $500,000 and $2.0 million per tester. The depreciation expense on testers in any quarter has not in the past and may not in the future result in a corresponding revenue increase in that quarter, which may cause our gross profit to vary. We currently have 46 testers and plan to purchase between three and seven additional testers by the end of 2000. We have performed software and hardware development that was often billed to customers in the form of non-recurring engineering charges. These charges were not capitalized or expensed as research and development expenses, but instead were included in cost of revenues. We expect that cost of revenues will increase if we are required to expand our workforce or facilities to meet commitments under any purchase orders or other agreements with new or existing customers. Cost of revenues in the nine months ended September 30, 2000 was $7.5 million, or 58.6% of revenues, an increase of $5.0 million, or 202.9%, over the nine months ended September 30, 1999. Cost of revenues in the nine months ended September 30, 1999 was $2.5 million, or 41.8% of revenues. This increase was primarily due to increases in head count and salary expense totaling $1.1 million, depreciation expense totaling $1.2 million, rent expense totaling $339,000, subcontracting costs totaling $1.9 million and $460,000 primarily related to utility and production supply costs. The increase in salary, depreciation, rent, subcontracting costs, utilities and production supplies were associated with the expansion of our operations to meet current and anticipated demand. During the nine months ended September 30, 2000, we increased our operations head count by approximately 80, invested significantly in new testers, expanded our Sunnyvale facility and opened our San Jose and San Diego facilities. The increase in subcontracting costs relate to the outsourcing of assembly and test services for Micro Linear and Acoustic Technologies, Inc. which have significantly lower gross margins than our traditional test services. Gross profit margins declined from 58.2% in the nine months ended September 30, 1999 to 41.4% in the nine months ended September 30, 2000, primarily as a result of revenues from the long-term contracts with Fairchild and Micro Linear and assembly management services which we began to perform in May 2000. During the nine months ended September 30, 1999 we did not 30 perform any assembly management services, had not yet expanded our Sunnyvale facility, and our utilization of test equipment and personnel were essentially at full capacity, helping us achieve 58.2% gross profit margins during that period. Many of our expenses, particularly test equipment depreciation, employee compensation and rent, are fixed and will continue to increase as we expand our operations. Thus, a failure to increase our revenues or a decrease in our revenues as a result of a delay in a purchase by a customer or a cancellation of a significant purchase order by any of our customers could cause our quarter-to-quarter and year-to-year gross profit to vary significantly in the future as they have in the past. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and related costs, general allocated facilities costs, promotion costs and professional fees, including legal and accounting fees. We expect that selling, general and administrative costs will increase in the future as we hire additional personnel, expand our operations and incur additional costs related to the growth of our operations and the costs associated with being a public company. Selling, general and administrative expenses in the nine months ended September 30, 2000 were $2.2 million, or 17.4% of revenues, an increase of $1.1 million, or 104.9%, over the nine months ended September 30, 1999. As a percent of total revenues, selling, general and administrative expenses decreased to 17.4% in the nine months ended September 30, 2000, from 18.3%, or $1.1 million, in the nine months ended September 30, 1999. The increase in selling, general and administrative expenses was primarily due to increases in employee headcount and related costs totaling $980,000, and depreciation expense totaling $90,000 and $30,000 related to sales and marketing activities, rent, travel expenses and other general corporate activities. These increases primarily relate to the expansion of our corporate facilities, personnel and our operations to meet current and anticipated demand. Research and Development. Through March 31, 2000, our research and development activities have consisted primarily of software and hardware development that has been billed to our customers in the form of non-recurring engineering charges and have been included in cost of revenues. During the nine months ended September 30, 2000, we performed research and development activities for our own purposes and incurred $367,000 of research and development expenses to further develop proprietary technologies, such as our Test IP capability. We expect research and development expenses to represent between approximately 2.0% and 3.0% of our revenues in 2000. Amortization of Stock-based Compensation. For employees, amortization of stock-based compensation is the difference between the deemed fair value of our common stock at the date of grant of options and the exercise price of those options. For non-employees, amortization of stock-based compensation is based on the fair value method of accounting for an option grant. Such amounts, net of amortization, are presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable option. Amortization of stock-based compensation expense was $1.2 million, or 9.8% of revenues, in the nine months ended September 30, 2000, primarily due to the grant of stock options to newly hired employees and consultants. Other Income (Expense), Net. Other expense, net in the nine months ended September 30, 2000 was $20,000, compared to other income, net of $204,000 in the nine months ended September 30, 2000. The other expense, net of $20,000 is due to increased interest expense of $231,000 resulting from increased bank borrowings to finance our purchase of testers in order to meet rising demand for test services. Provision for Income Taxes. Our provision for income taxes was $865,000 in the nine months ended September 30, 2000, a decrease of $206,000, or 19.2%, over the nine months ended September 30, 1999. Our provision for income taxes decreased because of lower taxable income. Our effective tax rate increased from 43.0% in the nine months ended September 30, 1999 to 60.2% in the nine months ended September 30, 2000. The increase in our effective tax rate relates to permanent non-deductible expenses related to amortization of incentive stock-based compensation. 31 Years Ended December 31, 1999, 1998 and 1997 Revenues. Revenues in 1999 were $8.0 million, an increase of $4.6 million, or 134.2%, over 1998. Revenues in 1998 were $3.4 million, an increase of $2.4 million, or 227.5%, over 1997. The increase in revenues in 1999 was primarily due to an increase in our capacity, higher utilization rates and higher customer sales. Additionally, the average revenue generated per customer increased from $180,000 in 1998 to $363,000 in 1999. The average revenue per customer increased over 102% from year-end 1998 to 1999 as a result of a significant increase in sales to Philips' predecessor, VLSI, and Vitesse in 1999 as compared to 1998. The increase in revenues in 1998 over 1997 reflects a full year of revenues in 1998 as compared to four months of revenues in 1997, the year we started our operations. Cost of Revenues and Gross Profit. Cost of revenues in 1999 was $3.6 million, or 45.6% of revenues, an increase of $1.1 million, or 41.8%, over 1998. Cost of revenues in 1998 was $2.6 million, or 75.4% of revenues, an increase of $1.8 million, or 255.4%, over 1997. Cost of revenues in 1997 was $724,000, or 69.5% of revenues. The 1999 increase was primarily due to higher depreciation expenses that resulted from placing into service additional test equipment and costs associated with increased capacity and the corresponding labor costs. Depreciation expenses increased from $1.0 million in 1998 to $1.7 million in 1999 which offset the increase in cost of revenues in 1999. In 1998 we paid $135,000 in employee bonuses; however, we did not pay employee bonuses in 1999. Our board of directors, at its discretion, may decide to award employee bonuses in 2000 and in subsequent years. Employee compensation and related costs associated with testing operations increased due to the increase in headcount from 18 employees at December 31, 1998 to 29 employees at December 31, 1999. Gross margins increased from 24.6% in 1998 to 54.4% in 1999. The increase in gross margins was attributable primarily to improved utilization of test equipment and operating personnel. The improved utilization of test equipment and operating personnel improved our gross margins because our significant operating costs are generally fixed in nature, and therefore improvements in the utilization of testing ICs provide additional revenues with no significant corresponding increase in operating costs. The 1998 increase over 1997 was primarily due to the fact that we operated for four months in 1997 compared to a full year in 1998 and we increased our headcount from seven to 18 employees. Depreciation expense increased from $177,000 in 1997 to $1.0 million in 1998 as a result of the acquisition of additional test equipment. Gross margins decreased from 30.5% in 1997 to 24.6% in 1998. The decrease in gross margins was attributable primarily to higher fixed costs related to test equipment depreciation and employee compensation. Selling, General and Administrative. Selling, general and administrative expenses in 1999 were $1.6 million, or 20.3% of revenues, an increase of $269,000, or 20.0%, over 1998. Selling, general and administrative expenses in 1998 were $1.4 million, or 39.6% of revenues, an increase of $658,000, or 94.8%, over 1997. The 1999 increase in selling, general and administrative expenses primarily relates to expansion of our work force and administrative facilities to meet demand for our services. Total headcount included in selling, general and administrative expenses increased from three at December 31, 1998 to five at December 31, 1999. Payroll and related employee benefits increased by $203,000, from $464,000 in 1998 to $667,000 in 1999. Further, rent expense increased by $116,000, from $50,000 in 1998 to $166,000 in 1999, as a result of expanding our administrative activities. The 1998 increase was mainly due to the fact that we operated for only four months during 1997 as compared to a full year in 1998. Research and Development. Through March 31, 2000, our research and development activities have primarily consisted of software and hardware development that has been billed to our customers in the form of non-recurring engineering charges. Our non-recurring engineering activities have been included in cost of revenues. Amortization of Stock-based Compensation. Amortization of stock-based compensation increased from zero in 1998 to $219,000 in 1999 due primarily to the grant of stock options to 14 newly hired employees. There was no amortization of stock-based compensation in 1997 because we granted all options at the deemed fair value of our common stock. 32 Other Income (Expense), Net. Other income, net in 1999 was $354,000, a decrease of $275,000, or 43.7%, over 1998. Other income, net in 1998 was $629,000, a decrease of $132,000, or 17.3%, over 1997. The 1999 decrease is primarily due to a gain of $438,000 on the sale of short-term investments recognized in 1998. The sale of our short-term investments in 1998 related to equity securities in mutual funds. We sold our mutual fund investments in September 1998 and replaced them with short-term commercial paper and money market accounts. This gain in 1998 was offset by an increase in net interest income of $76,000 from higher cash balances and gain on the sale of equipment of $87,000. The 1998 decrease in comparison to 1997 is primarily due to an increase in interest expense from additional bank borrowings. Provision for Income Taxes. Provision for income taxes in 1999 was $1.2 million, compared to $70,000 in 1998 and $169,000 in 1997. The increase in provision for income taxes in 1999 relates to an increase in our pretax income from $117,000 in 1998 to $2.9 million in 1999. Our effective tax rate decreased from 59.8% in 1998 to 43.0% in 1999. Our effective tax rate increased from 43.9% in 1997 to 59.8% in 1998. Our effective tax rate in 1998 was higher than the federal and state statutory rate primarily as a result of permanent non- deductible expenses related to interest payments. The interest payments related to amounts due quarterly on federal and state income taxes that were not paid until the end of the year. As these interest payments are not deductible for determining taxable income, this non-deductible expense drove our effective income tax rate higher than the statutory rate in 1998. 33 Quarterly Results of Operations The following table sets forth our historical unaudited quarterly information for our most recent eleven quarters, both in absolute dollars and as a percentage of total revenue for each quarter. This quarterly information has been prepared on a basis consistent with our audited financial statements and we believe, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information shown. Our quarterly operating results have fluctuated and may continue to fluctuate significantly as a result of a variety of factors and operating results for any quarter are not necessarily indicative of results for any future quarter or for a full fiscal year.
Three Months Ended ----------------------------------------------------------------------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (in thousands) Statement of Operations: Revenues.......... $ 272 $ 834 $ 919 $1,388 $1,724 $2,025 $2,162 $2,083 $2,616 $4,233 $5,921 Cost of revenues.. 357 586 717 913 688 810 973 1,177 1,220 2,340 3,926 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Gross profit...... (85) 248 202 475 1,036 1,215 1,189 906 1,396 1,893 1,995 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Operating expenses: Selling, general and administrative.. 289 323 324 416 289 379 413 540 614 673 928 Research and development..... -- -- -- -- -- -- -- -- -- 139 228 Amortization of stock-based compensation.... -- -- -- -- -- -- 71 148 223 820 204 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Total operating expenses........ 289 323 324 416 289 379 484 688 837 1,632 1,360 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from operations...... (374) (75) (122) 59 747 836 705 218 559 261 636 Other income (expense), net.. 133 99 347 50 80 60 64 150 65 13 (98) ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before provision for income taxes............ (241) 24 225 109 827 896 769 368 624 274 539 Provision for income taxes (benefit)........ (144) 14 135 65 347 376 348 158 337 226 302 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss).......... $ (97) $ 10 $ 90 $ 44 $ 480 $ 520 $ 421 $ 210 $ 287 $ 48 $ 235 ====== ===== ===== ====== ====== ====== ====== ====== ====== ====== ====== Three Months Ended ----------------------------------------------------------------------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (percentage of total revenues) As a Percentage of Revenues: Revenues.......... 100.0 % 100.0 % 100.0 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 % Cost of revenues.. 131.3 70.3 78.0 65.8 39.9 40.0 45.0 56.5 46.6 55.3 66.3 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Gross profit...... (31.3) 29.7 22.0 34.2 60.1 60.0 55.0 43.5 53.4 44.7 33.7 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Operating expenses: Selling, general and administrative.. 106.3 38.7 35.3 30.0 16.8 18.7 19.1 25.9 23.5 15.9 15.7 Research and development..... -- -- -- -- -- -- -- -- -- 3.3 3.8 Amortization of stock-based compensation.... -- -- -- -- -- -- 3.3 7.1 8.5 19.4 3.4 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Total operating expenses........ 106.3 38.7 35.3 30.0 16.8 18.7 22.4 33.0 32.0 38.6 22.9 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) from operations...... (137.6) (9.0) (13.3) 4.2 43.3 41.3 32.6 10.5 21.4 6.1 10.8 Other income (expense), net.. 48.9 11.9 37.8 3.6 4.6 3.0 3.0 7.2 2.5 0.3 (1.7) ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Income (loss) before provision for income taxes............ (88.7) 2.9 24.6 7.8 47.9 44.3 35.6 17.7 23.9 6.4 9.1 Provision for income taxes (benefit)........ (52.9) 1.7 14.7 4.7 20.1 18.6 16.1 7.6 12.9 5.3 5.1 ------ ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss).......... (35.8)% 1.2 % 9.9 % 3.1% 27.8% 25.7% 19.5% 10.1% 11.0% 1.1% 4.0 % ====== ===== ===== ====== ====== ====== ====== ====== ====== ====== ======
34 Other than the last quarter of 1999, our revenues generally increased in each quarter of 1998 and 1999 and in each of the three quarters in the nine months ended September 30, 2000, primarily as a result of increased customer demand for our test services from existing and new customers. During the quarters ended June 30, 1999, September 30, 1999 and December 31, 1999, revenues remained relatively consistent, and actually decreased in the last quarter of 1999 as a result of test capacity limitations. However, in 2000, we increased our test capacity by adding floor space and additional testers compared to the last quarter of 1999, allowing us to increase the volume of our test services and our revenues. Gross profit percentages have fluctuated from quarter-to-quarter as a result of increased fixed costs associated with the expansion of our operations and increases in our headcount. Our gross profit percentage of revenues increased from 34.2% in the fourth quarter of 1998 to 60.1% in the first quarter of 1999 primarily as a result of increased revenues in the first quarter of 1999 caused by an increase in the demand for our test services from customers such as Vitesse and MMC without a corresponding increase in costs. Also, in the fourth quarter of 1998, we had additional costs related to employee compensation for bonuses and we performed additional non-recurring engineering service projects, which typically have lower gross profit percentages than our test services. Gross profit decreased in each of the last two quarters of 1999 because revenues remained relatively flat while we increased fixed costs related to headcount and facility expansions to meet anticipated demand for our test services. Further, in the last quarter of 1999, we performed and completed additional non-recurring engineering projects which typically have lower gross profit percentages than our test services. Additionally, during the second and third quarters of 2000, our gross profit percentages decreased as a result of performing assembly management services which have significantly lower gross profit percentages than our test services. We expect this trend of fluctuating gross profit percentages to continue as we intend to further expand our operations. Liquidity and Capital Resources Our annual need for funds has generally increased reflecting the expanding scope and level of our test service activities. Since our inception, we have financed our operations primarily through the sale of $14.0 million of our Series A convertible preferred stock, cash flows from operating activities, bank borrowings and customer equipment financings. In the nine months ended September 30, 2000, cash provided by operating activities of $2.5 million related to net income of $570,000, depreciation expense of $2.5 million, amortization of deferred stock based compensation of $1.2 million and an increase in accounts payable to $2.8 million, related to equipment purchases at the end of the quarter, offset by an increase in accounts receivable of $2.8 million, related to an increase in sales and an increase in prepaid expenses and other current assets of $1.4 million related to capitalized initial public offering costs. Cash used in investing activities of $12.8 million related to equipment purchases. Cash provided by financing activities of $7.8 million primarily related to proceeds from issuance of notes payable for the acquisition of the Micro Linear test equipment of $5.0 million and bank borrowings of $3.9 million, offset by payments on our bank facilities of $1.5 million. In 1999, cash provided by operating activities of $4.4 million primarily consisted of net income of $1.6 million, depreciation expense of $1.7 million, an increase in income tax payable of $1.2 million, as a result of higher taxable income, and an increase in accounts payable of $1.1 million, related to equipment purchases at year-end. Cash used in investing activities of $1.4 million primarily related to capital expenditures of $3.8 million for test equipment offset by a reduction in restricted cash of $2.3 million. Cash provided by financing activities of $199,000 primarily related to net bank borrowings. The total cash and cash equivalents at the end of 1999 was $11.6 million. In 1998, cash used in operating activities of $2.7 million primarily related to a decrease in accounts payable of $2.9 million primarily related to payments on equipment purchases, an increase in accounts receivable of $518,000 as a result of higher sales, and a realized gain on sale of short-term investments of $438,000, offset by depreciation of $1.1 million, an increase in accrued liabilities of $250,000, due to employee bonuses and net income of $47,000. Cash used in investing activities of $1.6 million related to purchases of 35 property and equipment of $1.9 million, an increase in restricted cash of $4.5 million, offset by proceeds from sale of short-term investments of $4.8 million. Cash provided by financing activities of $3.7 million related to net borrowings on our bank facilities to fund test equipment purchases. In 1997, cash provided by operating activities of $2.8 million primarily related to an increase in accounts payable of $3.1 million, due primarily to equipment purchases, net income of $216,000, an increase in accrued liabilities of $280,000 related to employee compensation and benefits, offset by an increase in accounts receivable of $693,000 and a realized gain on sale of short-term investments of $366,000. Cash used in investing activities related to purchases of property and equipment of $5.4 million and purchases of short- term investments of $4.0 million. Cash provided by financing activities of $15.6 million related to proceeds from our issuance of Series A convertible preferred stock of $14.0 million and net borrowings of $1.6 million on our bank facility to fund purchases of test equipment. On September 29, 1999, we entered into an agreement with Fairchild to purchase its backend test equipment used in its San Diego, California test facility. The purchase price for the test equipment was $865,000 of which $778,500 was funded through our bank facility on October 26, 1999. The entire purchase price consideration was allocated to the fair value of the acquired test equipment. The bank promissory note used to fund this transaction bears interest at a per annum rate of 9.5% due monthly with monthly principal installments of $13,000. The bank promissory note matures in October 2004. We incurred moving expenses of approximately $22,000 and leasehold improvements of $284,000 to move this equipment to our new San Diego facility. On April 28, 2000, we issued an unsecured promissory note in the amount of approximately $5.0 million to purchase mixed-signal and radio frequency test equipment from Micro Linear. The entire purchase price consideration was allocated to the fair value of the acquired test equipment. The promissory note bears interest at a per annum rate of 6.00% due monthly with equal monthly principal installments of approximately $165,000 beginning November 15, 2000. The note is due and payable in full in April 2003. Our long-term contract agreements with both Micro Linear and Fairchild provide that we perform production test services at initial prices, which serve as price ceilings, as long as we maintain competitive costs, service and quality. If the initial prices under the agreements are no longer competitive, the prices could be lowered to be less than or equal to the prevailing market rates. Also, under our agreement with Micro Linear, we have agreed to implement productivity enhancements to our services that would reduce test costs charged to Micro Linear. If fixed costs associated with these long-term agreements increase without a corresponding increase in revenues, our gross margins, operating results and cash flows could be harmed. In November 1997, we established a secured equipment line of credit with California Bank and Trust, formerly Sumitomo Bank of California, for $6.5 million. Borrowings under this arrangement bear interest between 7.10% and 7.30%. This line is secured by liens on our equipment and was secured by $4.5 million in deposits at December 31, 1998 and $2.25 million in deposits at December 31, 1999 and March 31, 2000. Pursuant to this arrangement, each advance matures in five years and is limited to 100% of the invoice amount plus tax, license and freight. No additional advances are available on this credit line. As of September 30, 2000, $2.8 million was outstanding under this arrangement. In August 1999, we established an additional secured equipment line of credit with California Bank and Trust for $2.0 million. Each advance under this agreement bears interest at the effective prime rate, matures within five years, and is limited to 90% of the cash value of the equipment securing the loan. No further advances are available after August 31, 2000. This equipment line of credit is secured by liens on our equipment. As of September 30, 2000, $1.7 million was outstanding under this agreement. In January 2000, we entered into an unsecured equipment note payable agreement with Quality Test Systems for $389,000 in connection with the purchase of a tester. The note payable agreement bears zero interest. The note payable agreement expires March 2003. At September 30, 2000 the total borrowing outstanding is $346,000. We are not required to satisfy any financial covenants in connection with this agreement. 36 In July 2000, we established an additional secured equipment line of credit with California Bank and Trust for $4.0 million. All outstanding advances on this line of credit will be converted into fully-amortized term loans with terms of 54 months. All borrowings against this equipment line bear an interest rate equal to the effective prime rate minus one-half percent, which was 9.0% at September 30, 2000. No further advances are available under the bank facility after July 31, 2001. As of September 30, 2000, $3.4 million was outstanding under this agreement. This equipment line of credit is secured by liens on the equipment purchased under it. Future maturities of principal on our promissory notes and equipment lines of credit as of September 30, 2000 were as follows for the next 12 months: 2001................................................................... 3,659 2002................................................................... 4,508 2003................................................................... 2,566 2004................................................................... 1,097 2005 and thereafter.................................................... 1,435
Our contractual commitments as of December 31, 1999 for capital expenditures were approximately $248,000. As discussed above, our commitment to purchase the Micro Linear test equipment was funded through an unsecured promissory note we issued to Micro Linear. We also plan to fund our capital expenditures through the end of 2000 with our existing equipment lines of credit, cash generated from operations and the net proceeds from the sale of our common stock in this offering. The costs of approximately $22,000 associated with relocating our San Diego facility and the related leasehold improvements of $284,000 were funded by our current cash balances. We believe that the net proceeds from the sale of the common stock in this offering, together with funds generated from operations and our equipment lines of credit, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all. The sale of additional equity or debt securities may result in additional dilution to our stockholders. See "Risk Factors--Our business could be adversely affected if we have difficulty obtaining additional capital to finance future purchases of technically advanced test equipment." Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as recently amended, is effective for fiscal years beginning after June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a material effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The adoption of SAB 101 has not had a significant impact on our results of operations and financial position. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies the definition of employee for purposes of applying Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued to Employees," the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combinations. This interpretation is effective July 1, 2000, but there are conclusions in this interpretation that cover events that occur after either 37 December 15, 1998, or January 12, 2000. We believe that FIN 44 will not have a material effect on our financial position or results of operations. Qualitative and Quantitative Disclosures about Market Risk To date, we have operated exclusively in the United States and all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. Even when we manage a customer's outsourced IC assembly operation in Asia, the fees have been paid in U.S. dollars. Because of this, our revenues and profits have not been impacted directly by changes in foreign exchange rates. However, our future revenues may be impacted indirectly by changes in foreign exchange rates if our customers use foreign currency to purchase U.S. dollars to pay for our services. In addition, we may be involved with customers and suppliers from overseas and the fees may not be based in U.S. dollars. Such revenues and costs will then be impacted by changes in foreign exchange rates. Our exposure to market risk is confined to our cash and cash equivalents. We maintain an investment portfolio of depository accounts and investment grade short-term commercial paper. The securities in our investment portfolio are not leveraged, are classified as cash equivalents and are, due to their very short- term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have any material adverse impact on the realized value of our investment portfolio. 38 BUSINESS Overview We are an independent United States-based provider of comprehensive semiconductor test services. We focus on analog, digital, mixed-signal and high-performance ICs, primarily utilized in the communications and networking industries. We provide our customers with a flexible, full service solution for their testing needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our services include software test program and hardware development, prototype verification, characterization, volume production wafer sort and volume production final test. Each IC design requires a software test program customized to the product, which can take up to four months to develop. As the time, expense and expertise involved in this development process grows, manufacturers are increasingly looking to outsource their test needs. However, most independent providers of test services only offer production test services using the customers' internally developed test programs. In contrast, our range of customer services includes customized, high quality test software programs that can reduce overall test times. Our test services combine our internally developed software test programs and test hardware to provide our customers with advanced test solutions on a cost-effective basis. We have created a library of proprietary and reusable self-contained components called test modules, or Test IP, which we generated during and used in the development of test programs for over 60 ICs. Our experienced test engineers use our Test IP to facilitate the rapid development of high quality test programs and the reduction of test times. This can accelerate our customers' new product time-to-market and time-to-volume while simultaneously lowering their production costs. We provide test services to integrated device manufacturers and fabless semiconductor companies, which are companies that do not own manufacturing facilities. Our top six customers during the nine months ended September 30, 2000 were Micro Linear, Philips, Vitesse, Fairchild, GlobeSpan, and MMC. Over this period these customers accounted for 94% of our revenues. We were founded in November 1996, opened our first facility in May 1997 and commenced operations in September 1997, and have facilities located in California, in Sunnyvale, San Jose and San Diego. We have strategically placed our facilities close to concentrations of semiconductor companies in order to allow close collaboration between our customers' development engineers and our test engineers throughout all stages of new product development and production. This allows our engineers to directly interact and communicate with our customers during critical times of the product cycle, such as prototype verification and production. Industry Background Growth in the Semiconductor Industry ICs are critical components used in an increasingly wide variety of electronic applications including communications, internet infrastructure, networking, computers, consumer electronic devices and automotive and industrial systems. The Semiconductor Industry Association, or SIA, estimates that revenues for the semiconductor industry will grow from $149 billion in 1999 to approximately $312 billion in 2003, a compound annual growth rate of 20.3%. We believe that a principal factor driving the growth in ICs is increased sales of communications and network ICs used in applications such as digital subscriber lines, or DSL, cellular phones, television set-top-boxes, broadband communications, cable modems, electronic commerce hardware and network appliances and other wireless devices. Overview of Our Semiconductor Test and Packaging Process The process of testing and packaging a semiconductor can be visualized as follows: [DIAGRAM OF TEST AND PACKAGING PROCESS APPEARS HERE] 39 The Semiconductor Testing Process ICs are manufactured on high-purity silicon discs called wafers, which are the base material for the ICs. The wafers are processed through a series of complex cycles to form a number of individual ICs on each wafer. The testing of an IC is a complex process that requires increasingly sophisticated engineering, software, production expertise and test equipment. ICs are tested on automated test equipment to verify that they operate in compliance with their applicable specifications, including frequency and timing over temperature and voltage ranges. These tests require the development of software programs and hardware that are customized to the IC and the test equipment. This test process can be divided into the three functional areas described below: Prototype Test. Initially, wafers and packaged ICs are tested to evaluate design specification compliance. If compliant, a statistically significant sample is selected for characterization tests to determine whether the prototype is ready for volume production. If initially noncompliant, additional tests are performed to attempt to debug the prototype and determine the origin of the devices' failure. Wafer Sort. Next, each IC on a completed wafer is tested for electrical performance. Nonfunctioning ICs are identified and subsequently discarded before being assembled in plastic or ceramic packages. Final Test. Finally, the packaged ICs are tested again to confirm that they operate and are suitable for shipment to customers or end users. Increasing Test Complexity and Cost Historically, semiconductor manufacturers performed their own test and assembly and would rely on independent providers to handle overflow volume. However, advances in IC technology such as increased functionality, integration of analog and digital circuitry and a higher number of electrical contacts, or pin counts, on a single IC have given rise to more complex testing requirements and the deployment of sophisticated test equipment. This increasing IC complexity has increased the cost of developing and maintaining advanced test resources including the time and cost to develop test software, and the cost of engineering resources and capital equipment. As a result, semiconductor manufacturers have begun to outsource their sophisticated test needs to full service test providers. IC complexity has also given rise to sophisticated test software programs and new generations of advanced test equipment. In addition, the cost of developing and maintaining the advanced test resources required to effectively introduce a new product to market. Faster new product introductions have made it increasingly difficult for semiconductor companies to maintain adequate internal capacity utilization levels necessary for cost effective IC testing. More rapid obsolescence of expensive test equipment further adds to the increasing cost of maintaining effective test capabilities. For example, equipment used to test mixed-signal devices can become obsolete for the most advanced ICs in as little as two years. We expect the cost of test software and equipment to continue to increase as product development cycles shorten, new products and applications proliferate, pin counts increase and IC sizes shrink. Rising Demand for Outsourced Test Today, semiconductor manufacturers increasingly are outsourcing test to independent providers who have the expertise, equipment and engineers to satisfy the time-to-market and time-to-volume demands of the industry, allowing them to focus internal resources on their core competencies. According to Semiconductor Business News, an online industry news service, a number of industry estimates indicate that spending on outsourced test services is growing by more than 40.0% per year and is expected to reach $2.0 billion by 2001. 40 We believe that this growth is being driven by the following factors: . Increased Engineering Complexity. As ICs have become more complex, test program development and hardware platforms now require more sophisticated engineering resources. Each device requires a customized, product-specific test program, which can take up to four months to develop. To keep pace with IC complexity, software test programs must be developed by engineers experienced in the test field. We believe that integrated device manufacturers and fabless companies will prefer to outsource an increasing percentage of their test services rather than directly incur the costs of employing the additional experienced test engineers that otherwise would be required. . Efficient Use of Capital. The complex test process requires substantial investment in specialized test equipment and facilities, the cost of which has increased substantially over the past several years as the devices they test have become more sophisticated. Shorter product life cycles for high-performance ICs further discourage customers and competitors from investing in expensive test equipment that cannot be fully used. Conversely, having multiple customers, with differing levels of technical requirements, allows independent test companies to use their test equipment 24 hours per day, seven days a week and to extend the productive life of their equipment. We believe that semiconductor companies are turning to the outsourcing of test services to optimize their limited resources, reduce capital expenditures and control research and development costs. . Time-to-Market and Time-to-Volume Pressures. To meet the demands of the increasingly competitive semiconductor market, and to respond to decreasing product life spans, semiconductor companies are seeking to shorten their time-to-market and time-to-volume. We believe that independent test companies that offer comprehensive test solutions, test equipment, engineering capabilities and test expertise can accelerate their customers' new product development and time-to-market and time-to-volume. The Artest Solution We provide comprehensive engineering and production test services to the semiconductor industry for analog, digital, mixed-signal and high-performance ICs. We have the engineering, software and hardware experience to provide our customers with a flexible, full service solution to their test needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our development engineering staff, with an average of over 19 years of engineering and operations experience, has a comprehensive understanding of device test requirements, including digital technology, analog technology, test equipment, test languages and test hardware. We also have created a library of our Test IP which we generated during and used in the development of test programs for over 60 ICs. We use our Test IP library as valuable building blocks to develop new solutions for our customers. Our engineering experience and our software library allow us to accelerate test development times and increase our own test capacity and utilization. We have strategically placed our facilities close to concentrations of semiconductor companies in order to allow close collaboration between our customers' development engineers and our test engineers throughout all stages of new product development and production. Our engineers' proximity to our customers allows them to directly interact and communicate during critical times of the product cycle such as prototype debug and production. 41 Two case studies demonstrate how we use our comprehensive test engineering services and experience to assist our customers. Case Study No. 1 -- Test Operations Purchase Model Customer Micro Linear Corporation Customer Challenge Micro Linear faced increasing cost pressure associated with delivering its analog and mixed-signal products. Although Micro Linear had outsourced its assembly operations overseas, it was seeking an outsourcing company to provide complex test services locally, including direct access to automated test equipment and test engineers who would collaborate directly with Micro Linear engineers, to support new product development and production. Artest Solution We purchased the mixed-signal and radio frequency test equipment from Micro Linear and entered into a three-year agreement under which we are providing Micro Linear production test services and equipment access for their new product development. Micro Linear is one of two customers for whom we are providing a broad range of end-to-end test services within our facilities. By using our experience in mixed-signal device testing, engineering and manufacturing, we were able to reduce their total test costs by 40%. Micro Linear is our first customer of this type to track cost reduction data, and the actual cost reduction percentage for other customers may vary from the Micro Linear result. In addition, we now are providing management services for Micro Linear's outsourced assembly operations. Our agreement allows Micro Linear to focus its resources on the development of new products, and helps us build a closer relationship with this key customer. Case Study No. 2 -- Project Specific Model Customer Philips Semiconductors, Inc. Customer Challenge Philips' predecessor, VLSI Technology, Inc., had developed an advanced, mixed-signal cellular phone chip. The product required complex testing and would have involved the devotion of significant Philips resources and delayed the product's time-to-volume if test services were conducted in-house.
Artest Solution Our engineering team worked closely with Philips' test engineers to quickly develop test software to support the high volume production requirements. As Philips' production increased, we optimized the test program which reduced the test time from 8 seconds to 4.5 seconds, a time reduction of 44%, and as a result, significantly reduced Philips' production costs.
Strategy Our goal is to be the leading provider of a comprehensive selection of advanced test services to the communications and networking segments of the semiconductor industry. The principal components of our strategy to achieve this objective are set forth below. Target Selected Customers in Complex Analog, Digital and Mixed-Signal IC Markets. We intend to strengthen our position as a leading provider of test services for complex analog, digital and mixed-signal ICs in the communications and networking sectors. Our engineering and software expertise will enable us to continually expand our test services in these two high-growth areas driven by rapid product introduction and shorter product life cycles. We believe that our offering of services, including test software and hardware development and prototype and production test services, are well-suited to the product introduction and time-to- 42 volume needs of IC companies. We also believe that by focusing our testing services on these fast-growing markets, we will be able to take advantage of the growing demand for testing expertise and the evolving trend towards outsourcing. Continue to Develop Our Test IP Library. We plan to expand our Test IP library to include test modules for emerging standards such as analog-to- digital converter, digital-to-analog converter, universal serial bus, a standard for attaching external equipment to personal computers, and firewire, a standard for high capacity communication. This will allow us to generate test programs more efficiently for our customers. Pursue Acquisitions of IC Test Operations. We believe that, like Micro Linear and Fairchild, a number of potential customers ultimately may decide to outsource their entire test operation. We believe that we can profitably purchase their equipment and hire their test employees and then use these resources as part of long-term test arrangements with these customers. This strategy also will provide us with additional test capacity for other customers. Increase Penetration of Existing Customers. Independent test services companies provide only a relatively small percentage of most IC manufacturers' overall testing needs. For example, our major customers typically outsource to us less than 10% of their overall test functions. We believe that as we continue to demonstrate our expertise to these manufacturers, they will outsource a greater proportion of their testing needs to us. Expand Our Geographic Presence and Scope of Activities. We intend to open a limited number of additional facilities in the United States and Asia near concentrations of existing and potential customers. Our close proximity to our customers' design facilities has allowed us in the past, and we anticipate will permit us in the future, to work closely with them starting with the early stage of product development. In order to complement our core test capabilities and enable us to offer a comprehensive range of test and assembly services, our expansion plans may also include the acquisition of packaging operations. Services We offer a comprehensive array of technologically advanced test and engineering services to address the needs of our customers and their end customers. We work closely with our customers to bring their products to market quickly and cost-effectively while providing ongoing test data for yield enhancement and cost reduction. There are two major device life-cycle phases: prototype and production. We work closely with our customers to offer test services during both phases. In addition, we offer our customers a turnkey solution which includes wafer sort, selection and management of assembly subcontractors, final test and drop shipment services, all of which can reduce our customers' manufacturing costs and their time-to-market and time-to-volume. For each of the last three years most of our revenues have been derived from production phase services with 1% of our revenues for the nine months ended September 30, 2000 from software test program and hardware development, or non- recurring engineering services, and 11% from assembly management services. The following is a summary of the services we offer throughout the IC development to volume production process. Prototype Phase The initial stage of IC design, development and testing is the prototype phase, during which we provide the following services: Software Test Program and Hardware Development. To properly test the functionality and performance of our customers' ICs for prototype verification and characterization, our engineering staff develops software test programs for each particular product. Additionally, we develop the test hardware required to test the particular product. Prototype Assembly. Based on our customers' requirements and the device specifications, our engineers will assist customers with the selection of their package and assembly vendor. Our engineers help our 43 customers select the optimal package for their product in terms of package type and cavity size by evaluating the electrical, thermal, mechanical and material application characteristics of their product. We also provide expedited domestic and overseas assembly management services. By working closely with specialized packaging firms, we can provide tested prototypes to our customers in two days. Prototype Verification. We test wafers and packaged prototype devices to verify basic functionality and compliance with the device specifications. In the event that the IC does not meet published specifications, we work closely with our customers' development engineers to quickly provide device test data feedback to help identify and isolate failures. This is a critical step in enabling our customers to achieve their development schedule and production time-to-market requirements. Prototype Characterization. We offer extensive test services to determine if there are any IC design or manufacturing weaknesses. This often includes developing an enhanced test program to measure functionality, frequency and timing over temperature and voltage ranges. Reliability Qualification. We provide engineering services to evaluate the IC's life span. This process often includes long- and short-term high temperature stress, electrostatic discharge, susceptibility to damage during power up and package integrity tests. Production Phase The second stage of IC design, development and testing is the production phase, during which we provide the following services: Software Test Program and Hardware Development. To properly test the functionality and performance of our customers' ICs for wafer sort and final test, our engineering staff develops software test programs for each particular product. Additionally, we develop the test hardware required to test the particular product. Wafer Sort. Following wafer fabrication and prior to packaging, we electrically test the wafers to determine which ICs on the wafers meet the device specifications. Assembly Management. For a few of our customers, we offer to select their independent assembly suppliers and manage the outsourcing of their assembly operations. We negotiate the price, assist in package selection, manage the inventory and manage the relationship with these independent assembly suppliers. Currently, we are providing this service to only two of our customers, Micro Linear and Acoustic Technologies. Final Test. After ICs are packaged, we electrically test each IC to verify that it conforms to the device specifications. Other Tests and Support. After final test, we can lead scan, or verify pin position on the IC package. Prior to shipment we can bake, or heat, and dry pack, or place in protective shipping bags, packaged ICs. Additionally, we either drop-ship the ICs to the end-user or return them to our customers. We also help our customers plan their production and track their inventory. Test Optimization. As the IC moves into high production volume, we provide test engineering services to optimize test programs and reduce test time and, therefore, the customer's cost. In addition, we provide our customers device and test yield data and work closely with them to increase yield, which also reduces costs. In addition, we rent the use of our IC test equipment to a number of our customers in order to maximize our capacity utilization rates. 44 Customers, Long-Term Customer Relationships and Market Customers. We provide test services to a growing number of customers consisting primarily of integrated device manufacturers and fabless companies. Our largest customers accounted for a significant portion of our revenues in the nine months ended September 30, 2000 and in 1999, 1998 and 1997. During the nine months ended September 30, 2000, Micro Linear represented 40% of our revenues, Philips represented 27% of our revenues, and Fairchild, GlobeSpan, MMC and Vitesse each ranged between 5.5% and 7.5% of our revenues. In 1999, our three largest customers, MMC, Philips and Vitesse in the aggregate represented 85% of our revenues, with Philips representing 60%, Vitesse representing 15% and MMC representing 10%. In 1998 Philips represented 43%, Vivid Semiconductor, Inc. represented 27% and Vitesse represented 13% of our revenues. In 1997 Philips represented 82% of our revenues. We anticipate that Fairchild, GlobeSpan, Micro Linear, MMC, Philips and Vitesse will account for a high percentage of our revenues for the near future, with Micro Linear expected to be our largest customer for 2000. We expect that we will continue to be dependent upon a relatively limited number of customers for a significant portion of our revenue in future periods. Our customers generally place their purchase orders one to three months in advance, which is typical for the test industry. As a result, we usually operate with no significant backlog. Moreover, all of our customers operate in the cyclical semiconductor industry and may vary order levels significantly from period to period. Our customers over the twelve months ended September 30, 2000 were: Acoustic Technologies, Integrated Telecom Schlumberger Inc. Express, Inc. Technologies, Inc. Alantro Communications, LSI Logic Corporation Sensory, Inc. Inc. MMC Networks, Inc. Sigma Designs, Inc. Applied Micro Circuits MediaQ, Inc. Siliconware Precision Corporation Micrel Semiconductor, Industry Company, Ltd. Arizona Microtek, Inc. Inc. Siliconwave, Inc. Artisan Components, Inc. Micro Linear Corporation Synaptics, Inc. ATI Technologies, Inc. NetLogic Microsystems, Trident Microsystems, AverLogic Technologies, Inc. Inc. Inc. Oak Technology, Inc. TriQuint Semicondutor, C-Cube Microsystems, Inc. Philips Semiconductors, Inc. Edge Semiconductor, Inc. Inc. Tropian, Inc. Fairchild Semiconductor PLX Technology, Inc. Vitesse Semiconductor Corporation PMC-Sierra, Inc. Corporation Fujitsu Computer Packaging RealChip, Inc. ZiLOG, Inc. Technologies, Inc. Sage, Inc. GlobeSpan, Inc.
Long-Term Customer Relationships. An important element of our business strategy is to increase our customer base by expanding our services to include a broader range of test and related services. We intend to achieve this result by creating long-term relationships with potential customers. To facilitate these long-term relationships, we may enter into arrangements similar to the Micro Linear and Fairchild agreements, in which we purchase part or all of the customers' test equipment and hire their test engineers and operators. Such arrangements will also provide us with additional test capacity for other customers. Fairchild. In September 1999, we entered into a test equipment purchase and engineering test services agreement with Fairchild, under which we purchased their San Diego mixed-signal test equipment and agreed to pay Fairchild a monthly user fee until June 30, 2000 for the rental of its facilities. After June 30, 2000, we relocated, at our cost, to a new facility in San Diego, California, to accommodate Fairchild's test and engineering needs. We incurred moving expenses of approximately $22,000 and leasehold improvements of $284,000 to move the equipment to our new San Diego facility. We also agreed to offer employment to six of Fairchild's employees and pay them a retention fee which shall be covered by Fairchild. For an initial three-year term, Fairchild has agreed to 45 use our production test and shipping services for a significant portion of the production test and shipping services it had previously performed for itself and to give us a favored testing service status for any new mixed-signal products it develops. Fairchild also agreed to use these services for the term of the agreement for as long as we maintain competitive costs, service and quality. We cannot increase the prices for our services under the agreement higher than the maximum prices set in the agreement. Under the agreement, Fairchild is obligated to pay us minimum annual user fees for use of our testers. The agreement provides for automatic renewals for successive one-year terms unless either party gives written notice to the contrary. Micro Linear. In April 2000, we entered into a test equipment purchase agreement with Micro Linear under which we purchased the mixed-signal and radio frequency test equipment from Micro Linear and assumed liabilities under six contracts of Micro Linear. We also entered into an operating agreement that requires us to employ approximately 65 of Micro Linear's employees, of which 26 are currently full-time employees of Artest, and assume severance payment obligations which are funded by Micro Linear. For an initial three-year term, Micro Linear has agreed to use us as its primary subcontractor to perform wafer sort, final test, assembly management and shipping services for substantially all of its existing products for a maximum hourly rate as long as we maintain competitive costs, service and quality. Under the agreement, Micro Linear is obligated to pay us minimum annual user fees for the use of our testers covered by the agreement. The operating agreement provides for automatic renewals for successive one-year terms unless either party gives written notice to the contrary. Market. The following table sets forth for the periods indicated the percentage of our revenue derived from the testing of ICs used in communications, which includes both telecommunications and data communications, and other applications:
Nine Months Year Ended December 31, Ended --------------------------- September 30, 1997 1998 1999 2000 ------- ------- ------- ------------- (percentage of total revenue) Communications..................... 73% 51% 74% 77% Networking......................... -- 5 13 14 Computing.......................... 9 11 7 -- Video.............................. 11 28 3 9 Application specific IC............ 1 1 1 -- Other.............................. 6 4 2 -- ------- ------- ------- --- Total............................ 100% 100% 100% 100% ======= ======= ======= ===
Sales, Marketing and Customer Service We target potential customers who are industry leaders in communications and networking which present significant volume growth opportunities. We market our services through our senior management and through direct sales personnel located in Sunnyvale and San Diego, California and Phoenix, Arizona. Our sales team is supported by technical managers, and consists of sales and engineering representatives knowledgeable about our capabilities and our customers' needs for testing analog, digital, mixed-signal and high-performance ICs. Typically, our sales cycle goes through the following stages: initial contact with a customer; discussion of the customer's technical requirements, production volume and schedule forecast; discussion of our capabilities and advantages; engineering discussions; development of our proposal and price quotes to the customer and issuance of a purchase order by the customer. 46 Our marketing strategy focuses on developing close working relationships with our customers early in the product development phase and throughout the lifecycle of their product. Our objective is to have our customers consider us an integral part of their businesses. We place a strong emphasis on providing quality test services to our customers, which we believe is a significant component in our customers' selection process. We also believe our customers value the breadth and the flexibility of the test services we provide. In addition, we are committed to finding solutions for our customers' problems, which has been a significant factor in our ability to attract and retain customers. Intellectual Property and Research and Development Intellectual Property. Our operational success will depend in part on our ability to develop and protect our intellectual property. We have developed test programs for over 60 ICs for high-end applications such as DSL, modem, television set-top-box and networking products. We are continuing to expand this Test IP library, which provides valuable building blocks which enable rapid test program generation, cross-platform program conversion and optimization of test programs. We also are working with IC design intellectual property providers, wafer foundries and computer aided design tool providers to fully integrate the test program generation process into the design flow. We protect our Test IP and software generation methodologies through non-disclosure and proprietary rights assignment agreements with our key employees and non-disclosure agreements with many of our customers. Research and Development. In the past, most of our research and development was in the form of customer-financed non-recurring engineering charges. We first incurred research and development expenses for our own purposes in the second quarter of 2000 and expect to incur research and development expenses in the future to further develop our Test IP. Our research and development efforts also will include our continuing development of interface hardware to provide for high-frequency testing by minimizing electrical noise. We believe that our research and development program will be an integral component of our business strategy in the future. As of September 30, 2000, we employed 13 engineers who dedicate more than 50% of their time to our research and development activities. In addition, our management and operational personnel are also involved in research and development activities. Equipment, Quality Control and Quality Standard Certification Equipment. We work closely with our major equipment suppliers to ensure that equipment is delivered on time and such equipment meets our stringent performance specifications. In a number of cases, we obtain our equipment through sole or limited source suppliers. We have formed equipment evaluation teams, consisting of engineering and operations employees, to manage and procure equipment that meets our customers' current and future needs. These teams conduct a regular review of future technology roadmaps, equipment capacity and cost performance targets. These activities provide a basis for us to determine our ongoing equipment needs. With the exception of a few key suppliers that provide us with reserved equipment delivery slots and price discount structures, we have no binding supply agreements with any of our suppliers. A reserved equipment delivery slot is one which allows us to obtain an accelerated delivery of the equipment over and above the delivery schedule previously committed by the supplier. Typically, price discounts are offered for volume purchases. 47 Test equipment is one of the most critical components of the testing process. We believe the highly specialized equipment we use is among the most advanced for production test of IC's. We generally seek to obtain testers from different vendors with similar functionality and the ability to test a variety of different semiconductors. In general, particular semiconductors can be tested on only a limited number of specially configured testers. As part of the qualification process, customers may specify the equipment on which their semiconductors may be tested. We purchase test equipment from major international manufacturers, which are primarily located in the United States, Europe and Asia, including Agilent Technologies, Inc., Credence Systems Corporation, Eagle Test Systems, Inc., LTX Corporation, Schlumberger Technologies, Inc., Teradyne Inc. and TMT, Inc., a division of Credence Systems. We operate approximately 46 testers, including 42 for mixed- signal/analog/radio frequency testing and four for digital testing. Also, in situations where a customer has specified test equipment that is not widely applicable to other products that we test, we have required the customer to provide the equipment to us on a consignment basis. Two of the 46 testers we operate are on consignment. In addition, in the future, we may agree to purchase specified test equipment that we do not currently support in order to satisfy a potential customer's test requirements, if the potential customer enters into a long-term customer relationship with us committing the customer to use our test services. In addition to test equipment, we maintain a variety of other types of equipment, such as automated wafer probers and handlers, scanners and workstations for use in software development. Quality Control. Customers require that our facilities and procedures undergo a stringent vendor qualification process. This qualification process typically takes from one to two weeks, but can take longer depending on the requirements of the customer. The initial phase of test qualification is a process known as correlation. During correlation, which typically takes two to three days, the customer provides us with sample semiconductors to be tested. Our engineers work with customers to resolve any correlation issues that may arise. Our engineers and technicians are responsible for monitoring our test and manufacturing processes to ensure they meet our quality standards. Quality Standard Certification. Our test operations in Sunnyvale, California and San Jose, California are ISO 9002 certified. We plan to obtain ISO 9002 certification for our San Diego, California facility later this year. This standard is issued and certified by the International Standards Organization, and sets forth what is required to ensure production of quality products and services. The ISO certification process involves periodically subjecting production processes and quality management systems to stringent third-party review and verification. ISO certification is required for sales of products to those customers that look to an ISO certification as a threshold indication of our quality control standards. Competition We believe that the independent semiconductor test service industry is fragmented and in an early stage of development. Traditionally, integrated device manufacturers performed test development and production test services for their products internally. The trend towards outsourcing and the recent success of the fabless companies have altered this traditional business model. We believe that the principal competitive factors in our markets are state-of- the-art test and engineering capabilities, technical competence, software development, flexibility of services offered, quality, price, customer service and support, maturity of sales and services relationships, cycle time, location and available capacity. We believe that we face competition from the internal capabilities of many of our current and potential customers who manufacture integrated devices and from large assembly houses which offer production test services that compete with our services. Our largest competitors include Amkor, ASE Test, ASAT, ChipPAC, 48 ST Assembly Test and Siliconware. Bough Lin is a director of our Company and chief executive officer and chairman of Siliconware. See "Management--Bough Lin" and "Certain Transactions and Relationships with Related Parties--Sale of Securities." We also face competition from smaller independent, test-houses such as Multitest and Viko, which do not provide as wide an array of services. We believe that we are competitive with these companies because of our engineering breadth, test generation methodologies and Test IP. Our competitors' ability to provide the full set of engineering services, such as test, product characterization, reliability and assembly to support product development from the prototype stage through the production stage varies greatly. The majority of our competitors sell little more than just production test using the customer's own test software programs. Many of our competitors and potential customers have significantly longer operating histories, larger installed bases of test equipment, greater name recognition and significantly greater technical, financial, manufacturing and marketing resources than we do. In addition, a number of these competitors have long established relationships with our customers and potential customers. We believe it is likely that additional competitors will enter the market for most, if not all, of the services which we offer. See "Risk Factors--We may not be able to compete successfully in our industry because our industry is competitive and diverse." Employees As of September 30, 2000, we had 101 employees, with 53 in general operations, 40 in engineering, including research and development, and eight in sales, administration and finance. Our key employees are subject to non-disclosure and proprietary rights assignment agreements. We have not entered into collective bargaining agreements with any of our employees. We have not experienced any strikes or work stoppages by our employees and believe that our relationship with our employees is good. Facilities Our testing operations are conducted in facilities located in San Jose, Sunnyvale and San Diego, California. These facilities have a total floor space of 46,998 square feet and typically operate 24 hours per day in two or three shifts, seven days per week. We lease a 17,240 square-foot facility in Sunnyvale, California, a 17,140 square-foot facility in San Jose, California and a 12,618 square-foot facility in San Diego, California. We completed the move to our current San Diego facility in June 2000. Our lease for the San Diego facility expires June 30, 2005. Our lease for the Sunnyvale facility expires February 28, 2002, and our lease for the San Jose facility expires April 30, 2003. We believe that we have adequate facilities to accommodate our needs for at least the next 12 months. Litigation We believe that we are not a party to any legal proceedings which would, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Environmental Matters and Compliance Our test operations do not generate significant pollutants. Our operations are subject to regulatory requirements and potential liabilities arising under California laws and regulations governing, among other things, air, emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. We believe that we are in compliance with all applicable environmental laws and regulations. Expenditures on environmental compliance currently represent an insignificant portion of our operating expenses. 49 MANAGEMENT The following table sets forth information regarding our executive officers, directors and key employees as of September 30, 2000:
Name Age Position ---- --- -------- Jen Kao................................. 51 President, Chief Executive Officer and Director Suheil Samaan........................... 50 Senior Vice President, Operations S.C. "Sam" Lee, Ph.D. .................. 53 Senior Vice President, Engineering and Technology Keith Imai.............................. 45 Vice President, Sales and Marketing Steven Liaw............................. 45 Vice President, Technology Hector Santana.......................... 29 Vice President, Finance Alan "Lanny" Ross(1)(2)................. 65 Chairman of the Board and Director Jim Fiebiger, Ph.D.(1)(2)............... 59 Vice Chairman of the Board and Director Terry Gou .............................. 49 Director Bough Lin(1)(2)......................... 48 Director Satoshi Nagata.......................... 53 Director
- -------- (1)Member of the audit committee (2)Member of the compensation committee Jen Kao founded Artest and has served as our President and a member of our Board of Directors since November 1996 and also as our Chief Executive Officer since March 1997. From May 1988 until February 1997, he served as a director and vice president of VLSI Technology, Inc., now Philips Semiconductors, Inc., a semiconductor manufacturing company. Mr. Kao holds an M.S. in electrical engineering from Stanford University and a B.S. in electrical engineering from National Chiao Tung University in Taiwan. Suheil Samaan has served as our Senior Vice President, Operations since August 1998. From March 1997 until July 1998, Mr. Samaan was vice president of worldwide assembly and test operations of VLSI, now Philips. From May 1995 until March 1997, he was director of subcontract assembly and test for VLSI. From September 1988 until May 1995, he served as a manager at VLSI. Mr. Samaan holds an M.S. in physics from San Jose State University. S.C. "Sam" Lee, Ph.D., has served as our Senior Vice President, Engineering and Technology since April 2000. From January 1998 until March 2000, he was senior vice president, analog and mixed signal products at Fairchild Semiconductor International, Inc., a semiconductor manufacturing company. Prior to that, Dr. Lee was president of the semiconductor division at Raytheon Company from April 1994 until December 1997. Dr. Lee received his Ph.D. and M.S. degrees from Ohio State University in electrical engineering and his B.S. in electrophysics from National Chiao Tung University in Taiwan. Keith Imai served as our Director of Sales and Marketing from October 1997 until he was promoted to his present position of Vice President, Sales and Marketing in April 2000. From June 1988 until October 1997, Mr. Imai served as a marketing manager and engineering section head for the Advanced Computing Division at VLSI, now Philips. Mr. Imai received his B.S. in electrical engineering and computer science from the University of California at Berkeley. Steven Liaw has served as our Vice President, Technology since March 1997. From November 1986 until April 1996, he served as an engineering manager at VLSI, now Philips. Mr. Liaw received his B.S. in electrical engineering from Bolton Institute of Technology in the United Kingdom. Hector Santana joined Artest as our Corporate Controller in May 2000, and has served as our Vice President, Finance since June 2000. From July 1994 until May 2000, Mr. Santana was employed by Arthur Andersen LLP, an accounting firm. From September 1998 to May 2000, Mr. Santana served as Arthur Andersen's audit manager for Artest. Mr. Santana holds a B.S. in accounting from Santa Clara University. 50 Alan "Lanny" Ross has served as Chairman of our Board of Directors since March 1997. From February 1996 until September 1999, he served as Chairman of WSMC (Taiwan), a semiconductor manufacturing company. Mr. Ross also served as chairman of the Semiconductor Industry Association in 1994. From 1988 until 1996, he was president of Rockwell International Telecommunications, currently Conexant Systems Incorporated, an IC manufacturing and communications company. He currently serves on the board of directors of Broadcom Corporation, a public company. Mr. Ross holds a B.S. in industrial management from San Diego State University. Jim Fiebiger, Ph.D., has served as Vice Chairman of our Board of Directors since December 1999. He has also served as chief executive officer and chairman of Lovoltech Inc., a private semiconductor company, since December 1999 and as vice chairman of GateField Corporation, a fabless semiconductor company, since February 1999. From June 1996 until February 1999, Dr. Fiebiger was president and chief executive officer of GateField. From December 1987 to September 1993, he was president and chief operating officer of VLSI, now Philips. From October 1993 until June 1996, he was managing director and chairman of Thunderbird Technology, a semiconductor technology licensing company. Dr. Fiebiger is a director of Mentor Graphics and QLogic, which are both public companies. Dr. Fiebiger received his Ph.D. and M.S. degrees in solid state electronics and B.S. in electrical engineering from the University of California at Berkeley. Terry Gou has served as a director on our Board of Directors since March 1997. From January 1995 until the present, Mr. Gou has served as the chairman and chief executive officer of Hon Hai Precision Industry Co. Ltd., a public manufacturing company in Taiwan. He received his B.S. in shipping management from China College of Marine Technology and Commerce. Bough Lin has served as a director on our Board of Directors since March 1997. Since April 1998, Mr. Lin has served as the chief executive officer and chairman of Siliconware Corporation, a semiconductor test company in Taiwan and an affiliate of Artest. He served as vice-chairman of Siliconware Corporation from January 1994 until March 1998. He is the chief executive officer and vice- chairman of Siliconware Precision Industries Company, Ltd., a public semiconductor assembly company in Taiwan whose American Depository Shares are traded on the Nasdaq National Market. See "Certain Transactions and Relationships with Related Parties" and "Business--Competition." Mr. Lin received his B.S. in physical electronics from National Chiao Tung University in Taiwan. Satoshi Nagata served as a director on our Board of Directors from March 1997 until July 1998 and from April 2000 through the present. Since April 1998, Mr. Nagata has served as president and chief executive officer of Mitsui High- tec (USA) Inc., a subsidiary of Mitsui High-tec, Inc., a public IC assembly and leadframe company in Japan. Mr. Nagata served as senior managing director of Mitsui from April 1994 until April 1997 and executive vice president from April 1997 until April 1998. Mr. Nagata has also served as president of Mitsui Asia H/Q Pte, Ltd. since January 1997 and president of MHT America Holdings, Inc. since September 1997. He received his B.L. in law from Tokyo University and M.S. from Stanford University. Board of Directors We currently have six directors. Following our reincorporation as a Delaware corporation, our board of directors will consist of six directors divided into three classes, with each class serving for a term of three years. At each annual meeting of stockholders, directors will be elected by the holders of common stock to succeed the directors whose terms are expiring. Messrs. Nagata and Gou will be Class I directors whose terms will expire in 2000; Messrs. Lin and Ross will be Class II directors whose terms will expire in 2001; and Messrs. Fiebiger and Kao will be Class III directors whose terms will expire in 2002. This classification of the board of directors may delay or prevent a change in control of Artest or in our management. For more information, see "Description of Capital Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware General Corporation Law." 51 Board Committees Audit Committee. We will establish an audit committee composed of independent directors that reviews and supervises our financial controls, including the selection of our independent public accountants, reviews our books and accounts, meets with our officers regarding our financial controls, acts upon recommendations of our independent public accountants and takes further actions as the audit committee deems necessary to complete an audit of our financial statements, as well as other matters that may come before it or as directed by the board of directors. The audit committee will consist of three directors: Messrs. Ross, Fiebiger and Nagata. Compensation Committee. We will also establish a compensation committee that reviews and approves the compensation and benefits for our executive officers, administers our stock option plans and performs other duties as may from time to time be determined by the board of directors. The compensation committee will consist of three directors: Messrs. Ross, Fiebiger and Lin. Director Compensation Currently, directors who are not our employees have received options to purchase an aggregate of 400,000 shares of common stock. Directors also receive reimbursement of out-of-pocket travel expenses for attendance at meetings of our board of directors. Under the 2000 stock incentive plan, non-employee directors will receive automatic option grants upon becoming directors and on the date of each annual meeting of stockholders. The 2000 stock incentive plan also contains a director fee option grant program. Should this program be activated in the future, each non-employee board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of an option with an exercise price below the then fair market value. Non-employee directors will also be eligible to receive discretionary option grants and direct stock issuances under the 2000 Stock Incentive Plan. See "Management-- Benefit Plans." In June 2000, we granted an option to purchase 50,000 shares of common stock at an exercise price of $8.00 per share, which became fully vested and immediately exercisable on June 30, 2000, to each of Alan "Lanny" Ross, Terry Gou, Bough Lin and Satoshi Nagata. In addition, we granted an option to purchase 200,000 shares of common stock at an exercise price of $8.00 per share, which became fully vested and immediately exercisable on June 30, 2000, to Jim Fiebiger. Compensation Committee Interlocks and Insider Participation None of our directors who perform the functions of a compensation committee, other than Mr. Jen Kao, our President and Chief Executive Officer, is an employee of or ever was an employee of Artest. Messrs. Lin, Nagata and Gou, who serve on our board of directors, are affiliated with three of our significant stockholders. See "Certain Transactions and Relationships with Related Parties." None of our executive officers serves on the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or our compensation committee. Executive Officers Our executive officers are appointed by and serve at the discretion of our board of directors. There are no family relationships among any of our directors, officers or key employees. 52 Executive Compensation Summary Compensation Table The following tables set forth information concerning compensation in 1999 of our chief executive officer and our four other most highly compensated executives who earned an annualized salary of more than $100,000 for that year. Although Mr. Bugarin, our Director, Engineering, does not hold an executive officer position, he was included in the table because his annualized salary met the required threshold for 1999. The table also includes two senior executives we hired in 2000. In April 2000, Dr. S.C. "Sam" Lee joined Artest as our Senior Vice President, Engineering and Technology. Dr. Lee's annualized salary for 2000 is $150,000. Also in April 2000, Mr. Imai was promoted to his present position of Vice President, Sales and Marketing with an annualized salary for 2000 of $130,000. In May 2000, Hector Santana joined Artest as our Corporate Controller and was appointed as our Vice President, Finance in June 2000. Mr. Santana's annualized salary for 2000 is $130,000. Summary Compensation Table
Annual Long-Term Compensation(1) Compensation -------------------- ------------ Fiscal Securities Year Salary Bonus Other Underlying All Other Name and Principal Position Ended ($) ($) ($) Options (#) Compensation - --------------------------- ------ -------- ----- ----- ------------ ------------ Jen Kao ............................... 1999 $169,200 -- -- -- $33,887(2) President and Chief Executive Officer Suheil Samaan.......................... 1999 160,500 -- -- -- -- Senior Vice President, Operations Steven Liaw ........................... 1999 132,500 -- -- -- -- Vice President, Technology Keith Imai ............................ 1999 122,500 -- -- -- -- Vice President, Sales and Marketing John Bugarin .......................... 1999 122,000 -- -- -- -- Director, Engineering S.C. "Sam" Lee......................... 1999 -- -- -- -- -- Senior Vice President, Engineering and Technology Hector Santana......................... 1999 -- -- -- -- -- Vice President, Finance
- -------- (1) Excludes other compensation in the form of perquisites and other personal benefits that constitute the lesser of $50,000 or 10% of the total annual salary or bonus in 1999. (2) Includes $15,887 for automobile allowance and $18,000 for premiums paid on a cash surrender value life insurance policy. Option Grants in Fiscal 1999 and through September 30, 2000 We did not grant any stock options to our chief executive officer, our four other most highly compensated executive officers or our other executive officers in fiscal 1999. In 1999, we granted options to purchase an aggregate of 328,000 shares to employees under our 1998 Stock Option Plan at an exercise price equal to the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors. In May 2000, we granted an option to purchase 100,000 shares of common stock to Hector Santana, our Vice President of Finance, at a weighted average exercise price of $8.00 per share. Since March 31, 2000, we have granted options representing 1,172,000 shares, of which 715,000 shares became exercisable on June 30, 2000, at a weighted average exercise price of $8.00 per share. Of those shares, we granted an option to purchase 20,000 shares to Keith Imai, our Vice President, Sales and Marketing. 53 Aggregated Option Exercises in 1999 and Fiscal Year End Option Values The following table sets forth information with respect to option exercises in 1999 and the value of options at December 31, 1999 for our chief executive officer and our four other most highly compensated executive officers. The value of unexercised "in-the-money" options at December 31, 1999 is calculated on the basis of the assumed initial public offering price of $10.00 per share, the midpoint of the range shown on the front cover of the prospectus. Table of Aggregated Option Exercises During 1999 and Option Values at December 31, 1999
Number of Shares of Common Stock Underlying Unexercised Value of Unexercised Common Options and Warrants at In-the-Money Options at Stock Value December 31, 1999 December 31, 1999 Acquired on Realized ------------------------- ------------------------- Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Jen Kao................. -- .11 400,000 600,000 $3,956,000 $5,934,000 Suheil Samaan........... -- .20 60,000 240,000 588,000 2,352,000 Steven Liaw............. -- .10 96,000 144,000 950,400 1,425,600 Keith Imai.............. -- .10 40,000 60,000 396,000 594,000 John Bugarin............ -- .20 24,000 96,000 235,000 940,800
Benefit Plans 2000 Stock Incentive Plan Introduction. Our 2000 stock incentive plan is intended to serve as the successor program to replace our 1998 stock option plan. The 2000 plan will be adopted by our board of directors prior to the completion of this offering and is expected to be approved by our stockholders prior to the consummation of this offering. If approved, the 2000 plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under our 1998 plan will be transferred to the 2000 plan, and no further option grants will be made under the prior 1998 plan. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 2000 plan to those options. Except as otherwise noted below, the transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 2000 plan. Share Reserve. Six million shares of our common stock have been authorized for issuance under the 2000 plan. This share reserve consists of the number of shares we estimate will be carried over from the 1998 plan plus an additional increase of 1,279,567 shares. The share reserve under our 2000 plan will automatically increase on the first trading day in January each calendar year from 2001 through 2005, by an amount equal to 3% of the total number of shares of our common stock outstanding on the last trading day of December in the prior year, but in no event will this annual increase exceed one million shares. In addition, no participant in our 2000 plan may be granted stock options or direct stock issuances for more than 1,000,000 shares of common stock per calendar year. Programs. Our 2000 plan has five separate programs: . the discretionary option grant program, under which eligible employees may be granted options to purchase shares of our common stock at an exercise price not less than the fair market value of those shares on the grant date; . the stock issuance program, under which eligible individuals may be issued shares of our common stock directly through the purchase of such shares at a price not less than their fair market value at the time of issuance or as a bonus tied to the attainment of performance milestones or upon the completion of a specified period of service; 54 . the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below market stock option grants; . the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and . the director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash for the year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 2000 plan include our officers and other employees, our board members and any consultants that we hire. Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a nonstatutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The compensation committee will also have the authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program if that program is put into effect for one or more calendar years. Plan Features. Our 2000 plan will include the features described below. . The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same- day sale program without any cash outlay by the optionee. In addition, the compensation committee will have the authority to provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. . The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including any transferred options from our 1998 plan, in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the shares subject to the surrendered options less the exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the options under our 1998 plan have any stock appreciation rights. Change in Control. The 2000 plan will include the change in control provisions that may result in the accelerated vesting of outstanding option grants and stock issuances described below. . If we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program that is not to be assumed by the successor corporation will immediately become exercisable for all the option shares, and all outstanding unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. 55 . The compensation committee will have complete discretion to grant one or more options that will become exercisable for all the option shares if those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of any outstanding shares under our 2000 plan may be accelerated upon similar terms and conditions. . The compensation committee will also have the authority to grant options which will immediately vest in the event we are acquired, whether or not those options are assumed by the successor corporation. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will vest in connection with a successful tender offer for more than fifty percent of our outstanding voting stock or a change in the majority of our board through one or more contested elections. Such accelerated vesting may occur either at the time of such transaction or upon the subsequent termination of the individual's service. . A number of the options currently outstanding under our 1998 plan will immediately vest if we are acquired by a merger or asset sale. The remainder of those options, however, contain a provision that will result in their termination immediately prior to the consummation of a merger or asset sale. Salary Investment Option Grant Program. If the compensation committee decides to put this program into effect for one or more calendar years, each of our executive officers and other highly compensated employees may elect to reduce his or her base salary for the calendar year by an amount not less than $10,000 nor more than $50,000. Each selected individual who makes such an election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount by which the optionee's salary is reduced under the program. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will receive an option grant for 40,000 shares of common stock on the date such individual joins the board. In addition, on the date of each annual stockholders' meeting held after the effective date of this offering, each non- employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board members, will automatically be granted an option to purchase 10,000 shares of common stock, provided such individual has served on the board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of 10 years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option that are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 40,000-share automatic option grant will vest in a series of four successive annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual 10,000-share automatic option grant will vest upon the optionee's completion of one year of service on our board of directors measured from the grant date. However, the shares will immediately vest in full upon changes in control or ownership, as defined in the 2000 plan, or upon the optionee's death or disability while a board member. 56 Director Fee Option Grant Program. If this program is put into effect in the future, then each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below- market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the retainer fee election is in effect. However, the option will become immediately exercisable for all the option shares upon the death or disability of the optionee while serving as a board member. Additional Program Features. Our 2000 plan will also have the features described below: . Outstanding options under the salary investment, automatic option grant and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The board of directors may amend or modify the 2000 plan at any time, subject to any required stockholder approval. The 2000 plan will terminate no later than October, 2010. Employee Stock Purchase Plan Our employee stock purchase plan will be adopted by the board prior to the completion of this offering, and is expected to be approved by the stockholders prior to the consummation of this offering. If approved, the plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of any of our future participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions. We have 250,000 shares of our common stock that will initially be reserved for issuance under the plan. The reserve will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2001, by an amount equal to one percent of the total number of shares of our common stock outstanding on the last trading day of the immediately preceding first fiscal quarter. In no event will any annual reserve increase exceed 250,000 shares. The plan will have a series of successive overlapping offering periods, with a new offering period beginning on the first business day of May and November each year. Each offering period will continue for a period of 24 months, unless otherwise determined by our compensation committee. However, the initial offering period will start on the date the underwriting agreement for this offering is signed and will end on the last business day of October 2002. The next offering period will start on the first business day of May 2001 and end on the last business day of April 2003. 57 Employees scheduled to work more than 20 hours per week for more than five calendar months per year may participate in the plan and may join an offering period on the start date of that period. Employees may participate in only one offering period at any time. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. Semi-annual purchase dates will occur on the last business day of April and October each year, with the first purchase to occur on the last business day of April 2001. The purchase price per share on each semi-annual purchase date will be equal to 85% of the fair market value per share on the start date of the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. However, a participant may not purchase more than 1,500 shares on any purchase date, and not more than 62,500 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the 24-month offering period, then that offering period will automatically terminate, and all participants in the terminated offering period will automatically be transferred to the new offering period commencing immediately thereafter. Should we be acquired by merger or sale of substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price in effect for each participant will be equal to 85% of the market value per share on the start date of the offering period in which the participant is enrolled at the time the acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. The following provisions will also be in effect under the plan: . the plan will terminate no later than the last business day of October 2010; and . the board of directors may at any time amend, suspend or discontinue the plan; however, a number of amendments may require stockholder approval. 401(k) Plan In 1997, we adopted a 401(k) plan covering our full-time employees. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code so that contributions to the 401(k) plan by employees or by us, and the investment earnings thereon, are not taxable to the employees until withdrawn from the 401(k) plan, and so that we can deduct our contributions, if any, when made. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the lesser of 15% of their annual pre-tax gross compensation or the statutorily prescribed annual limit of $10,500 in 2000, and to have the amount of the reduction contributed to the 401(k) plan. Our 401(k) plan permits us, but does not require us, to make additional matching contributions on behalf of a number of plan participants. Employment Contracts, Termination of Employment Arrangement and Change in Control Agreements We have no employment contracts, termination of employment arrangements or change in control agreements with any of our executive officers at this time. 58 Limitation of Liability and Indemnification Our certificate of incorporation eliminates to the maximum extent allowed by the Delaware General Corporation Law, our directors' personal liability to us or our stockholders for monetary damages for breaches of fiduciary duties. Our certificate of incorporation does not, however, eliminate or limit the personal liability of a director for the following: . any breach of the director's duty of loyalty to us or our stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. Our bylaws provide that we shall indemnify our directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify our other officers, employees and other agents as set forth in the Delaware General Corporation Law. In addition, we have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements contain provisions that require us, among other things, to indemnify our directors and executive officers against liabilities, other than liabilities arising from intentional or knowing and culpable violations of law, that may arise by reason of their status or service as directors or executive officers of Artest or other entities to which they provide service at our request and to advance expenses they may incur as a result of any proceeding against them as to which they could be indemnified. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified directors and officers. Prior to the consummation of this offering, we intend to obtain an insurance policy covering directors and officers for claims they may otherwise be required to pay or for which we are required to indemnify them. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 59 CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES Since 1997, there have been no transactions or series of transactions to which we were or are a party in which the amount involved exceeded or exceeds $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons has or will have a direct or indirect material interest, other than the transactions described below. Sales of Securities In March 1997, we issued and sold an aggregate of 14 million shares of our Series A convertible preferred stock for an aggregate purchase price of $14,000,000, or $1.00 per share, to a number of investors, including one million shares to Silicon Foundaries. Siliconware Investment Company, Ltd. purchased six million shares of our Series A convertible preferred stock. Siliconware Precision Industries Company, Ltd., a public semiconductor assembly company in Taiwan, owns Siliconware Investment Company, Ltd. Bough Lin, one of our current directors, is chief executive officer and vice-chairman of Siliconware Precision. As of September 30, 2000, Siliconware Investment owned 32% of the outstanding securities of Siliconware Corporation, a semiconductor test company in Taiwan and an affiliate of Artest, and 31.2% of shares of our common stock outstanding prior to this offering assuming the conversion of all of the Series A preferred stock into our common stock. Bough Lin is the chief executive officer and chairman of Siliconware Corporation. Siliconware Corporation is a competitor of Artest. Bough Lin's ongoing relationship with Siliconware and Artest may present conflict-of-interest situations for the board of directors of Artest. Although the directors of Artest intend to act in a manner consistent with their fiduciary duties to Artest's stockholders, there is a risk that Bough Lin's role as chief executive officer and chairman of Siliconware and his role as a director of Artest will lead to conflicts of interest in connection with transactions that each company may wish to pursue. It is anticipated that Bough Lin will abstain from voting on any matter submitted to a vote of the Artest board of directors involving a conflict of interest with Siliconware. See "Management--Bough Lin." Mitsui High-tec (USA), Inc., formerly International Leadframe Corporation, purchased two million shares of our Series A convertible preferred stock. Satoshi Nagata, one of our current directors, is the president and chief executive officer of Mitsui High-tec (USA). Creative Group Ltd. purchased two million shares of our Series A convertible preferred stock. Creative Group Limited is an investment organization for Hon Hai Precision Co., Ltd. Terry Gou, one of our current directors, is chairman and chief executive officer of Hon Hai. Samuel D.F. Lee purchased one million shares of our Series A convertible preferred stock as the representative of nine individuals, consisting of Jennie K. Hanabusa, Tom J. Kao, Randy Jen-Yang Kao, A-Jen Lin, Le-Li Kuan, Chao-Yi Yu, Chiu-Jong Huang, Chialie Sun Chen and Tian-Fuh Tseng. Jennie K. Hanabusa is the sister of Jen Kao, our president and chief executive officer, and Tom Kao and Randy Kao are Jen Kao's brothers. In April 2000, Mr. Lee transferred 100,000 shares of Series A convertible preferred stock to Ms. Hanabusa, 100,000 shares of Series A convertible preferred stock to Mr. Tom Kao and 100,000 shares of Series A convertible preferred stock to Mr. Randy Kao. Fairchild Transaction In September 1999, we entered into an equipment purchase and engineering test services agreement with Fairchild. Pursuant to that agreement, we purchased test equipment for $865,000 and, until the end of the lease term at June 30, 2000, were obligated to pay $5,840 per month as a user fee for the rental of facilities. Dr. S.C. "Sam" Lee, currently our Senior Vice President, Engineering and Technology, served as a senior vice president of Fairchild at the time we entered into the agreement. 60 Agreements with Officers and Directors We conduct business with Siliconware Precision of which Mr. Bough Lin, one of our current directors, is the chief executive officer and vice-chairman. We received purchase orders representing approximately $63,000 from Siliconware Precision in 1998. Also, Mr. Bough Lin is the chief executive officer and chairman of Siliconware Corporation, a semiconductor test company in Taiwan and an affiliate of Artest. In 1999, we sold a test handler to Siliconware Corporation for approximately $144,000. We recognized a gain of $87,000 from the $144,000 received from Siliconware Corporation for the test handler. See "--Sales of Securities" above. See "Management--Bough Lin." We have granted options and issued common stock to our executive officers and directors. See "Management--Board of Directors--Director Compensation" and "Principal Stockholders." We have entered into an indemnification agreement with each of our executive officers and directors. See "Management--Limitation of Liability and Indemnification." We have entered non-disclosure proprietary rights assignment agreements with our key employees. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties. All future transactions, including loans, if any, between Artest and our officers, directors and principal stockholders and their affiliates and any transactions between Artest and any entity with which our officers, directors or five percent stockholders are affiliated will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors of the board of directors and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 61 PRINCIPAL STOCKHOLDERS The table below sets forth information regarding the beneficial ownership of our common stock as of September 30, 2000, by the following individuals or groups: . each person or entity who is known by us to own beneficially more than 5% of our outstanding common stock; . each of our named executive officers; . each of our directors; and . all directors and executive officers as a group. Each stockholder's percentage ownership in the following table is based on 19,279,567 shares of common stock outstanding as of September 30, 2000, as adjusted to assume the conversion of all 14 million outstanding shares of our Series A convertible preferred stock into our common stock on a one-for-one basis. Each stockholder's percentage ownership after this offering assumes the issuance of 5,000,000 shares of our common stock in this offering for an assumed total of 24,279,567 shares outstanding after this offering. For purposes of calculating each stockholder's percentage ownership, any shares of common stock as to which the stockholder has sole or shared voting power and any options or warrants exercisable within 60 days after September 30, 2000 held by a stockholder listed in the table below are treated as outstanding shares. As of September 30, 2000, we had 25 stockholders. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Artest Corporation, 678 Almanor Avenue, Sunnyvale, California 94085. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them. Unless otherwise indicated, we have assumed each share of our Series A convertible preferred stock converts into one share of our common stock. 62
Shares Shares Beneficially Owned Beneficially Prior to the Owned After the Offering Offering ------------------ ----------------- Name and Address Number Percent Number Percent - ---------------- ---------- ------- --------- ------- Siliconware Investment Company, Ltd.(1)............... 6,000,000 31.1% 6,000,000 24.7% Fl. 9, No. 105 Tun Hwa S. Road, Sec. 2. Taipei 106, Taiwan ROC Creative Group Limited................................ 2,000,000 10.4 2,000,000 8.2 c/o Hon Hai Precision Industries Co., Ltd. No. 2 Tzu Yu Street, Tu-cheng City, Taipei Hsien 236, Taiwan Mitsui High-tec (USA), Inc., formerly International Leadframe Corporation................... 2,000,000 10.4 2,000,000 8.2 2001 Gateway Place, Suite 201 East Tower San Jose, California 95110 Silicon Foundries..................................... 1,000,000 5.2 1,000,000 4.2 4F, No. 12, Huang-Hua E. 1st Street Hsin Chu, Taiwan Jen Kao(2)............................................ 5,866,667 29.1 5,866,667 23.3 Suheil Samaan(3)...................................... 135,000 * 135,000 * S.C. "Sam" Lee........................................ -- * -- * Steven Liaw(4)........................................ 192,000 * 192,000 * Keith Imai(5)......................................... 83,333 * 83,333 * Hector Santana........................................ -- * -- * Alan "Lanny" Ross(6).................................. 277,500 1.4 277,500 1.1 Jim Fiebiger(7)....................................... 200,000 1.0 200,000 * Terry Gou(8).......................................... 2,050,000 10.6 2,050,000 8.4 Bough Lin(9).......................................... 6,050,000 31.3 6,050,000 24.9 Satoshi Nagata(10).................................... 2,050,000 10.6 2,050,000 8.4 John Bugarin(11)...................................... 60,000 * 60,000 * Directors and Executive Officers as a Group (11 persons)............................................ 16,772,500 79.8 64.5%
- -------- * Less than one percent of the outstanding shares of our common stock. (1) Siliconware Investment Company, Ltd. owns approximately 32% of Siliconware Corporation, a semiconductor test company in Taiwan and an affiliate of Artest. Siliconware Investment is a fully-owned subsidiary of Siliconware Precision Industries Company, Ltd. Mr. Bough Lin, one of our directors, is the chief executive officer and vice-chairman of Siliconware Precision and the chief executive officer and chairman of Siliconware Corporation. See "Management--Bough Lin,""Certain Transactions and Relationships with Related Parties" and "Business-- Competition." (2) Includes 5,000,000 shares of our common stock owned by the Jen Kao and Chia-Yin Kao Revocable Trust, dated August 13, 1998, for which Mr. Kao is a trustee. Also includes 866,667 shares issuable upon exercise of stock options held by Mr. Kao. (3) Includes 135,000 shares issuable upon exercise of stock options held by Mr. Samaan. (4) Includes 192,000 shares issuable upon exercise of stock options held by Mr. Liaw. (5) Includes 83,333 shares issuable upon exercise of stock options held by Mr. Imai. (6) Includes 50,000 shares issuable upon exercise of stock options held by Mr. Ross. (7) Includes 200,000 shares issuable upon exercise of stock options by Dr. Fiebiger. (8) Includes 2,000,000 shares owned by Creative Group Limited, which is an investment organization for Hon Hai Precision Industry Co., Ltd. Mr. Gou is chairman and chief executive officer of Hon Hai Precision Industry Co., Ltd. Also includes 50,000 shares issuable upon exercise of stock options held by Mr. Gou. (9) Includes 6,000,000 shares owned by Siliconware Investment Company, Ltd., a fully-owned subsidiary of Siliconware Precision Industries Company, Ltd. Mr. Lin is chief executive officer and vice-chairman of Siliconware Precision Industries Company, Ltd. See "Certain Transactions and Relationships with Related Parties." Also includes 50,000 shares issuable upon exercise of stock options held by Mr. Lin. (10) Includes 2,000,000 shares owned by Mitsui High-tec (USA), formerly International Leadframe Corporation. Mr. Nagata is president and chief executive officer of Mitsui High-tec (USA). Also includes 50,000 shares issuable upon exercise of stock options held by Mr. Nagata. (11) Includes 60,000 shares issuable upon exercise of stock options held by Mr. Burgarin. 63 DESCRIPTION OF CAPITAL STOCK General At the closing of this offering, we will be authorized to issue 90,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated preferred stock, $0.001 par value, after giving effect to the amendment of our certificate of incorporation to delete references to the existing preferred stock following conversion of that preferred stock. The following description of capital stock gives effect to our restated certificate of incorporation to be filed prior to the closing of this offering. Immediately following the closing of this offering and assuming no exercise of the underwriters' over- allotment option, an aggregate of 24,279,567 shares of common stock will be issued and outstanding, and no shares of preferred stock will be issued and outstanding. The following description of our capital stock is subject to and qualified by our restated certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part. Common Stock The holders of our common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to preferences that may be applicable to any outstanding preferred stock that may come into existence, the holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividends. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Our common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of our common stock are fully paid and nonassessable, and the shares of common stock to be outstanding upon completion of this offering will be fully paid and nonassessable. Preferred Stock Our board of directors is authorized to issue from time to time, without stockholder authorization, in one or more designated series, any or all of our authorized but unissued shares of preferred stock with any dividend, redemption, conversion and exchange provisions as may be provided in the particular series. Any series of preferred stock may possess voting, dividend, liquidation and redemption rights superior to those of the common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. Our issuance of a new series 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 to remove our board of directors and making it more difficult for a third-party to acquire, or discourage a third-party from acquiring, a majority of our outstanding voting stock. We have no present plans to issue any shares of or designate any series of preferred stock. Registration Rights Pursuant to a stock purchase agreement we entered into with holders of 14,000,000 shares of our Series A convertible preferred stock, the holders of these shares are entitled to registration rights. The registration rights provide that if we propose to register any securities under the Securities Act, they are entitled to notice of the registration and are entitled to include shares of their common stock in such registration. This right is subject to conditions and limitations, including the right of the underwriters in an offering to limit the number of shares included in the registration. We are required to use our best efforts to effect this registration, subject to conditions and limitations. Each holder of our Series A convertible preferred stock has waived its registration rights with respect to this offering. 64 Compliance with California Law We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, a number of provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect a few members of our board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval; . places limitations on the distribution of dividends; . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market and that we will have at least 800 stockholders of record by the record date for our 2001 annual meeting of stockholders. If these two conditions occur, then we will not be subject to Section 2115 as of the record date for our 2001 annual meeting of stockholders. Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware General Corporation Law Provisions of Delaware law, our certificate of incorporation and our bylaws could have the effect of delaying or preventing a third party from acquiring us, even if the acquisition would benefit our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by the board of directors and to discourage types of transactions that may involve an actual or threatened change of control of Artest. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares, or an unsolicited proposal for the restructuring or sale of all or part of Artest. We are subject to Section 203 of the Delaware General Corporation Law, which could discourage a takeover. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: (i)persons who are directors and also officers; and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or 65 . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; . subject to a number of exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. In addition, provisions of our certificate of incorporation and bylaws may have an anti-takeover effect. These provisions may delay, defer or prevent a tender offer or takeover attempt of our company that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. See "Risk Factors--Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a takeover." The following summarizes these provisions. Classified Board of Directors. Our certificate of incorporation provides that at the first annual meeting of stockholders following the closing of our initial public offering, our board of directors will be divided into three classes of directors, as nearly equal in size as is practicable, serving staggered three-year terms. As a result, approximately one-third of the board of directors will be elected each year. These provisions, when coupled with the provisions of our certificate of incorporation and bylaws authorizing our board of directors to fill vacant directorships or increase the size of our board, may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors. Stockholder Action; Special Meeting of Stockholders. Our certificate of incorporation eliminates the ability of stockholders to act by written consent. Our bylaws provide that special meetings of our stockholders may be called only by our Chief Executive Officer, President, Chairman of the Board or a majority of our board of directors. Advance Notice Requirements for Stockholders Proposals and Directors Nominations. Our bylaws provide that stockholders seeking to bring business before any meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide our secretary with written notice of their proposal not less than one-hundred twenty (120) days before such meeting. Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock are available for our board to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of our authorized but unissued shares of common stock 66 and preferred stock could render more difficult or discourage an attempt to obtain control of our company by means of a proxy context, tender offer, merger or other transaction. Supermajority Vote Provisions. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation includes supermajority vote provisions that require the affirmative vote of the holders of at least two-thirds of the combined voting power of all then-outstanding shares of our voting capital stock in order to amend the provisions of our certificate of incorporation relating to the classified board of directors and the elimination of action by written consent of stockholders. Indemnification. Our bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. We intend to enter into indemnification agreements with all of our directors and executive officers and intend to purchase directors' and executive officers' liability insurance. Transfer Agent and Registrar Our transfer agent and registrar for our common stock is Equiserve. Its telephone number is (781) 575-2294. 67 SHARES AVAILABLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities. Upon the completion of this offering we will have 24,279,567 shares of common stock outstanding, including the issuance of 5,000,000 shares of common stock in this offering and excluding: . 3,984,000 shares of common stock issuable upon the exercise of stock options outstanding as of September 30, 2000 at a weighted average exercise price of $2.71 per share, 715,000 of which were granted on June 15, 2000 at a weighted average exercise price of $8.00 per share and became fully vested and immediately exercisable on June 30, 2000; and . 736,433 shares of common stock reserved for issuance under our stock option plans at September 30, 2000. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our "affiliates," as that term is defined in Rule 144 promulgated under the Securities Act, may only be sold in compliance with the limitations described below. The remaining 19,279,567 shares of common stock will be deemed "restricted securities" as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act. Subject to the lock-up agreements described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows:
Number of Shares Date ---------- ------------------------------------------------------------------- 5,512,500 after the date of this prospectus, freely tradable shares sold in this offering and shares saleable under Rule 144(k) that are not subject to the 180-day lock-up; -- after 90 days from the date of this prospectus shares saleable under Rule 701 (subject to repurchase by us) and Rule 144 (subject in a number of cases, to volume limitations) that are not subject to the 180-day lock-up; 18,767,067 after 180 days from the date of this prospectus, the 180-day lock- up is released and these shares are saleable under Rule 144 (subject, in a number of cases, to volume limitations), Rule 144(k) or Rule 701 (subject to repurchase by us); and -- after 180 days from the date of this prospectus, restricted securities that are held for less than one year and are not yet saleable under Rule 144.
Rule 144 In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including any of our affiliates, who has beneficially owned shares for at least one year, including the holding period of any prior owner who is not an affiliate, 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 one percent of the then-outstanding shares of our common stock, which will be approximately 242,795 shares immediately after this offering, or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to a number of restrictions. In addition, a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, would be entitled to sell these 68 shares under Rule 144(k) without regard to the volume limitations described above. To the extent that shares were acquired from one of our affiliates, a person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. Rule 701 Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144, but without compliance with some of the restrictions of Rule 144, including the holding period requirement, of Rule 144. Any employee, officer or director or consultant to Artest who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their Rule 701 shares in reliance on Rule 701 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. Stock Options At September 30, 2000, options to purchase a total of 3,984,000 shares of common stock were outstanding, and pursuant to those options, 2,325,633 shares were exercisable. We intend to file a Form S-8 registration statement under the Securities Act to register all shares of common stock issuable under our option plans. Accordingly, shares of common stock underlying these options will be eligible for sale in the public markets, subject to vesting restrictions or the lock-up agreements described below. See "Management--Benefit Plans." Lock-up Agreements All of our officers and directors who own stock and substantially all of our securityholders have agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Robertson Stephens, Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, Robertson Stephens, Inc. may, in its sole discretion release all or any portion of the securities subject to these lock-up agreements. See "Underwriting--Lock-Up Agreements." Registration Rights Following this offering, under specified circumstances and subject to customary conditions, holders of approximately 14,000,000 shares of our outstanding common stock, received through the conversion of our Series A convertible preferred stock, will have demand registration rights with respect to their shares of common stock, subject to the 180-day lock-up arrangement described above, to require us to register their shares of common stock under the Securities Act, and rights to participate in any future registrations of securities. If the holders of these registrable securities request that we register their shares, and if the registration is effected, these shares will become freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See "Description of Capital Stock-- Registration Rights." 69 UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of the common stock applicable to Non-United States Holders of our common stock. For the purpose of this discussion, a Non-United States Holder is any holder that for U.S. federal income tax purposes is not a U.S. person. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant in light of a Non-United States Holder's particular facts and circumstances, such as being a U.S. expatriate, and does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. We have not and will not seek a ruling from the Internal Revenue Service with respect to the U.S. federal income and estate tax consequences described below, and as a result, there can be no assurance that the Internal Revenue Service will not disagree with or challenge any of the conclusions set forth in this discussion. For purposes of this discussion, the term U.S. person means: . a citizen or resident of the United States; . a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or any political subdivision thereof; . an estate whose income is included in gross income for U.S. federal income tax purposes regardless of its source; or . a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust. Dividends If we pay a dividend, any dividend paid to a Non-United States Holder of common stock generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. Dividends received by a Non-United States Holder that are effectively connected with a U.S. trade or business conducted by the Non-United States Holder are exempt from such withholding tax. However, those effectively connected dividends, net of applicable deductions and credits, are taxed at the same graduated rates applicable to U.S. persons. Dividends received by a corporate Non-United States Holder that are effectively connected with a U.S. trade or business of the corporate Non-United States Holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. A Non-United States Holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the Internal Revenue Service. Gain on Disposition of Common Stock A Non-United States Holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of his or her common stock unless: . the gain is effectively connected with a U.S. trade or business of the Non-United States Holder (which gain, in the case of a corporate Non- United States Holder, must also be taken into account for branch profits tax purposes); . the Non-United States Holder is an individual who holds his or her common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and other conditions are met; or 70 . Artest is or has been a "United States real property holding corporation" for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder's holding period for its common stock. Artest has determined that it is not and does not believe that it will become a "United States real property holding corporation" for U.S. federal income tax purposes. Backup Withholding and Information Reporting Generally, we must report annually to the Internal Revenue Service the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld with respect to the dividend. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the Internal Revenue Service may make its reports available to tax authorities in the recipient's country of resident. Dividends paid to a Non-United States Holder at an address within the U.S. may be subject to backup withholding at a rate of 31% if the Non-United States Holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payer. Backup withholding will generally not apply to dividends paid to Non-United States Holders at an address outside the U.S. on or prior to December 31, 2000 unless the payer has knowledge that the payee is a United States person. Under recently finalized Treasury Regulations regarding withholding and information reporting, payment of dividends to Non-United States Holders at an address outside the U.S. after December 31, 2000 may be subject to backup withholding at a rate of 31% unless such Non-United States Holder satisfies applicable certification requirements. Under current Treasury Regulations, the payment of the proceeds of the disposition of common stock to or through the U.S. office of a broker is subject to information reporting and backup withholding at a rate of 31% unless the holder certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Generally, the payment of the proceeds of the disposition by a Non-United States Holder of common stock outside the U.S. to or through a foreign office of a broker will not be subject to backup withholding but will be subject to information reporting requirements if the broker is: . a U.S. person; . a "controlled foreign corporation" for U.S. federal income tax purposes; or . a foreign person 50% or more of whose gross income for a number of periods is from the conduct of a U.S. trade or business; unless the broker has documentary evidence in its files of the Non-United States Holders' non-U.S. status and other conditions are met, or the holder otherwise establishes an exemption. Neither backup withholding nor information reporting generally will apply to a payment of the proceeds of a disposition of common stock by or through a foreign office of a foreign broker not subject to the preceding sentence. In general, the recently promulgated final Treasury Regulations, described above, do not significantly alter the substantive withholding and information reporting requirements but would alter the procedures for claiming benefits of an income tax treaty and change the certification procedures relating to the receipt by intermediaries of payments on behalf of the beneficial owner of shares of common stock. Non-United States Holders should consult their tax advisors regarding the effect, if any, of those final Treasury Regulations on an investment in the common stock. Those final Treasury Regulations are generally effective for payments made after December 31, 2000. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the Internal Revenue Service. 71 Estate Tax An individual Non-United States Holder who owns common stock at the time of his or her death or had made lifetime transfers of an interest in common stock will be required to include the value of that common stock in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. The foregoing discussion is only a summary of the principal federal income and estate tax consequences of the ownership, sale or other disposition of common stock by Non-United States Holders. Investors are urged to consult their own tax advisors with respect to the income tax consequences of the ownership and disposition of common stock, including the application and effect of the laws of any state, local, foreign or other taxing jurisdiction. 72 UNDERWRITING The underwriters named below, acting through their representatives, Robertson Stephens, Inc. and CIBC World Markets Corp. have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their names below at the public offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriters are committed to purchase and pay for all shares if any are purchased.
Number of Underwriter Shares ----------- --------- Robertson Stephens, Inc. ......................................... CIBC World Markets Corp. ......................................... --------- Total........................................................... 5,000,000 =========
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to various dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction of this type will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30- day period after the date of this prospectus, to purchase up to 750,000 additional shares of common stock to cover over-allotments, if any, at the same price per share that we will receive for the 5,000,000 shares that the underwriters have agreed to purchase. If the underwriters exercise their over- allotment option to purchase any of the additional 750,000 shares of common stock, the underwriters have severally agreed, subject to a number of conditions, to purchase additional shares approximately in proportion to the amount specified in the table above. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 5,000,000 shares are being sold. We will be obligated, under the terms of the option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock in this offering. The following table summarizes the compensation that we will pay to the underwriters:
Total ------------------- Without With Per Over- Over- Share allotment allotment ----- --------- --------- Underwriting discounts and commissions paid by us............................................ $ $ $
We estimate the expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $2,000,000. 73 Indemnity The underwriting agreement contains covenants of indemnity among the underwriters and us against a number of civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each of our directors and executive officers, all of our stockholders and substantially all of our optionholders have agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Robertson Stephens, Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, Robertson Stephens, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our stockholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of Robertson Stephens, Inc., subject to a number of exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock- up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of options under existing stock option and incentive plans provided that those options do not vest prior to the expiration of the lock-up period. Listing We have filed an application seeking approval for quotation on The Nasdaq National Market under the symbol "ARTE." No Prior Public Market Prior to this offering, no public market existed for our common stock. Consequently, the initial public offering price for the common stock offered by this prospectus was determined through negotiations between us and the representatives. Among the factors considered in these negotiations were prevailing market conditions, our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Syndicate Short Sales The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a "covered" short position to the extent that it does not exceed the 750,000 shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce 74 or close out their covered short position either by exercising the over- allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act, they may engage in transactions, including stabilizing bids, or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of our common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that transactions of these types may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Directed Share Program At our request, the underwriters have reserved up to an aggregate of 5% of the shares of common stock offered by this prospectus for sale at the initial public offering price to persons who are directors, officers or employees of Artest, or who are otherwise associated with us and our affiliates, and who have advised us of their desire to purchase such shares. These shares are referred to as the "directed shares." The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares sold to any of the persons for whom they have been reserved. The directed shares will not be subject to the lock-up agreements described above. Any directed shares not purchased will be offered by the underwriters on the same basis as all other shares of common stock offered by this prospectus. We have agreed to indemnify the underwriters who have reserved directed shares against a number of liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares. 75 LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Francisco, California. Legal matters relating to the sale of common stock in this offering will be passed on for the underwriters by Latham & Watkins, Menlo Park, California. EXPERTS The audited financial statements and schedule included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, under the Securities Act a registration statement on Form S-1 including the exhibits, schedule and amendments to the registration statement relating to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedule. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits and schedule. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other document filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the commission at 1-800-SEC-0330. The commission maintains a web site that contains reports, proxy information statements and other information regarding registrants that file electronically with the commission. The address of this website is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law. 76 ARTEST CORPORATION INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants.................................... F-2 Balance Sheets.............................................................. F-3 Statements of Operations.................................................... F-4 Statements of Shareholders' Equity.......................................... F-5 Statements of Cash Flows.................................................... F-6 Notes to Financial Statements............................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Artest Corporation: We have audited the accompanying balance sheets of Artest Corporation (a California corporation) as of June 30, 2000, December 31, 1999 and 1998 and the related statements of operations, shareholders' equity and cash flows for the six months ended June 30, 2000 and for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Artest Corporation as of June 30, 2000, December 31, 1999 and 1998 and the results of its operations and its cash flows for the six months ended June 30, 2000 and for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP San Jose, California September 26, 2000 F-2 ARTEST CORPORATION BALANCE SHEETS (In thousands, except share data)
September 30, 2000 December 31, Pro Forma --------------- June 30, September 30, Shareholders' 1998 1999 2000 2000 Equity ------- ------- -------- ------------- ------------------ (unaudited) ASSETS Current Assets: Cash and cash equivalents................ $ 8,422 $11,626 $10,003 $ 9,056 Restricted cash.......................... 1,328 1,684 1,752 1,712 Accounts receivable, net of allowance of $10, $60, $60, and $75, respectively... 1,211 1,700 3,526 4,465 Prepaid expense and other current assets................................. -- 67 741 1,509 Deferred income tax asset--current....... 69 166 166 166 ------- ------- ------- ------- Total current assets.................. 11,030 15,243 16,188 16,908 Property and Equipment, net................ 6,132 8,220 16,642 18,555 Deferred Income Tax Asset and Other Assets................................... 166 448 476 485 Restricted cash--Long term................. 3,172 566 498 538 ------- ------- ------- ------- $20,500 $24,477 $33,804 $36,486 ======= ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable--current portion........... $ 1,328 $ 1,684 $ 3,203 $ 3,659 Accounts payable......................... 129 1,259 4,920 4,053 Accrued liabilities...................... 530 156 318 361 Income tax payable....................... 213 1,387 510 812 ------- ------- ------- ------- Total current liabilities............. 2,200 4,486 8,951 8,885 Notes payable--long-term portion........... 3,984 3,825 7,307 9,606 ------- ------- ------- ------- Total liabilities..................... 6,184 8,311 16,258 18,491 ------- ------- ------- ------- Commitments and Contingencies (Note 4) Shareholders' Equity: Series A convertible preferred stock, no par value--14,000,000 shares authorized, issued and outstanding..... 14,000 14,000 14,000 14,000 $ -- Common stock, no par value: 24,000,000 authorized at December 31, 1999 and pro forma, respectively; 5,240,000, 5,246,000, 5,259,567, and 5,279,567 shares outstanding at December 31, 1998, December 31, 1999, June 30, 2000, and September 30, 2000, respectively, and 19,279,567 shares outstanding pro forma.................. 53 1,740 2,340 2,350 16,350 Deferred stock-based compensation........ -- (1,467) (1,022) (818) (818) Retained earnings........................ 263 1,893 2,228 2,463 2,463 ------- ------- ------- ------- ------- Total shareholders' equity............ 14,316 16,166 17,546 17,995 $17,995 ------- ------- ------- ------- ======= $20,500 $24,477 $33,804 $36,486 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 ARTEST CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share data)
Nine Months Year Ended Ended December 31, September 30, ---------------------- Six Months Ended --------------- 1997 1998 1999 June 30, 2000 1999 2000 ------ ------ ------ ---------------- ------ ------- (unaudited) Revenues............................ $1,042 $3,413 $7,994 $6,849 $5,911 $12,770 Cost of revenues.................... 724 2,573 3,648 3,560 2,471 7,486 ------ ------ ------ ------ ------ ------- Gross profit................... 318 840 4,346 3,289 3,440 5,284 ------ ------ ------ ------ ------ ------- Operating expenses: Selling, general and administrative ................. 694 1,352 1,621 1,287 1,081 2,215 Research and development.......... -- -- -- 139 -- 367 Amortization of stock-based compensation(1)................. -- -- 219 1,043 71 1,247 ------ ------ ------ ------ ------ ------- Total operating expenses....... 694 1,352 1,840 2,469 1,152 3,829 ------ ------ ------ ------ ------ ------- Income (loss) from operations....... (376) (512) 2,506 820 2,288 1,455 Other Income (Expense): Interest income................... 405 533 592 329 440 467 Realized gain from sale of investments and dividend income.......................... 366 438 -- -- -- -- Realized gain from sale of equipment....................... -- -- 87 -- -- -- Interest expense.................. (10) (342) (325) (251) (236) 487 ------ ------ ------ ------ ------ ------- Total other income (expense)... 761 629 354 78 204 (20) ------ ------ ------ ------ ------ ------- Income before provision for income taxes................. 385 117 2,860 898 2,492 1,435 Provision for income taxes.......... 169 70 1,230 563 1,071 865 ------ ------ ------ ------ ------ ------- Net income.......................... $ 216 $ 47 $1,630 $ 335 1,421 570 ====== ====== ====== ====== ====== ======= Net income per share(2): Basic............................. $0.041 $0.009 $0.311 $0.064 $0.271 $ 0.108 ====== ====== ====== ====== ====== ======= Diluted........................... $0.014 $0.002 $0.074 $0.015 $0.066 $ 0.026 ====== ====== ====== ====== ====== ======= Shares used for net income per share(2): Basic............................. 5,240 5,240 5,241 5,249 5,240 5,254 ====== ====== ====== ====== ====== ======= Diluted........................... 15,740 21,055 21,927 21,922 21,549 21,909 ====== ====== ====== ====== ====== =======
- -------- (1) For the year ended December 31, 1999, amortization of deferred stock-based compensation includes $100 related to cost of revenues, and $119 related to selling, general and administrative expense. For the six months ended June 30, 2000, amortization of deferred stock-based compensation includes $315 related to cost of revenues and $728 related to selling, general and administrative expense. For the nine months ended September 30, 1999, amortization of deferred stock-based compensation includes $12 related to cost of revenues and $59 related to selling, general and administrative expense. For the nine months ended September 30, 2000, amortization of deferred stock-based compensation includes $471 related to cost of revenues and $776 related to selling, general and administrative expense. (2) No pro forma net income per share is presented for the year ended December 31, 1999, the six months ended June 30, 2000, and the nine months ended September 30, 2000 because the amounts would be the same as diluted net income per share for those periods. The accompanying notes are an integral part of these financial statements. F-4 ARTEST CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data)
Series A Convertible Preferred Stock Common Stock Deferred ------------------ ---------------- Stock-Based Retained Shares Amount Shares Amount Compensation Earnings Total ---------- ------- --------- ------ ------------ -------- ------- Issuance of common stock................ -- $ -- 5,240,000 $ 53 $ -- $ -- $ 53 Issuance of Series A convertible preferred stock................ 14,000,000 14,000 -- -- -- -- 14,000 Net income............ -- -- -- -- -- 216 216 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1997.................. 14,000,000 14,000 5,240,000 53 -- 216 14,269 Net income............ -- -- -- -- -- 47 47 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1998.................. 14,000,000 14,000 5,240,000 53 -- 263 14,316 Exercise of stock options............. -- -- 6,000 1 -- -- 1 Deferred stock-based compensation........ -- -- -- 1,686 (1,686) -- -- Amortization of deferred stock-based compensation........ -- -- -- -- 219 -- 219 Net income............ -- -- -- -- -- 1,630 1,630 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1999.................. 14,000,000 14,000 5,246,000 1,740 (1,467) 1,893 16,166 Exercise of stock options............. -- -- 13,567 2 -- -- 2 Deferred stock-based compensation........ -- -- -- 598 (598) -- -- Amortization of deferred stock-based compensation........ -- -- -- -- 1,043 -- 1,043 Net income............ -- -- -- -- -- 335 335 ---------- ------- --------- ------ ------- ------ ------- Balance, June 30, 2000.. 14,000,000 14,000 5,259,567 2,340 (1,022) 2,228 17,546 ---------- ------- --------- ------ ------- ------ ------- Exercise of stock options............. -- -- 20,000 10 -- -- 10 Amortization of deferred stock-based compensation........ -- -- -- -- 204 -- 204 Net income............ -- -- -- -- -- 235 235 ---------- ------- --------- ------ ------- ------ ------- Balance, September 30, 2000.............. 14,000,000 $14,000 5,279,567 $2,350 $ (818) $2,463 $17,995 ========== ======= ========= ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-5 ARTEST CORPORATION STATEMENTS OF CASH FLOWS (In thousands)
Six Months Nine Months Ended Ended September Year Ended December 31, June 30, ------------------------- 30, ----------------- 1997 1998 1999 2000 1999 2000 ------- ------- ------- ------- ------- -------- (unaudited) Cash flows from operating activities: Net income..................................... $ 216 $ 47 $ 1,630 $ 335 $ 1,421 $ 570 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................. 175 1,075 1,674 1,287 1,209 2,459 Amortization of deferred stock-based compensation............................... -- -- 219 1,043 71 1,247 Realized gain from sale of investments and dividend income............................ (366) (438) -- -- -- -- Realized gain from sale of equipment......... -- -- (87) -- -- -- Changes in assets and liabilities: Accounts receivable........................ (693) (518) (489) (1,826) (631) (2,765) Prepaid expense............................ -- -- (67) (674) (34) (1,442) Deferred tax asset and other assets........ (78) (157) (379) (28) (240) (37) Accounts payable........................... 3,062 (2,932) 1,130 3,661 1,084 2,794 Accrued liabilities........................ 280 250 (374) 162 (376) 205 Income tax payable......................... 233 (19) 1,174 (877) 982 (575) ------- ------- ------- ------- ------- -------- Net cash provided by (used in) operating activities.............................. 2,829 (2,692) 4,431 3,083 3,486 2,456 ------- ------- ------- ------- ------- -------- Cash flows from investing activities: Purchases of property and equipment............ (5,441) (1,942) (3,816) (9,709) (2,398) (12,794) Proceeds from sale of equipment................ -- -- 140 -- -- -- Purchases of available-for-sale short-term investments.................................. (4,000) -- -- -- -- -- Proceeds from sale of available-for-sale short- term investments............................. -- 4,804 -- -- -- -- Restricted cash due to financing of equipment.. -- (4,500) 2,250 -- 2,250 -- ------- ------- ------- ------- ------- -------- Net cash used in investing activities..... (9,441) (1,638) (1,426) (9,709) (148) (12,794) ------- ------- ------- ------- ------- -------- Cash flows from financing activities: Proceeds from issuance of notes payable........ 1,704 5,087 1,649 5,847 635 9,209 Payments on notes payable...................... (114) (1,366) (1,451) (846) (998) (1,453) Proceeds from issuance of common stock......... 53 -- 1 2 -- 12 Proceeds from issuance of Series A convertible preferred stock.............................. 14,000 -- -- -- -- -- ------- ------- ------- ------- ------- -------- Net cash provided by (used in) financing activities.............................. 15,643 3,721 199 5,003 (363) 7,768 ------- ------- ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents................................... 9,031 (609) 3,204 (1,623) 2,975 (2,570) Cash and cash equivalents, beginning of period.. -- 9,031 8,422 11,626 8,422 11,626 ------- ------- ------- ------- ------- -------- Cash and cash equivalents, end of period........ $ 9,031 $ 8,422 $11,626 $10,003 $11,397 $ 9,056 ======= ======= ======= ======= ======= ======== Supplemental disclosure of cash flow information: Cash paid for interest......................... $ 10 $ 314 $ 325 $ 251 $ 236 $ 460 ======= ======= ======= ======= ======= ======== Cash paid for income taxes..................... $ -- $ 253 $ 315 $ 1,440 $ 315 $ 1,440 ======= ======= ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements. F-6 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS As of June 30, 2000, December 31, 1999 and 1998 (Information for the nine months ended September 30, 1999 and 2000 is unaudited) (In thousands except share data and per share data) 1. Organization and Operations of the Company Artest Corporation ("the Company") was incorporated in California on November 18, 1996, opened its first facility in May 1997 and began operations in September of 1997. The Company is an independent provider of comprehensive semiconductor test services with an emphasis on complex analog, digital and mixed signal integrated circuits primarily in the communications and networking industries. The Company provides its customers with a flexible full service solution for their test needs and their services include software test program development, prototype testing and debugging, charterization, verification, wafer sort and final test. The Company sells its services primarily to semiconductor companies located in the United States. The Company is subject to a number of business risks including, but not limited to, dependence on key individuals, key customers, competition from larger companies and the need for the continued successful development, marketing and selling of its engineering and manufacturing test services. 2. Summary of Significant Accounting Policies Use of Estimates in Preparation of Financial Statements 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 disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Interim Financial Statements The unaudited interim financial statements for the nine months ended September 30, 1999 and 2000 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. Results for the nine months ended September 30, 2000 are not necessarily indicative of results in future periods. Cash and Cash Equivalents The Company considers all highly liquid debt instruments or money market- type funds with an original maturity of three months or less to be cash equivalents. Income Taxes The Company accounts for income taxes in Accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-7 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Property and Equipment Property and equipment are stated at cost. Depreciation for all property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are depreciated over the shorter of their useful lives or the term of the lease. As of December 31, 1998 and 1999, June 30, 2000, and September 30, 2000, property and equipment consisted of the following:
December 31, ---------------- June 30, September 30, 1998 1999 2000 2000 ------- ------- -------- ------------- Computers and software............ $ 199 $ 262 $ 367 $ 388 Leasehold improvements............ 627 633 633 932 Furniture and fixtures............ 45 436 439 447 Machinery and equipment........... 6,513 9,815 19,416 22,173 ------- ------- ------- ------- 7,384 11,146 20,855 23,940 Less: accumulated depreciation.... (1,252) (2,926) (4,213) (5,385) ------- ------- ------- ------- $ 6,132 $ 8,220 $16,642 $18,555 ======= ======= ======= =======
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets. Accrued Liabilities As of December 31, 1998 and 1999, June 30, 2000, and September 30, 2000, accrued liabilities consisted of the following:
December 31, ------------- June 30, September 30, 1998 1999 2000 2000 ------ ------ -------- ------------- Payroll and related employee benefits........................... $ 455 $ 149 $318 $330 Other................................ 75 7 -- 31 ------ ------ ---- ---- $ 530 $ 156 $318 $361 ====== ====== ==== ====
Revenue Recognition The Company recognizes revenues on engineering and manufacturing testing services, and assembly support services when the services are completed and there are no significant obligations remaining. The Company's revenues have also included test software and hardware development that is billed in the form of non-recurring engineering charges for time and materials incurred. To date, revenues from non-recurring engineering charges have not been significant. The following table summarizes the percentage of revenues represented by significant customers:
Nine Months Year Ended December 31, Six Months Ended September 30, ------------------------- Ended ------------------- 1997 1998 1999 June 30, 2000 1999 2000 ------- ------- ------- ------------- --------- --------- Customer A........ 82% 43% 60% 40% 61% 27% Customer B........ -- 27% -- -- -- -- Customer C........ -- 13% 15% 7% 17% 8% Customer D........ -- -- 10% 6% 10% 6% Customer E........ -- -- -- 25% -- 40%
F-8 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Concentrations of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. The Company generally does not require collateral on accounts receivable, as the majority of the Company's revenues come from large, well established companies. During the years ended December 31, 1997, 1998 and 1999, and six months ended June 30, 2000, and nine months ended September 30, 2000, the Company provided $0, $10, $50, $0, and $15, respectively, to its allowance for doubtful accounts. The Company did not have any write-offs of uncollectible amounts during 1997, 1998 and 1999, and the six months ended June 30, 2000. However, the Company wrote-off uncollectable amounts during the nine months ended September 30, 2000 of $11. As of September 30, 2000, approximately 67.2% of gross accounts receivable was concentrated with two customers. As of June 30, 2000, approximately 65.6% of gross accounts receivable was concentrated with two customers. As of December 31, 1999, approximately 55.5% of gross accounts receivable was concentrated with two customers. As of December 31, 1998, approximately 71.1% of gross accounts receivable was concentrated with two customers. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This accounting standard permits the use of either a fair value based method or the method defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion 25), to account for stock-based compensation arrangements. Companies that elect to employ the valuation method provided in APB Opinion 25 are required to disclose the pro forma net income that would have resulted from the use of the fair value based method. The Company has elected to determine the value of stock-based compensation arrangements under the provisions of APB Opinion 25 and, accordingly, the pro forma disclosures required under SFAS No. 123 have been included in Note 6. Computation of Per Share Amounts Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128, "Earnings Per Share" (SFAS No. 128) for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net income per common share as if such stock had been outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. In accordance with SFAS No. 128, basic net income per common share has been calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been calculated assuming the conversion of the convertible preferred stock and outstanding stock options. For the year ended December 31, 1997, the Company has excluded 1,000,000 outstanding stock options from the calculation of diluted net income per common share because such securities are anti-dilutive for the period. F-9 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The following table presents the calculation of basic and diluted net income per share:
Six Months Ended Nine Months Ended Year Ended December 31, June 30, September 30, ----------------------- ---------------- ----------------- 1997 1998 1999 2000 1999 2000 ------- ------- ------- ---------------- -------- -------- Net Income...................... $ 216 $ 47 $ 1,630 $ 335 $ 1,421 $ 570 ======= ======= ======= ======= ======== ======== Basic: Weighted average shares used in computing basic net income per share............ 5,240 5,240 5,241 5,249 5,240 5,254 ======= ======= ======= ======= ======== ======== Basic net income per share.... $ 0.041 $ 0.009 $ 0.311 $ 0.064 $ 0.271 $ 0.108 ======= ======= ======= ======= ======== ======== Diluted: Weighted average shares used above....................... 5,240 5,240 5,241 5,249 5,240 5,254 Weighted average dilutive convertible preferred stock....................... 10,500 14,000 14,000 14,000 14,000 14,000 Weighted average dilutive stock options............... -- 1,815 2,686 2,673 2,309 2,655 ------- ------- ------- ------- -------- -------- Weighted average shares used in computing diluted net income per share............ 15,740 21,055 21,927 21,922 21,549 21,909 ======= ======= ======= ======= ======== ======== Diluted net income per share.. $ 0.014 $ 0.002 $ 0.074 $ 0.015 $ 0.066 $ 0.026 ======= ======= ======= ======= ======== ========
No pro forma net income per share calculation is presented for the year ended December 31, 1999, the six months ended June 30, 2000, and the nine months ended September 30, 2000 because the calculations would be the same as diluted net income per share for those periods. Fair Value of Financial Investments For certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, recorded amounts approximate fair value due to the relatively short maturity period. Based on interest rates available to the Company for debt with comparable maturities, the carrying values of the Company's loans payable approximate fair value. Software Development Costs The company accounts for software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be sold, leased or otherwise Marketed." The Company has expensed all software development costs to date and as such development costs have substantially occurred prior to the Company's services attaining technological feasibility. Comprehensive Income In fiscal 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Such items may include foreign currency translation adjustments and unrealized gains/losses from investing and hedging activities. Comprehensive income is the same as net income for all periods presented in the accompanying consolidated financial statements. F-10 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as recently amended, is effective for fiscal years beginning after June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Management believes the adoption of SAB 101 will not have a significant impact on the Company's consolidated results of operations and financial position in fiscal 2000. The Company plans to adopt SAB 101 in the fourth quarter of fiscal 2000. In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25" (FIN No. 44). FIN No. 44 addresses the application of APB No. 25 to clarify, among other issues: (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 is effective as of July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent FIN 44 covers events occurring during the period after December 15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying the interpretation will be recognized on a prospective basis from July 1, 2000. The Company does not expect that FIN 44 will have a material effect on its financial position or results of operations. 3. Notes Payable In November 1997, the Company entered into an equipment note payable agreement with a bank under which it can borrow up to $6,500. Interest on outstanding advances under the credit arrangement range between 7.10% and 7.30%. The credit arrangement expired for additional advances in November 1998. In August 1999, the Company entered into another secured equipment note payable agreement under which it can borrow up to $2,000. Interest on advances under this credit arrangement accrues at the bank's prime lending rate (9.50% at September 30, 2000). The credit arrangement expired for additional advances in August 2000. At December 31, 1998 and 1999, June 30, 2000, and September 30, 2000 total borrowings outstanding under the above credit arrangements were $5,312, $5,509, $5,212, and $4,542 respectively. At December 31, 1998 and 1999, June 30, 2000 and September 30, 2000, the $6,500 equipment note payable agreement was secured by $4,500, $2,250, $2,250, and $2,250 cash and cash equivalents, respectively. The Company's testing equipment which secures this note payable had a carrying amount of $8,902 at September 30, 2000. The cash and cash equivalent amounts which secures the note payable are reflected as restricted cash in the accompanying financial statements. The Company is required to satisfy certain financial covenants which includes the prohibition of the payment of cash dividends without receiving the bank's prior consent, which were all met at December 31, 1999, June 30, 2000 and September 30, 2000. In April 2000, the Company entered into an unsecured equipment note payable agreement with Micro Linear for $4,956. Interest on outstanding advances under the note payable agreement is 6.00%. The notes payable agreement expires April 2003. At September 30, 2000 the total borrowing outstanding is $4,956. The Company is not required to satisfy any financial covenants in connection with this agreement. F-11 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) In January 2000, the Company entered into an unsecured equipment note payable agreement with Quality Test Systems for $389 in connection with the purchase of a tester. The note payable agreement bears zero interest. The note payable agreement expires in March 2003. At September 30, 2000 the total borrowing outstanding is $346. The Company is not required to satisfy any financial covenants in connection with this agreement. On July 10, 2000 the Company entered into a $4,000 notes payable agreement with California Bank and Trust. Interest on outstanding advances under the credit agreement was 9.00% at September 30, 2000. The credit arrangement will expire for additional advances on July 31, 2001. At September 30, 2000 the total borrowings under the credit agreement is $3,421 (unaudited), which is secured by the Company's test equipment with a carrying value of $3,538 (unaudited). Monthly payments will commence in January 2001 and will be amortized over 54 months. Future maturities of principal on the promissory notes and equipment lines of credit as of September 30, 2000 were as follows (for the 12 months ended September 30): 2001.............................................................. $ 3,659 2002.............................................................. 4,508 2003.............................................................. 2,566 2004.............................................................. 1,097 2005 and thereafter............................................... 1,435 ------- $13,265 =======
4. Commitments and Contingencies The Company leases its facilities under operating lease agreements expiring through June 2005. Rent expense for the years ended December 31, 1997, 1998 and 1999, six months ended June 30, 2000 and nine month ended September 30, 2000 was $113, $179, $305, $258, and $487, respectively. Future minimum lease payments as of September 30, 2000 were as follows (for the 12 months ended September 30): 2001.............................................................. $ 824 2002.............................................................. 848 2003.............................................................. 511 2004.............................................................. 177 2005.............................................................. 133 ------ Total........................................................... $2,493 ======
5. Shareholders' Equity On March 28, 1997, the Company issued 14,000,000 shares of Series A convertible preferred stock under the Series A convertible preferred stock Purchase Agreement at one dollar per share. The rights with respect to Series A convertible preferred stock are as follows: Dividends a. Preference. The holders of outstanding Series A convertible preferred stock are entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available, dividends in cash at the rate of $0.08 per share per annum before any dividend is paid on common stock. The right to such dividends on shares of Series A convertible preferred stock is non-cumulative. Such dividend is payable when and as the Board of Directors may from time to time determine. F-12 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) b. Non-Cash Dividends. In the event the Company declares a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Series A convertible preferred stock are entitled to a proportionate share of any such distribution as though the holders of the Series A convertible preferred stock were the holders of the number of shares of common stock of the corporation into which their respective shares of Series A convertible preferred stock are convertible. Liquidation Preference In the event of any liquidation, dissolution or winding up of the Company, either voluntary or, involuntary, the holders of the Series A convertible preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the common stock, the amount of one dollar per share. If upon the occurrence of such event the assets and funds distributed among the holders of the Series A convertible preferred stock are insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Company legally available for distribution are distributed ratably among the holders of the Series A convertible preferred stock. Conversion Each share of Series A convertible preferred stock is convertible at the option of the holder into one share of common stock. Each share of Series A convertible preferred stock will automatically convert into common stock on a one-for-one basis upon the closing of an initial public offering ("IPO"). Voting Each holder of shares of the Series A convertible preferred stock is entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. Unaudited Pro Forma Shareholders' Equity In June 2000, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with a proposed IPO. If the IPO is consummated under the terms presently anticipated, all of the currently outstanding shares of Series A convertible preferred stock as of September 30, 2000 will be converted into 14,000,000 shares of common stock upon the closing of the IPO. The effect of the Series A convertible preferred stock conversion has been reflected as unaudited pro forma shareholders' equity in the accompanying balance sheet as of September 30, 2000. Common Stock At September 30, 2000, the Company had reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of Series A convertible preferred stock outstanding............................................... 14,000,000 Stock option plan........................................... 4,720,433 ---------- 18,720,433 ==========
401(k) Plan Substantially, all of the Company's employees are eligible to participate in the Artest 401(k) Plan. Employer matching contributions for the years ended December 31, 1997, 1998, and 1999, six months ended June 30, 2000, and nine months ended September 30, 2000, were $16, $43, $67, $61, and $127 respectively. F-13 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) 6. Stock Option Plan In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan") and, in accordance with the Plan, as amended, authorized the issuance of 4,760,000 shares of common stock. Under the Plan, the Board of Directors may grant incentive and nonqualified stock options to employees, directors, and consultants of the Company. The exercise price per share for an incentive stock option cannot be less than the fair market value, as determined by the Board of Directors, on the date of the grant. The exercise price per share for nonqualified stock options cannot be less than the fair market value, as determined by the Board of Directors, on the date of grant. Options generally vest over a four-year period and generally expire ten years after the date of grant. Option activity under the Plan was as follows:
Weighted Average Weighted Average Outstanding Options Exercise Price Grant Fair Value ------------------- ---------------- ---------------- Balance at December 31, 1996.................. -- -- -- Granted............... 1,785,000 $0.10 $0.10 Exercised............. -- -- -- Cancellations......... (5,000) 0.10 0.10 --------- ----- ----- Balance at December 31, 1997.................. 1,780,000 0.10 0.10 Granted............... 685,000 0.20 0.20 Exercised............. -- -- -- Cancellations......... -- -- -- --------- ----- ----- Balance at December 31, 1998.................. 2,465,000 0.13 0.13 Granted............... 328,000 0.50 5.64 Exercised............. (6,000) 0.20 0.20 Cancellations......... (24,000) 0.20 0.20 --------- ----- ----- Balance at December 31, 1999.................. 2,763,000 0.17 0.78 Granted............... 1,270,500 8.00 7.55 Exercised............. (13,567) 0.11 0.11 Cancellations......... (8,333) 0.10 0.10 --------- ----- ----- Balance at June 30, 2000.................. 4,011,600 2.65 2.92 Granted............... 1,000 8.00 7.00 Exercised............. (20,000) 0.50 0.50 Cancellations......... (8,600) 5.19 5.19 --------- ----- ----- Balance at September 30, 2000.................. 3,984,000 $2.71 $2.92 ========= ===== =====
The following table summarizes additional information with respect to stock options outstanding as of September 30, 2000:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Weighted Average Weighted Average Weighted Average Range of Exercise Prices Number Remaining Years Exercise Price Number Exercise Price ------------------------ --------- ---------------- ---------------- --------- ---------------- $0.10-0.11.............. 1,760,000 7.21 $0.11 1,332,000 $0.11 0.20................... 650,000 8.21 0.20 269,166 0.20 0.50................... 308,000 9.21 0.50 9,467 0.50 8.00................... 1,266,000 9.66 8.00 715,000 8.00 --------- --------- 3,984,000 2,325,633 ========= =========
F-14 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The Company accounts for these Plans under APB Opinion No. 25 under which compensation expense has been recognized as the grant price was less than the deemed fair market value at date of grant. Had compensation expense for stock options granted to employees been determined based on the fair value of the related options at the grant dates, consistent with SFAS No. 123, the Company's net income and net income per share would have decreased by the pro forma amounts indicated below:
Year Ended December Nine Months Ended 31, September 30, -------------------- Six Months Ended ------------------ Net Income 1997 1998 1999 June 30, 2000 1999 2000 ---------- ------ ------ ------ ---------------- -------- --------- Net income as reported.. $ 216 $ 47 $1,630 $ 335 $1,421 $ 570 Net income pro forma.... 190 4 1,149 (399) 1,285 (526) As Reported: Basic net income per share............... $0.041 $0.009 $0.311 $ 0.064 $0.271 $ 0.108 Diluted net income per share............... 0.014 0.002 0.074 0.015 0.066 0.026 Pro Forma: Basic net income per share............... $0.036 $0.001 $0.219 $(0.076) $0.245 $(0.100) Diluted net income per share............... 0.012 0.000 0.052 (0.018) 0.060 (0.024)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 1999, for six months ended June 30, 2000, and for the nine months ended September 30, 2000: risk-free interest rate range of 4.64%-6.50%; expected dividend yield of zero percent; expected lives of four years; and volatility of common stock of 70%. Stock-based Compensation In connection with the grant of certain stock options to employees during the year ended December 31, 1999, the Company recorded deferred stock-based compensation of approximately $1,686 representing the difference between the deemed value of the common stock for accounting purposes and the option exercise price at the date of the option grant. Such amount is presented as a reduction of stockholders' equity and will be amortized over the vesting period of the applicable options in a manner consistent with Financial Standards Board Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans." Approximately $219, $1,043, and $1,247 was expensed during the year ended December 31, 1999, six months ended June 30, 2000, and the nine months ended September 30, 2000, respectively, and is included in amortization of deferred stock-based compensation in the accompanying statement of operations. The amortization expense relates to options granted to employees in all operations' expense categories. Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder's services. Options Granted to Non-employees In June 2000, the Company granted options to purchase 205,000 shares of common stock to consultants under the 1998 plan. The options had an exercise price of $8.00 per share and vested on June 30, 2000. The Company recorded selling, general, and administrative expense of approximately $598 as deferred compensation based on the fair value of the option at the date of the grant calculated using the Black-Scholes model. F-15 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The following assumptions were used in the Black-Scholes model for calculating the fair value of the non-employee options granted: Risk-free interest rate............................................ 6.00% Average computed life of the option................................ 1.5 years Dividend yield..................................................... 0% Volatility of common stock......................................... 70%
7. Income Tax The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109, "Accounting for Income Taxes"). The provision for income taxes consisted of the following:
Year Ended Nine Months Ended December 31, September 30, ------------------- Six Months Ended ------------------- 1997 1998 1999 June 30, 2000 1999 2000 ---- ----- ------ ---------------- --------- -------- Current: Federal............... $184 $ 178 $1,263 $525 $1,107 $ 317 State................. 48 49 216 86 181 93 Deferred: Federal............... (50) (134) (219) (18) (190) 389 State................. (13) (23) (30) (30) (37) 66 ---- ----- ------ ---- --------- ------- Income tax provision........ $169 $ 70 $1,230 $563 $1,071 $865 ==== ===== ====== ==== ========= =======
The components of the net deferred income tax asset are as follows:
December 31, ------------- June 30, September 30, 1998 1999 2000 2000 ------ ------ -------- ------------- Depreciation and asset basis differences.......................... $ 152 $ 304 $304 $304 Reserves and accruals not currently deductible for tax purposes.......... 69 166 166 166 ------ ------ ---- ---- Deferred income tax asset............ $ 221 $ 470 $470 $470 ====== ====== ==== ====
The Company has been profitable for each of the three years ended December 31, 1999, for the six months ended June 30, 2000 and for the nine months ended September 30, 2000. As a result, management believes it is more likely than not that the Company will generate sufficient taxable income in the future to realize the deferred income tax assets. Accordingly, the Company has not recognized a valuation allowance at December 31, 1998 and 1999, June 30, 2000, and at September 30, 2000. However, given the dynamic nature of the semiconductor engineering and manufacturing test services industry, management can provide no assurance as to the realization of deferred income tax assets. F-16 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The provision for income taxes differs from the amount computed by applying the federal statutory rate to the Company's income before provision for income taxes as follows:
Nine Months Year Ended Ended December 31, Six Months September 30, ---------------- Ended --------------- 1997 1998 1999 June 30, 2000 1999 2000 ---- ---- ------ ------------- ------- ------ Tax provision at statutory rate..................... $135 $41 $1,001 $314 $ 872 $ 502 Non-deductible amortization of deferred stock-based compensation............. -- 90 183 71 226 State tax expense, net of federal benefit.......... 22 7 166 52 144 83 Other, net................. 12 22 (27) 14 (16) 54 ---- --- ------ ---- ------- ------ Provision for income taxes.................... $169 $70 $1,230 $563 $ 1,071 $ 865 ==== === ====== ==== ======= ======
8. Segment Reporting Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The Chief Executive Officer is the Company's chief decision maker. Because the business is completely focused on one industry segment, engineering and manufacturing test services to semiconductor companies, management believes the Company has one reportable segment. All of the revenues and profits are generated through the engineering and manufacturing test services for this one segment. 9. Equipment Purchase On September 29, 1999 the Company entered into an asset purchase agreement with Fairchild Semiconductor Corporation ("Fairchild") under which it purchased certain assets from Fairchild relating to its test operations for cash consideration of $865. The purchase was funded through the Company's bank facility. The entire purchase price consideration was allocated to the fair value of the assets acquired. On April 28, 2000 the Company entered into an asset purchase agreement with Micro Linear Corporation ("Micro Linear") under which it purchased certain assets from Micro Linear relating to its test operations for a value of $5,956 of which $1,000 was paid in cash with the remaining balance settled with the issuance of a promissory note. The entire purchase price consideration was allocated to the fair value of the test equipment acquired. F-17 [Back Page] LOGO ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information contained in this prospectus is not complete and may be + +changed. We may not sell these securities until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +prospectus is not an offer to sell securities, and we are not soliciting + +offers to buy these securities, in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Alternate Page for International Prospectus SUBJECT TO COMPLETION, DATED OCTOBER 17, 2000 [LOGO] Artest Corporation 5,000,000 Shares Common Stock Artest Corporation is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "ARTE." We anticipate that the initial offering price will be between $9.00 and $11.00 per share. -------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 9. --------------
Per Share Total ------ ----- Public Offering Price............................................. $ $ Underwriting Discounts and Commissions............................ $ $ Proceeds to Artest Corporation.................................... $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Artest Corporation has granted the underwriters a 30-day option to purchase up to an additional 750,000 shares of its common stock to cover over- allotments. Robertson Stephens International CIBC World Markets The date of this Prospectus is , 2000 Alternate Page for International Prospectus UNDERWRITING The underwriters named below, acting through their representatives, Robertson Stephens, Inc. and CIBC World Markets Corp. have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth opposite their names below at the public offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriters are committed to purchase and pay for all shares if any are purchased.
Number of Underwriter Shares ----------- --------- Robertson Stephens, Inc. ......................................... CIBC World Markets Corp. .......................................... International Underwriter ------------------------- Robertson Stephens International, Ltd. ............................ CIBC World Markets plc. ........................................... --------- Total............................................................ 5,000,000 =========
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to various dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction of this type will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30- day period after the date of this prospectus, to purchase up to 750,000 additional shares of common stock to cover over-allotments, if any, at the same price per share that we will receive for the 5,000,000 shares that the underwriters have agreed to purchase. If the underwriters exercise their over- allotment option to purchase any of the additional 750,000 shares of common stock, the underwriters have severally agreed, subject to specific conditions, to purchase additional shares approximately in proportion to the amount specified in the table above. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the 5,000,000 shares are being sold. We will be obligated, under the terms of the option, to sell shares to the underwriters to the extent 70 Alternate Page for International Prospectus the over-allotment option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock in this offering. The following table summarizes the compensation that we will pay to the underwriters:
Total ------------------- Without With Per Over- Over- Share allotment allotment ----- --------- --------- Underwriting discounts and commissions paid by us............................................ $ $ $
We estimate the expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $2,000,000. Indemnity The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each of our directors and executive officers and substantially all of our stockholders and optionholders have agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Robertson Stephens, Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, Robertson Stephens, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our stockholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of Robertson Stephens, Inc., subject to specific exceptions, consent to the disposition of any shares held by stockholders subject to lock-up agreements prior to the expiration of the lock- up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of options under existing stock option and incentive plans provided that those options do not vest prior to the expiration of the lock-up period. Listing We have filed an application seeking approval for quotation on The Nasdaq National Market under the symbol "ARTE." No Prior Public Market Prior to this offering, no public market existed for our common stock. Consequently, the initial public offering price for the common stock offered by this prospectus was determined through negotiations between us and the representatives. Among the factors considered in these negotiations were prevailing market conditions, 71 Alternate Page for International Prospectus our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Syndicate Short Sales The representatives have advised us that, on behalf of the underwriters, they may make short sales of our common stock in connection with this offering, resulting in the sale by the underwriters of a greater number of shares than they are required to purchase pursuant to the underwriting agreement. The short position resulting from those short sales will be deemed a "covered" short position to the extent that it does not exceed the 750,000 shares subject to the underwriters' over-allotment option and will be deemed a "naked" short position to the extent that it exceeds that number. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the trading price of the common stock in the open market that could adversely affect investors who purchased shares in the offering. The underwriters may reduce or close out their covered short position either by exercising the over-allotment option or by purchasing shares in the open market. In determining which of these alternatives to pursue, the underwriters will consider the price at which shares are available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Any "naked" short position will be closed out by purchasing shares in the open market. Similar to the other stabilizing transactions described below, open market purchases made by the underwriters to cover all or a portion of their short position may have the effect of preventing or retarding a decline in the market price of our common stock following this offering. As a result, our common stock may trade at a price that is higher than the price that otherwise might prevail in the open market. Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act, they may engage in transactions, including stabilizing bids, or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of our common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in the open market pursuant to a stabilizing bid or to cover all or part of a syndicate short position. The representatives have advised us that transactions of these types may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Directed Share Program At our request, specific underwriters have reserved up to an aggregate of 5% of the shares of common stock offered by this prospectus for sale at the initial public offering price to persons who are directors, officers or employees of Artest, or who are otherwise associated with us and our affiliates, and who have advised us of their desire to purchase such shares. These shares are referred to as the "directed shares." The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares sold to any of the persons for whom they have been reserved. The directed shares will not be subject to the lock-up agreements described above. Any directed shares not purchased will be offered by the underwriters on the same basis as all other shares of common stock offered by this prospectus. We have agreed to indemnify the underwriters who have reserved directed shares against specific liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares. 72 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discounts payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC Registration Fee............................................. $ 16,698 NASD Filing Fee.................................................. 6,825 Nasdaq National Market Listing Fee............................... 5,000 Printing and Engraving Expenses.................................. 300,000 Legal Fees and Expenses.......................................... * Accounting Fees and Expenses..................................... * Blue Sky Fees and Expenses....................................... 10,000 Transfer Agent Fees.............................................. 15,000 Miscellaneous.................................................... * ---------- Total.......................................................... $2,000,000 ==========
- -------- *To be filed by amendment Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit the indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Our bylaws provide for mandatory indemnification of our directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Our certificate of incorporation provides that, subject to Delaware law, our directors will not be personally liable for monetary damages for breach of the directors' fiduciary duty as directors to Artest Corporation and its stockholders. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the company or our stockholders for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We have entered into indemnification agreements with our officers and directors, a form of which will be filed with the Securities and Exchange Commission as an exhibit to our registration statement on Form S-1 (No. 333-40744). The indemnification agreements provide our officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section of the underwriting agreement contained in exhibit 1.1 hereto, indemnifying our officers and directors against certain liabilities, and section 6.4 of the Series A Preferred Stock Purchase Agreement contained in exhibit 4.2 hereto, indemnifying the parties thereto, including controlling stockholders, against liabilities. II-1 Item 15. Recent Sales of Unregistered Securities During the past three years, the registrant has issued unregistered securities to a limited number of persons as described below: Common Stock (1) In March 1997, we sold 5,000,000 shares of our common stock at a price of $0.01 per share to Jen Kao, our President and Chief Executive Officer for a purchase price of $50,000. (2) In March 1997, we sold 240,000 shares of our common stock at a price of $0.01 per share to Alan Ross, Chairman of our Board of Directors for a purchase price of $2,400. (3) In March 1997, we sold 14,000,000 shares of our Series A convertible preferred stock at a price of $1.00 per share to a group of eight investors for an aggregate purchase price of $14,000,000. Stock Options (1) From 1997 through September 2000, we granted stock options to acquire an aggregate of 4,023,567 shares of our common stock at prices ranging from $0.10 to $8.00 per share to employees, consultants and directors pursuant to our 1998 Stock Plan. (2) From 1997 through September 2000, we issued an aggregate of 39,567 shares of our common stock to employees pursuant to the exercise of stock options granted under the 1998 Stock Plan for an aggregate consideration of $12,746.70. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients in each transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules The exhibits listed in the exhibit Index are filed as part of this registration statement. (a) Exhibits
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.2** Amended and Restated Bylaws, to be effective upon consummation of this offering. 4.1** Form of registrant's Specimen Common Stock Certificate. 4.2** Series A Preferred Stock Purchase Agreement. 5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the registrant, with respect to the common stock being registered. 10.1+ Agreement for Purchase and Sale of Assets between Registrant and Micro Linear Corporation, dated April 28, 2000.
II-2
Exhibit Number Description of Document ------- ----------------------- 10.2+ Equipment Purchase and Engineering Test Services Agreement between Registrant and Fairchild Semiconductor International, Inc., dated September 30, 1999. 10.3 [exhibit withdrawn] 10.4** Lease for Registrant's headquarters located at 678 Almanor Avenue, Sunnyvale, CA 94085. 10.5** Lease for Registrant's facilities located at 2050 and 2092 Concourse Drive, San Jose CA 95131, included as part of Exhibit 10.1. 10.6** Lease for Registrant's facilities located at 6696 Mesa Ridge, Suite A, San Diego, CA 92121. 10.7** Promissory Note payable to Micro Linear Corporation, included as part of Exhibit 10.1. 10.8** Operating Agreement between Registrant and Micro Linear Corporation, included as part of Exhibit 10.1. 10.9 Registrant's 2000 Stock Incentive Plan. 10.10 Registrant's 2000 Employee Stock Purchase Plan. 10.11** Form of registrant's Directors' and Officers' Indemnification Agreement. 10.12** Business Loan Agreement between Registrant and California Bank & Trust, dated November 20, 1997. 10.13** Business Loan Agreement between Registrant and California Bank & Trust, dated August 30, 1999. 10.14** Commercial Loan Agreement between Registrant and California Bank & Trust, dated July 10, 2000. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 24.1** Power of Attorney. Reference is made to Page II-5. 27.1** Financial Data Schedule. (In EDGAR format only)
- -------- * To be filed by amendment ** Filed previously + Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. (b) Financial Statement Schedule Item 17. Undertakings We hereby undertake 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 may be permitted to our directors, officers and controlling persons pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, indemnification agreements entered into between the company and our officers and directors, the underwriting agreement, or otherwise, we have been advised that in the opinion of the commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by any of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is II-3 against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, 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 us 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, 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, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on this 17th day of October 2000. /s/ Jen Kao By: ________________________________ Jen Kao President and Chief Executive Officer IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney as of the date indicated. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the persons whose signatures appear below, which persons have signed such registration statement in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Jen Kao President and Chief October ______________________________________ Executive Officer (Principal 17, 2000 Jen Kao Executive Officer) /s/ Hector Santana* Vice President, Finance October ______________________________________ (Principal Financial Officer 17, 2000 Hector Santana and Principal Accounting Officer) /s/ Alan Ross* Director October ______________________________________ 17, 2000 Alan Ross /s/ Jim Fiebiger* Director October ______________________________________ 17, 2000 Jim Fiebiger /s/ Terry Gou* Director October ______________________________________ 17, 2000 Terry Gou /s/ Bough Lin* Director October ______________________________________ 17, 2000 Bough Lin /s/ Satoshi Nagata* Director October ______________________________________ 17, 2000 Satoshi Nagata
/s/ Jen Kao By:* ______________________________ Jen Kao Attorney-in-Fact II-5 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders of Artest Corporation: We have audited, in accordance with generally accepted auditing standards, the financial statements of Artest Corporation included in this Registration Statement and have issued our report thereon dated September 26, 2000. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements as a whole. /s/ Arthur Andersen LLP San Jose, California September 26, 2000 S-1 ARTEST CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Column A Column B Column C Column D Column E - ----------------------------------- ---------- ---------- ---------- --------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - ----------------------------------- ---------- ---------- ---------- --------- Year Ended December 31, 1997 Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- Year Ended December 31, 1998 Allowance for doubtful accounts.... $ -- $ 10 $ -- $ 10 Year Ended December 31, 1999 Allowance for doubtful accounts.... $ 10 $ 50 $ -- $ 60 Six Months Ended June 30, 2000 Allowance for doubtful accounts.... $ 60 $ -- $ -- $ 60 Nine Months Ended September 30, 2000............................. Allowance for doubtful accounts (unaudited)...................... $ 60 $ 26 $ 11 $ 75
S-2 EX-10.1 2 0002.txt AGREEMENT FOR PURCHASE AND SALE EXHIBIT 10.1 AGREEMENT FOR PURCHASE AND SALE OF ASSETS BY AND BETWEEN MICRO LINEAR CORPORATION AND ARTEST CORPORATION This AGREEMENT FOR PURCHASE AND SALE OF ASSETS (the "Agreement") is made --------- and entered into as of April 28, 2000 by and between Micro Linear Corporation, a Delaware corporation (the "Seller"), and Artest Corporation, a California ------ corporation (the "Buyer"). ----- RECITALS -------- A. Seller is engaged in the business of designing, developing and marketing, analog and mixed signal integrated circuits. B. Buyer is engaged in the business of testing integrated circuits. C. Buyer desires to purchase at the Closing (as hereinafter defined) certain specified assets of Seller and to assume certain specified liabilities of Seller, all in accordance with the terms and conditions contained herein. D. Buyer desires to lease certain property of Seller. E. Seller desires to engage Buyer to test certain integrated circuits of Seller. NOW, THEREFORE, in consideration of the representations, warranties and agreements herein contained, the parties hereto agree as follows: SECTION 1 --------- 1. DEFINITIONS. Capitalized terms in this Agreement shall have the ----------- meanings stated in this Section I or defined elsewhere in this Agreement. A reference to a particular Exhibit is to an Exhibit to this Agreement, each of which is incorporated into and made a part of this Agreement by that reference. A reference to a particular Section is to a Section of this Agreement. "Assets" is defined in Section 2.1. ------ "Assumed Contracts" is defined in Section 3.2. ----------------- "Assumed Liabilities" is defined in Section 3.2. ------------------- "Claims" means any and all suits, demands, actions, fines, penalties, ------ claims, enforcement actions, Liens, Liabilities, damages, deficiencies, injunctions, attorneys' fees, experts' fees, costs and expenses imposed, threatened, paid or incurred at any time, whether foreseeable or unforeseeable, conditional or unconditional. "Closing" and "Closing Date" are defined in Section 4.1. ------- ------------ * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. "Compensation" means all base straight time gross earnings, commissions, ------------ overtime, shift premium, incentive compensation, incentive payments, bonuses, health insurance benefits, payroll taxes and other withholdings. and other compensation related amounts paid or accrued with respect to any Employee. "Disclosure Schedule" is defined in Section 5. 1. ------------------- "Employees" means those individuals identified in the Operating Agreement --------- who are employed by Seller on the date hereof and who are to become employed by Buyer at the Closing. "Governmental Body" means any foreign, federal, state, local or other ----------------- governmental authority, agency or regulatory body. "Intellectual Property" means trademarks (including service marks), --------------------- copyrights and applications therefor, trade names, patents and applications therefor, and software. "Lease Agreement" is defined in Section 4.2(e). --------------- "Liabilities" means any and all liabilities (including strict liability), ----------- claims, judgments, demands, actions, causes of action, damages, losses, expenses, penalties, fines, obligations, encumbrances, liens, costs, and expenses of investigation or defense of any claims of whatever kind or nature, whether absolute, contingent, accrued or otherwise, matured or unmatured, foreseeable or unforeseeable. "Liens" means mortgages, deeds of trust, pledges, taxes, security ----- interests, liens, leases, licenses, escrow arrangements. liabilities, encumbrances, costs, charges and claims of any nature whatsoever, direct or indirect, whether accrued, absolute, contingent or otherwise (including, without limitation, any agreement to give any of the foregoing). "Operating Agreement" is defined in Section 4.2(d). ------------------- "Person" means any individual, corporation, partnership, limited ------ liability company, joint venture, association, joint-stock company, trust, unincorporated organization or governmental body. "Purchase Price" is defined in Section 3.1. -------------- "Returns" is defined in Section 5.1(d). ------- "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any --- ----- ------- federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Body. Page 2 SECTION 2 --------- 2. SALE OF ASSETS. -------------- 2.1 Assets to be Purchased at the Closing. Subject to the terms and ------------------------------------- conditions of this Agreement. Seller agrees to sell. transfer, convey, assign and deliver to Buyer on the Closing Date (as defined herein), and Buyer agrees to buy and acquire, all right, title and interest of Seller in and to the following assets and properties of Seller as provided herein (collectively, the "Assets"): ------ (a) The testing equipment, machinery, tooling, computer hardware, software, intellectual property necessary to the performance by the Assets of their intended functions or purposes and other tangible personal property of Seller specifically listed in Schedule 2.1 (a) hereto; ---------------- (b) Copies of all manufacturing and technical documentation (including any documentation set forth in magnetic, machine-readable form) and any other appropriate documentation associated with the above assets and related thereto or used by Seller in the conduct of the business related thereto. SECTION 3 --------- 3. CONSIDERATION. In consideration for the transfer of the Assets, ------------- Buyer agrees to make the following payments and assume the following liabilities: 3.1 Purchase Price. The aggregate purchase price (the "Purchase -------------- -------- Price") to be paid by Buyer to Seller hereunder shall be Five Million Nine - ----- Hundred Fifty-Six Thousand Three Hundred Thirty-Two Dollars ($5,956,332). One Million Dollars ($1,000,000) of the Purchase Price shall be paid on the Closing Date by wire transfer to an account designated by Seller, with the balance of the Purchase Price to be evidenced by a Promissory Note substantially in the form attached hereto as Exhibit A (the "Promissory Note") --------- --------------- and to be paid in such amounts and at such times as are set forth in such note. 3.2 Assumed Liabilities. On the Closing Date, Buyer shall assume and ------------------- agree thereafter to pay, perform and discharge Seller's obligations under the contracts to which Seller is a party and which are specifically listed on Schedule 3.2 hereto (collectively, the "Assumed Contracts") and no others, but - ------------ ----------------- excluding any such obligations or liabilities based on failure by Seller to perform its obligations under the Assumed Contracts prior to the Closing Date (the "Assumed Liabilities"). Except for the Assumed Liabilities, Buyer shall not ------------------- assume, directly or indirectly, or have any responsibility for any Liability of Seller, and Seller shall retain all Liabilities arising from the operation of the Assets and the related business prior to the Closing Date, other than the Assumed Liabilities. Without limiting the foregoing, Buyer shall not directly or indirectly, assume or have any responsibility for any liability for any Compensation or other Liabilities related to the employment of the Employees by Seller prior to the Closing Date. 3.3 The buyer will be solely responsible for obtaining any required software licenses as a result of the transfer of the assets as per this agreement. Page 3 SECTION 4 --------- 4. CLOSING. ------- 4.1 Closing Date. The closing of the transactions contemplated by ------------ this Agreement (the "Closing") shall occur at the offices of Wilson Sonsini ------- Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, on April 28, 2000, or at such other date, time and place upon which Seller and Buyer shall mutually agree (the "Closing Date"). ------------ 4.2 Conditions to Obligation of Buyer. The obligation of Buyer to --------------------------------- close hereunder is subject to the following conditions: (a) Subject to changes that are not in the aggregate materially adverse in the reasonable judgment of Buyer, the representations and warranties made by Seller in this Agreement shall be true and correct on and as of the Closing Date with the same effect as if made on and as of the Closing Date, and Seller shall have performed and complied with all agreements, covenants and conditions on its part required to be performed or complied with on or prior to the Closing Date. (b) A duly authorized officer of Seller shall deliver to Buyer, at the Closing, a certificate certifying as to the matters set forth in Section 4.2(a) hereof and that there has been no adverse change with respect to the Assets or the Assumed Liabilities since the date hereof. (c) No legal action or proceeding shall be pending or threatened (i) by any Governmental Body seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby or (ii) which is reasonably likely to have a material adverse effect on the Assets or the use of the Assets by Buyer. (d) Buyer and Seller shall have entered into an operating agreement regarding TMT RFX test systems, production test services, off-shore assembly and test services and personnel matters in substantially the form attached hereto as Exhibit B (the "Operating Agreement"). --------- ------------------- (e) Buyer and Seller shall have entered into a lease agreement with respect to certain space at 2092 Concourse Drive, San Jose, California in substantially the form attached hereto as Exhibit C (the "Lease Agreement"). --------- --------------- (f) Seller shall have delivered to Buyer all bills of sale, endorsements, assignments and other instruments as Buyer shall reasonably request or as necessary or appropriate to sell, convey, assign, transfer and deliver to Buyer title to all the Assets. (g) Buyer shall have satisfactorily completed its due diligence with regard to the Assets to be carried out pursuant to Section 6.5. 4.3 Conditions of Obligation of Seller. The obligation of Seller to close ---------------------------------- hereunder is subject to the following conditions: Page 4 (a) Subject to changes that are not in the aggregate materially adverse in the reasonable judgment of Seller, the representations and warranties made by Buyer in this Agreement shall be true and correct on and as of the Closing Date with the same effect as if made on and as of the Closing Date, and Buyer shall have performed and complied with all agreements, covenants and conditions on its part required to be performed or complied with on or prior to the Closing Date. (b) A duly authorized officer of Buyer shall deliver to Seller, at the Closing, a certificate certifying as to the matters set forth in Section 4.3(a) hereof and that there has been no material adverse change with respect to the ability of Buyer to perform its obligations under the Operating Agreement since the date hereof. (c) No legal action or proceeding shall be pending or threatened (i) by any Governmental Body seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby or (ii) which is reasonably likely to have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement. (d) Buyer and Seller shall have entered into the Operating Agreement. (e) Buyer and Seller shall have entered into the Lease Agreement. (f) Seller shall have satisfactorily completed its due diligence with regard to the business and financial condition of Buyer to be carried out pursuant to Section 6.5. SECTION 5 --------- 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ 5.1 Representations and Warranties of Seller. Except as set forth in ---------------------------------------- the Seller's Disclosure Schedule attached hereto as Exhibit D, Seller represents --------- and warrants to Buyer as of the date of this Agreement and as of the Closing Date as follows: (a) Organization, Standing and Qualification. Seller is a ---------------------------------------- corporation duly organized, validly existing and in good standing under the laws of Delaware. Seller has all requisite corporate power and authority and is entitled to carry on its business as it is now being conducted, and to own, lease or operate the properties owned, leased and operated by it in the places where such business is now conducted. Seller is qualified to do business as a foreign corporation in the State of California. (b) Execution, Delivery and Performance. Seller has full ----------------------------------- corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, and all corporate and other proceedings required to be taken to authorize the execution, delivery and performance of this Agreement have been taken. This Agreement has been duly executed and delivered by and constitutes the valid and binding obligation of Seller and is enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium, and similar laws affecting creditors' rights generally and to Page 5 equitable principles limiting the availability of the remedy of specific performance or other equitable relief). (c) Good Title to Assets. Seller has good and marketable title -------------------- to the Assets, and none of the Assets is subject to any Lien. Other than the representations expressly set forth in this Agreement, Seller makes no other representations or warranties with respect to the Assets, their condition or their fitness for any particular purpose. (d) Taxes. ----- (i) To the extent a failure to do so could adversely impact the Assets or Buyer's use of the Assets, (a) Seller has timely filed within the time period for filing or any extension granted with respect thereto, all federal, state, local and foreign Tax returns, reports and estimates ("Returns") ------- which it is required to file relating or pertaining to any and all Taxes attributable to or levied upon the Assets and (b) paid any and all Taxes it is required to pay in connection with the taxable periods to which such Returns relate. There are no Liens on the Assets relating or pertaining to Taxes. (ii) To the extent relevant to the Assets, Seller shall retain and provide Buyer with all records or other information that may be relevant to the preparation of any Returns, or the conduct of any audit or examination, or other Tax proceeding by a Governmental Body or otherwise. (e) Claims and Litigation. No Claim, legal action, suit, --------------------- arbitration, governmental investigation or other legal, regulatory or administrative proceeding is pending against Seller related to the Assets, nor to the best of Seller's knowledge is there any threat thereof against or relating to the Assets or the transactions contemplated by this Agreement. (f) Suppliers. The Disclosure Schedule contains a correct list --------- of all of the current suppliers of supplies, equipment, spare parts or similar goods necessary for the use or operation of the Assets. (g) Assumed Contracts. Seller has provided to Buyer copies of ----------------- each of the Assumed Contracts. Except as otherwise indicated in the Disclosure Schedule, (a) to Seller's best knowledge each of the other parties to the Assumed Contracts has performed all the obligations required to be performed by it to date thereunder, (b) Seller does not know of the intention of any party to terminate any such Assumed Contract, and (c) each Assumed Contract is valid, binding and enforceable in accordance with its terms and is in full force and effect. (h) Employees. There are no suits, actions or administrative, --------- arbitration or other proceedings pending or threatened against Seller or affecting Seller or its business concerning any Employee. (i) Brokers or Finders. Seller is not obligated, directly or ------------------ indirectly, to any person for brokerage or finders' fees, agents' commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby. Page 6 (j) Board Approval. The Board of Directors of Seller has -------------- unanimously approved this Agreement and the transactions contemplated hereby. 5.2 Representations and Warranties of Buyer. Buyer represents and --------------------------------------- warrants to Seller as of the date of this Agreement and as of the Closing Date as follows: (a) Organization, Standing, and Qualification. Buyer is a ----------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has all requisite corporate power and authority and is entitled to carry on its business as now conducted, and to own, lease or operate its properties in the places where its business is now conducted. Buyer is qualified to do business in all foreign jurisdictions in which it is required to be so qualified, except where the failure to be so qualified would not have a material adverse effect on the business or assets of Buyer. (b) Execution, Delivery and Performance. Buyer has full ----------------------------------- corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and all corporate and other proceedings required to be taken to authorize the execution, delivery and performance of this Agreement have been taken. This Agreement has been duly executed and delivered by and constitutes the valid and binding obligation of Buyer and is enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and to equitable principles limiting the availability of the remedy of specific performance or other equitable relief). (c) Claims and Litigation. No Claim, legal action, suit, --------------------- arbitration, governmental investigation or other legal, regulatory or administrative proceeding is pending against Buyer that is reasonably likely to have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement, nor, to the best of Buyer's knowledge, is there any threat thereof. (d) Taxes. To the extent a failure to do so could adversely ----- impact the ability of Buyer to perform its obligations under the Operating Agreement, (a) Buyer has timely filed within the time period for filing or any extension granted with respect thereto, all Returns which it is required to file and (b) paid any and all Taxes it is required to pay in connection with the taxable periods to which such Returns relate. (e) Compliance with Laws and Regulations, Permits. Buyer is in --------------------------------------------- compliance with all statutes, laws, rules and regulations with respect to or affecting its ability to perform its obligations under the Operating Agreement. Buyer holds and has at all times held all licenses, permits and authorizations pursuant to the laws and regulations of any Governmental Body, the absence of which would have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement. Buyer does not know of any material violation of any of the foregoing licenses, permits and authorizations and Buyer has not received notice from any Governmental Body of any such violation or the intention of such Governmental Body to investigate the existence of any such violation. There is no fact known to Buyer or any of its management which adversely affects, or could reasonably be expected to adversely affect Page 7 the ability of Buyer to perform its obligations under the Operating Agreement or the ability of Buyer to carry out the transactions contemplated by this Agreement. (f) Intellectual Property. Buyer owns or possesses licenses or --------------------- other legally enforceable rights to all Intellectual Property necessary to conduct Buyer's business as presently conducted and to perform all of Buyer's obligations contemplated by the Operating Agreement. Buyer is not infringing upon, or otherwise violating the rights of any third party with respect to any Intellectual Property. For the Intellectual Property which Buyer uses, but does not own, Buyer is licensed to use such Intellectual Property and is not in breach of, or default under, any license agreement. (g) Brokers or Finders. Buyer is not obligated, directly or ------------------ indirectly, to any person for brokerage or finders' fees, agents' commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby. (h) Board Approval. The Board of Directors of Buyer has -------------- unanimously approved this Agreement and the transactions contemplated hereby. SECTION 6 --------- 6. ADDITIONAL AGREEMENTS. --------------------- 6.1 Transfer Taxes. In connection with the transactions contemplated -------------- hereunder, Buyer shall pay all sales, use, transfer and other similar taxes, if any, which may be or become due and payable as a result hereof. 6.2 Conduct of Business by Seller Prior to Closing Date. During the --------------------------------------------------- period from the date of this Agreement up to the Closing Date, Seller shall: (a) use the Assets in the usual, regular and ordinary course and in substantially the same manner as heretofore used; (b) preserve and maintain the Assets in their condition as of the date hereof (subject to use in the ordinary course of business); (c) perform all obligations required to be performed by it under all of the Assumed Contracts; and (d) not mortgage, pledge or subject to Lien any of the Assets or sell or transfer, or enter into any agreement to sell or transfer, any of the Assets. 6.3 Conduct of Business by Buyer Prior to Closing Date. During the -------------------------------------------------- period from the date of this Agreement up to the Closing Date, Buyer shall: (a) conduct its business in the ordinary course consistent with past practices; and Page 8 (b) give prompt notice to Seller of any material adverse change to its business, financial condition or ability to perform the obligations contemplated by the Operating Agreement. 6.4 Discharge of Liabilities. From and after the date hereof, Buyer ------------------------ shall discharge when due all of the Assumed Liabilities. 6.5 Access to Information. Between the date of this Agreement and the --------------------- Closing Date, (i) Seller shall give Buyer and its authorized representatives reasonable access during normal working hours to Seller's facilities and properties relating to the Assets, and its books and records relating to the Assets, shall permit Buyer to make inspections thereof, and shall furnish Buyer with such information with respect to the Assets as Buyer may from time to time reasonably request, and (ii) Buyer shall give Seller and its authorized representatives reasonable access during normal working hours to Buyer's facilities and properties, and its books and records, shall permit Seller to make inspections thereof, and shall furnish Seller with such information with respect to Buyer's business and financial condition as Buyer may from time to time reasonably request. Each party acknowledges that such disclosure shall be subject to the [Confidentiality Agreement] between the parties dated __________, 1999. 6.6 Public Disclosure. Seller and Buyer shall consult with each other ----------------- before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except that Seller may make such disclosures as are required by the Securities and Exchange Commission or the Nasdaq National Market. 6.7 Consents. Promptly after the date hereof, Seller and Buyer shall -------- consult with each other regarding the actions which are required to be taken to cause the Assumed Contracts to be transferred to Buyer on the Closing Date. Subject to such consultations, Seller shall promptly apply for or otherwise seek, and use reasonable commercial efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the transactions contemplated hereby and shall use reasonable commercial efforts to obtain all necessary consents, waivers and approvals under any of the Assumed Contracts in connection with the transaction for the assignment thereof or otherwise. The buyer will be solely responsible for obtaining any software licenses associated with the transfer of the test equipment identified. SECTION 7 --------- 7. TERMINATION. ----------- 7.1 Agreement Termination. This Agreement may be terminated at any --------------------- time on or prior to or at the Closing Date: (a) by Buyer or Seller if there has been a material misrepresentation, breach of warranty, or breach of covenant by the other in any of its representations, warranties or covenants set forth herein; (b) by Buyer if the conditions stated in Section 4.2 have not been satisfied by the Closing Page 9 Date other than as a result of inaction by Buyer; (c) by Seller if the conditions stated in Section 4.3 have not been satisfied by the Closing Date other than as a result of inaction by Seller; or (d) by mutual written agreement of Buyer and Seller. If the Closing Date does not occur by April 28, 2000, this Agreement shall terminate effective as of 5:00 p.m. (California time) on such date, unless such date is extended by mutual written agreement of the parties hereto, in which case this Agreement shall terminate on the date and at the time selected by the parties for such extension. 7.2 Effect of Termination. If this Agreement shall be terminated as --------------------- provided in Section 7.1, all obligations of the parties hereunder shall terminate without liability of any party to any other party, except that in the event of termination by reason of Section 7.1(a), the breaching party shall be liable for the reasonable expenses (including the reasonable attorneys' fees and expenses of counsel and court costs) of the other party in connection herewith and in the event of a willful breach the breaching party shall be liable for the damages of the other party resulting from such breach. SECTION 8 --------- 8. MISCELLANEOUS. ------------- 8.1 Absence of Third Party Beneficiary Right. No provisions of this ---------------------------------------- Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or employee of any party hereto or any other person or entity and all provisions hereof will be personal solely between the parties to this Agreement. 8.2 Further Assurances. Each party agrees to cooperate with the other ------------------ party and to execute such further instruments, documents and agreements and to give such further written assurances from and after the date hereof as may be reasonably requested to evidence and reflect the transaction described herein. 8.3 Changes, Waivers, Etc. Neither this Agreement nor any provision --------------------- hereof may be amended, changed, waived, discharged or terminated orally, except by a statement in writing which references this Agreement and is signed by the party against whom enforcement of the amendment, change, waiver, discharge or termination is sought. 8.4 Expiry of Representations and Warranties. The representations and ---------------------------------------- warranties contained in this Agreement shall expire on the Closing Date. 8.5 Payment of Fees and Expenses. Each of the parties hereto shall ---------------------------- pay its own respective fees and expenses incurred in connection herewith. 8.6 Notices. All notices, requests, consents and other communications ------- required or permitted hereunder shall be in writing and shall be delivered, sent by telecopy, or mailed first-class postage prepaid, registered or certified mail, Page 10 If to Buyer: Artest Corporation 678 Almanor Avenue Sunnyvale, CA 94085 Attention: Jen Kao, President Telephone: (408) 731-8778 Telecopy: (408) 731-8770 If to Seller: Micro Linear Corporation 2092 Concourse Drive San Jose, CA 95131 Attention: David Gellatly Telephone: (408) 298-8400 Telecopy: (408) 288-9910 with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: J. Robert Suffoletta Telephone: (650) 493-9300 Telecopy: (650) 493-6811 Such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally or by telecopy on the date of delivery, or, if sent by mail, five (5) days thereafter. 8.7 Entire Agreement. This Agreement, including the schedules and ---------------- exhibits which are incorporated into and made an internal part of this Agreement by reference, sets forth the entire understanding of the parties and supersedes all prior agreements of the parties with respect to the subject matter hereof 8.8 Satisfaction of Conditions. Each party will use reasonable -------------------------- commercial efforts to cause all conditions to its obligations hereunder to be timely satisfied and to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement to the end that the transactions contemplated hereby shall be effected substantially in accordance with the terms of this Agreement as soon as practicable. 8.9 Bulk Transfer Laws. The parties hereby waive compliance with any ------------------ applicable bulk transfer laws, including, but not limited to, the bulk transfer provisions of the Uniform Commercial Code of any state, or any similar statute, with respect to the transactions contemplated hereby. 8.10 Attorneys' Fees. If any litigation or arbitration is commenced --------------- between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity hereunder, solely as between the parties hereto or their successors, the party or parties prevailing in such proceeding (including any arbitration) will be entitled to the reasonable attorneys' fees and expenses of counsel and court costs and other out-of-pocket expenses incurred by reason of such litigation or arbitration. Page 11 8.11 Headings, References to Agreement. The headings of the sections --------------------------------- of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. References herein to "this Agreement" shall include all schedules and exhibits hereto. 8.12 Choice of Law; Interpretation. It is the intention of the parties ----------------------------- that the laws of the State of California shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties. 8.13 Arbitration. Any and all disputes, controversies or claims ----------- whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by binding arbitration in accordance with the Commercial Arbitration Rules then in effect of the American Arbitration Association (the "Arbitration Rules"). Unless otherwise agreed to in writing the ----------------- arbitration shall be held in San Jose, California. The arbitrators shall be selected as follows: In the event the parties agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the parties do not so agree, Seller and Buyer shall each designate one arbitrator within thirty (30) days following receipt of a notice from the other party of such party's election to submit an unresolved matter to arbitration. Such designated arbitrators shall mutually agree upon and shall designate a third arbitrator; provided, however, that failing such agreement within twenty (20) days after the end of the thirty (30) day notice period, the third arbitrator shall be appointed in accordance with the Arbitration Rules. At the request of either party, the arbitration proceedings will be confidential; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrator(s) and the American Arbitration Association as confidential records. The arbitrators shall have the authority to enter an appropriate protective order to enforce such confidentiality. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The final decision of the majority of the arbitrators, which shall be delivered in writing, shall constitute a conclusive determination of the matter in question, shall be binding upon the parties hereto and shall not be contested by either of them. The decree or judgment of an award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons as shall be required by law, in which case such persons or their authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. 8.14 Severability. To the extent any provision of this Agreement shall ------------ be invalid or unenforceable, it shall be considered deleted from this Agreement and the remaining provisions of this Agreement shall be unaffected and shall continue in full force and effect. 8.15 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Page 12 8.16 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.17 Advice of Legal Counsel. Each party acknowledges and represents ----------------------- that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. Further, each party has reviewed this Agreement, which may not be construed against any party by reason of its preparation or word processing. [Remainder of Page Intentionally Left Blank] Page 13 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of date and year first above written. MICRO LINEAR CORPORATION ARTEST CORPORATION By: /s/ David L. Gellatly By: /s/ Jen Kao ----------------------------- ---------------------------- David L. Gellatly Jen Kao President and Chief President and Chief Executive Officer Executive Officer [Signature Page to Agreement for Purchase and Sale of Assets] Exhibit A --------- PROMISSORY NOTE $4,956,332 April 28, 2000 For value received, the undersigned Artest Corporation, a California corporation ("Borrower"), irrevocably and unconditionally promises to pay to the -------- order of Micro Linear Corporation, a Delaware corporation ("Lender"), at such ------ place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal amount of Four Million Nine Hundred Fifty-Six Thousand Three Hundred Thirty-Two U.S. dollars ($4,956,332) (the "Loan"). ---- This note ("Note") is issued pursuant to an Agreement for Purchase and Sale ---- of Assets by and between Borrower and Lender dated as of April 28, 2000 (the "Purchase Agreement"). ------------------ Borrower shall pay interest on the aggregate unpaid principal advanced hereunder at the per annum rate of six percent (6%), which shall accrue on the basis of actual days elapsed and a year of 360 days ("Interest"). Interest -------- hereunder shall be due and payable on the 15th calendar day of each month until all principal advanced hereunder shall have been paid in full by Borrower. The principal amount of the Loan shall be due and payable in equal monthly installments of $165,211.07 beginning on November 15, 2000. All of the principal amount of the Loan and all other indebtedness of Borrower accrued under this Note shall be due and payable in full on April 15, 2003. The principal amount of the Loan is prepayable by Borrower at any time without penalty. Borrower promises to pay Lender all costs and expenses of collection of this Note and to pay all reasonable attorney's fees incurred in such collection, or in any judicial or other legal proceeding to collect this Note or in appeal thereof (collectively, "Expenses"), within ten (10) days after its receipt of -------- Lender's invoice therefor. If Borrower fails to fully pay when due any principal amount of the Loan, accrued unpaid Interest or Expenses when due pursuant to this Note, Borrower shall, in addition to the interest determined in accordance with the foregoing paragraph, pay default interest at the per annum rate of twelve and one-half percent (12.5%) or such lesser rate as would equal the maximum rate under applicable usury law, which shall accrue on the basis of actual days elapsed and a year of 360 days ("Default Interest"), on all such over-due and unpaid ---------------- principal, Interest and Expenses for a period from the date on which such failure occurred through the date on which such failure is cured, both inclusive. Borrower understands and irrevocably agrees that time is of the essence as to all obligations of Borrower hereunder and that no delay by Lender in exercising any power or right hereunder shall operate as a waiver of any power or right. Borrower irrevocably waives the right to direct the application of any and all payments at any time hereafter received by Lender from or on behalf of Borrower, and Borrower irrevocably agrees that Lender shall have the continuing exclusive right to apply any and all such payments Page 1 against the then due and owing obligations of Borrower as Lender may deem advisable. In the absence of a specific determination by Lender with respect thereto and except as otherwise provided herein, all payments shall be applied in the following order: (a) then due and payable fees and expenses, (b) then due and payable Default Interest payments, (c) then due and payable Interest payments, and (d) then due and payable principal payments. This Note shall be governed by, and construed in accordance with, the laws of the State of California. "Borrower" ARTEST CORPORATION By: /s/ Jen Kao ------------------------- Jen Kao President and CEO Page 2 Exhibit B --------- OPERATING AGREEMENT 04/28/2000 DEFINITIONS The definitions set forth below shall apply wherever they appear in this Agreement and all exhibits hereto. "Confidential Information" shall mean any information written or otherwise disclosed in any medium by one party to the other under this Agreement which is marked or otherwise designated as "Confidential" or is clearly by its nature confidential. Confidential Information shall include, but is not limited to, confidential information of subcontractors and suppliers to either party. "Production Test Services" shall mean those services Artest agrees to perform for MLIN pursuant to this contract including, but not limited to providing MLIN employees access to the TEST, and providing MLIN with sort, assembly, final test and shipping for MLIN products listed in Exhibit E. "Retention Amount" shall mean an amount of money to be paid over time by MLIN to Artest, which agrees to pay such amounts to the TEST Personnel in order to assure the retention of necessary TEST Personnel. The Retention Amount shall be equal to the sum of MLIN's current identified program (Exhibit F) for each of the TEST Personnel as specified in Exhibit G (for a total of [*]). Any part of the Retention Amount, which has not been paid to the TEST Personnel at the end of twelve (12) months following the effective date of this Agreement, shall be returned to MLIN. "TEST" shall mean the backend test equipment of MLIN test operations which is listed in Section 2.1a. "TEST Facilities" shall mean the current location of TEST. "TEST Personnel" shall mean the operators, techs, QA&R and test personnel listed in Exhibit G, who are currently employed by MLIN and are part of the transfer. PERSONNEL Artest agrees to hire the supervisors, operators, test maintenance, quality and shipping/receiving personnel listed in Exhibit G who are currently employed by --------- MLIN to maintain continuity and knowledge of MLIN products. The TEST Personnel shall become employees of Artest and shall be the sole responsibility of Artest. Artest will continue to provide MLIN with subcontracting services for production test and shipping in the same manner as is currently done by MLIN for a minimum of three (3) years following the closing of the transaction. All of the Artest personnel assigned to MLIN work projects will be allowed to co-mingle with MLIN personnel at the MLIN facility located at 2092 Concourse Drive, San Jose, California. All payments due to Micro * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Linear employees to be hired by Artest as a result of the termination of employment from Micro Linear are the sole responsibility of Micro Linear. MLIN and Artest agree to the following retention program to assure continuity or those personnel to be hired by Artest from MLIN. MLIN will pay the retention amount as three (3) retainer payments to Artest during the twelve (12) months following the effective date of the agreement in four (4) month intervals in the following manner: 4 months (30%), 8 months (30%), 12 months (40%). Arrest agrees to pay these retention payments received from MLIN to the listed personnel based on mutually agreed retention policies. Artest will refund to MLIN any retention amounts not paid to former MLIN employees at the end of the twelve (12) month period. Any additional retention amounts paid to these or other employees will be the sole responsibility of Artest. The Retention Amount shall be intended to meet any severance obligation of MLIN to the TEST Personnel and they shall be notified of this fact. Any transferred employee who is laid off during the 12-month time period will receive the retention payment entitled through the end of the applicable 4-month segment. (i.e. if an employee is laid off after 6 months, they will receive the 30% retention payment due through the 8-month time segment). The retention payments to Artest shall be paid on the following dates: 1st payment: September 1, 2000 2nd payment: January 2, 2001 3rd payment: May 1, 2001 PRODUCTION TEST SERVICES Production Test Services. MLIN will agree to use Artest as its primary subcontractor to perform sort, final test and shipping responsibilities for MLIN products listed in Exhibit E for a period of at least three (3) years following the closing of the transaction, provided that Arrest can maintain the costs, service and quality for test and shipping at or below the costs listed in Exhibit E. The parties agree to meet from time to time during the course of the - --------- term of this agreement to discuss the services and quality for the testing provided by Arrest to MLIN under this agreement. If MLIN determines that Arrest's services are in any way non-competitive, then MLIN shall give Artest written notice of such inadequacy and Artest shall have reasonable time to correct the deficiency. If Artest shall fail to correct then MLIN can upon written notice obtain services from another source. Artest will agree to implement productivity enhancements, which will reduce test costs to MLIN by [*] per year. MLIN will agree to endeavor to use Artest as its primary subcontractor for sort, final test and shipping and will grant to Artest first right of refusal for any new products MLIN develops, provided Artest's costs are competitive and Artest supports the tester platform required. Micro Linear agrees to subcontract to Artest production sort and/or final test volume shown in Exhibit E equal to a minimum of [*] of revenue to Artest. Micro --------- Linear also agrees, although it cannot guarantee volume levels or product mix, to subcontract to Arrest in the subsequent two (2) years all or most of its production sort and/or test volume with Arrest having the right of first refusal for all products, provided that Arrest costs and quality are competitive. (This ensures that * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Artest has the right to the maximum amount of MLIN revenue, at whatever business level MLIN can achieve during the subsequent 2 years). In the event that Artest is unable for any reason (other than force majeur) to provide testing services to Micro Linear at the Leased Premises or other locations as contemplated hereby (within the cost guidelines agreed to and represented in Exhibit E), then Micro Linear shall be granted such access to the --------- Test Equipment at mutually agreeable rates not in excess of prevailing market rates to enable Micro Linear to have such testing services performed in a timely manner. Access to Teradyne, Sentry, LTX and TMT Equipment. Artest will agree to provide access to its testing operations at the Leased Premises for MLIN product and test engineers for test development and yield enhancement during the daytime shift. Artest acknowledges that MLIN requires up to the hrs/month of the test systems listed in this table: Test System Hrs/month ----------- --------- [*] [*] Artest agrees to give MLIN the right to use these machines and the required support hardware software up to these limits during the daytime shift in any given month. MLIN will notify Artest when it doesn't need the time and will release any unused machine time to Artest for its use. Conversely, Artest will notify MLIN if it doesn't need the machine time beyond the minimum time listed above and release to MLIN the right to use the machines beyond the agreed to hours. For the use of the machines as listed above and required handler/prober support machines, MLIN will agree to pay Artest user fees of [*] per year payable in equal monthly installments, beginning on the date of the execution of this agreement. The user fee shall be payable on or before the third day of each month. Artest and MLIN will agree to cooperate to transfer to Artest any MLIN "right to use" license on the above systems at the most reasonable allowed cost. Artest and MLIN will identify the cost for such a transfer, if applicable, prior to the signing of the Definitive Agreement and subject to Artest approval of such terms. Artest and MLIN shall use their reasonable best efforts to minimize the cost of this transfer but any costs associated with the transfer of the license shall be born by Artest alone and MLIN shall have no obligation to assure the transfer. TMT RFX Test System. Artest will agree to provide additional capacity for TMT RFX system for production testing for certain products MLIN has developed and plans on developing, in the future. Artest will purchase sufficient TMT RFX test systems and related interface hardware, satisfactory to MLIN, to be located at the Leased Premises or another local site or Artest will make arrangements with other external test subcontractors to acquire TMT RFX test systems and ensure sufficient access as to meet the needs for MLIN production test. MLIN will negotiate with TMT to allow Artest access to MLIN's favorable price and scheduling if beneficial. MLIN will commit to [*]/hours of production testing per month per tester for a minimum of 1 year. If MLIN has a need for access to the additional TMT RFX test systems for product and test engineers for test development and yield enhancement beyond the amount identified above, then Artest will provide capacity for engineering during the daytime shift. MLIN will identify the hours per month required for this additional machine time and Artest agrees to give MLIN the * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. right to use the TMT RFX additional machines up to these limits during the daytime shift in any given month. MLIN will agreed to notify Artest when it doesn't need the minimum guaranteed time and will release any unused machine time to Artest for its use. Conversely, Artest will notify MLIN if it doesn't need the TMT RFX machines beyond the minimum time listed above and release to MLIN the right to use the machines beyond the agreed to hours. For the use of the additional TMT RFX test systems as listed above, MLIN agrees to pay Artest user fee's of [*] per week per tester for 8hrs/day daytime access to the system, if and as required for 1 year. Relocation of TEST. Upon the expiration of the term of the sublease, Artest may choose to relocate TEST at its own cost to a new facility that allows full access by MLIN product and test engineering personnel. Notwithstanding the foregoing, if Artest should consider such a move, Artest shall ensure the continuous operation of TEST during the relocation with uninterrupted access by MLIN employees. The new TEST Facilities shall be of the same quality and close proximity to MLIN's product and test engineering personnel as are the current TEST Facilities. Artest and MLIN shall use their best efforts to jointly seek new space to allow for a coordinated move to the new facilities. All facility items purchased by Artest will remain the property of Artest after the expiration of the current lease and not part of Facility left behind for landlord. Assembly Support/Off-shore Test Capability. MLIN will transfer the responsibility for assembly and off-shore test to Artest. In this capacity, Artest will endeavor to establish relationships with key assembly subcontractors for the purpose of securing both capacity and favorable pricing for MLIN products. MLIN estimates that the assembly business opportunity for fiscal year 2000 will be approximately [*]. Artest may consider establishing off-shore sort and/or test capability with selected subcontractors on certain products agreed to by MLIN. MLIN will pay to Artest a management fee of [*] of the assembly revenue for this transfer of responsibility. Term of Services Contract. Unless otherwise specified, the term of the Production Test Services part of the Agreement shall be for a minimum of three (3) years from the date of the execution of this Agreement. Termination and Renewal. At least 90 but not more than 180 days before the expiration of this Agreement, the parties shall notify each other in writing whether the Agreement will terminate if the parties do not provide such notification, the Agreement will automatically renew for a period of one year at prices to be agreed upon. Thereafter, the agreement will automatically renew each year until the parties provide written notice of its termination. Termination for Cause. If either party materially breaches a provision and fails to cure such breach within the thirty (30) days after receiving written notice from the other party, such other party shall have the right at its option to terminate the Production Test Services portion of this Agreement. Upon termination of the Production Test Services portion of this Agreement for cause, the parties shall pay to each other any fees or rents due at the time of the termination. Bankruptcy. Should either party: (i) become insolvent, (ii) make an assignment for the benefit of creditors; (iii) file or have filed against it a petition in bankruptcy or reorganization; (iv) have * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. a receiver, manager, administrator, or administrative receiver appointed; or (v) institute any proceedings for liquidation or winding up; then the other party may, in addition to other rights and remedies it may have, terminate this Agreement immediately by written notice. Property Upon Termination. Upon expiration or termination of this Agreement, both parties will deliver to the other all property of the other party that they may have in their possession or control. Acquisition of MLIN. In the event that MLIN is sold to or acquired by a third party, the terms and conditions of this agreement shall be binding. Acquisition of Artest. In the event that Artest is sold to or acquired by a third party, the terms and conditions of this agreement shall be binding. MISCELLANEOUS Invoices. Unless otherwise provided in this Agreement, Artest and MLIN shall invoice each other for fees for any Production Test Services provided pursuant to this agreement. All invoices shall be due and payable when invoiced, and shall be deemed overdue if they remain unpaid thirty (30) days after they become payable. Overdue amounts shall accrue interest at the rate of two (2) percent per month, or at the highest legal interest rate, if less. Payments. All payments referred to in this agreement are net 30 days. Confidential Information. During the term of this Agreement and subsequent thereto, the receiving party will keep all Confidential Information of the other party in confidence and will not, without prior written consent of the disclosing party, publish, disclose or otherwise make available, directly or indirectly, any item of Confidential Information to any person other than those of the receiving party's employees, agents or contractors who need to know the same in the performance of their duties for the receiving party. Publicity. The parties agree that they shall not make any disclosure, by means of the issuance of any reports, statements or releases or otherwise, pertaining to the contents of this Agreement or the transactions contemplated hereby, except that MLIN shall be permitted to make such disclosures as may be required by federal and state securities laws or the rules and regulations of the Nasdaq National Market. Dispute Resolution. The parties shall attempt in good faith to resolve any dispute arising out of this Agreement, including but not limited to any dispute regarding the interpretation of or performance under said Agreement, promptly by negotiations. If these negotiations should fail, the parties shall resolve any dispute by submitting it to binding arbitration in San Jose, California under the rules of the American Arbitration. Notwithstanding the foregoing, either party shall have the right to seek preliminary injunctive relief at any time. The prevailing party shall have all reasonable legal fees reimbursed. Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and the State of California. The parties agree that the United Nations Convention on Contracts for the International Sale of goods is specifically excluded from application to this Agreement. Notices. Any notices required or permitted hereunder will be given to the appropriate party at the address specified below or at such other address as the party may specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or, if sent by certified or registered mail, three (3) days after the date of mailing. As to: Micro Linear Corporation: David Gellatly Micro Linear Corporation 2092 Concourse Dr. San Jose, CA 95131 Artest Corporation: Jen Kao Artest Corporation 678 Almanor Ave. Sunnyvale, CA 94085 Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, and all of which shall together constitute one and the same Agreement. Complete Understanding and Modification. This Agreement and the Exhibits attached hereto constitute the full and complete understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior understandings and agreements relating to such subject matter. Any waiver, modification, or amendment of any provision of this Agreement shall be effective only if in writing and signed by each of the parties hereto. Waiver. The failure of either party to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time be deemed a waiver or relinquishment of that right or power for all or any other time. Force Majeure. The parties shall not be liable for any delay or failure to perform, in whole or in part, caused by the occurrence of any contingency beyond its reasonable control, including but not limited to: war, sabotage, insurrection, rebellion, riot or other act of civil disobedience, act of public enemy, failure or delay in transportation, act of any government or any agency or subdivision thereof, judicial action, labor disputes, shortages of materials, fire, accident, explosion, epidemic, quarantine restrictions, storm, flood or earthquake. In Witness Whereof, the duly authorized representative of the parties has executed this Agreement as of the effective Date. MICRO LINEAR CORPORATION ARTEST CORPORATION Signed: /s/ David L. Gellatly Signed: /s/ Jen Kao Printed Name: David Gellatly Printed Name: Jen Kao Title: President & CEO Title: President & CEO Date: 4/28/00 Date: 04-28-2000 Exhibit E to Operating Agreement [*] * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Exhibit F to Operating Agreement Exhibit F Retention Policy: Retention bonus of [*] week's pay for every [*] months of continued employment up to a maximum of [*] months after the acquisition. * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Exhibit G to Operating Agreement ARTEST/MLIN ----------- EMPLOYEE LISTING BY DEPARTMENT 27-Apr-00
- -------------------------------------------------------------------------------- Dept Name Title DOH Salary - -------------------------------------------------------------------------------- 4120 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 4 10% 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 1 10% 4310 [*] [*] [*] [*] [*] 4 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 2 10% 10% 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 3 15% 10% 4310 [*] [*] [*] [*] [*] 2 10% 10% 4310 [*] [*] [*] [*] [*] 4 10% 10% 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 4 10% 4310 [*] [*] [*] [*] [*] 4 10% 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 4 10% 10% 4310 [*] [*] [*] [*] [*] 3 15% 10% 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 1 Temporary Employees - ------------------- 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 3 15% 4310 [*] [*] [*] [*] [*] 5 15% 10% 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 1 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 2 10% 4310 [*] [*] [*] [*] [*] 4 10% 4310 [*] [*] [*] [*] [*] 4 10% 4310 [*] [*] [*] [*] [*] 5 15% 4310 [*] [*] [*] [*] [*] 4 10% 4360 [*] [*] [*] [*] [*] 1 7040 [*] [*] [*] [*] [*] 1 7040 [*] [*] [*] [*] [*] 1 7040 [*] [*] [*] [*] [*] 1 7040 [*] [*] [*] [*] [*] 1 7040 [*] [*] [*] [*] [*] 1 7500 [*] [*] [*] [*] [*] 1 7500 [*] [*] [*] [*] [*] 1 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 1 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 2 10% 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 2 15% 8050 [*] [*] [*] [*] [*] 4 8050 [*] [*] [*] [*] [*] 2 10% 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 2 10% 8050 [*] [*] [*] [*] [*] 1 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 3 15% 8050 [*] [*] [*] [*] [*] 1 [*]
* Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Schedule to Section 3.2 of Operating Agreement Assumed Contracts Section 3.2
Vendor Address Service ------ ------- ------- AICL/AAPI (160) 3945 Freedom Circle Ste. 830 Santa Clara CA 95054 ASSEMBLY ASAT (2152) 1010 Corporation Way Palo Alto CA 94030 ASSEMBLY AIT (2152) (Formerly AMT) 6800 Koll Center Pkwy Ste. 220 Pleasonton CA 94566 ASSEMBLY SIGNETICS (4244) 1737 N. First Street Ste. 400 San Jose CA 95112 ASSEMBLY US EXPORTS/BEST ELECTRONICS (4461) 4655 Old Ironsides Drive, Ste. 215 Santa Clara CA 95054 OUTSIDE TESTING SIGNETICS (4244) 1737 N. First Street Ste. 400 San Jose CA 95112 OUTSIDE TESTING
* Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Key Points of Understanding 04/27/2000 --------------------------- Offices. Two enclosed offices are to be made available in the NW side of Bldg 1. MLIN and Artest may consider replacing these with other offices in the rear of the building at a later date. Signage. MLIN and Artest will agree upon a location for Artest signage and implement. Artest will pay for this cost. Telephones. Establish phone lines with Pac Bell for Artest use. Artest will be billed directly. Review over next 90 days to determine any better alternate solutions. Email. Establish email access for Artest employees over the existing ML internet connection. Specific PCs will be set up to accomplish this. ML MIS will assist Artest employees to set this up and provide instruction. Review over the next 90 days to determine any better alternate solutions. Shipping/Receiving. Artest will maintain the shipping/receiving area in Bldg 2. They will provide all shipping materials and receiving services for MLIN and Artest. Stores. Artest will maintain `stores' in support of the production test services in Bldg 2. MLIN will assume responsibility for their stores within 60 days from the signing of the agreements. Mail Delivery. Artest will support all internal mail delivery for a maximum of 60 days, whereupon, MLIN will assume responsibility for all MLIN mail. Smocks. Artest will assume all responsibility for smocks used by all personnel in Bldg 1. They will bill MLIN separately for engineering and other MLIN support personnel requirements. Badges. MLIN will provide badges with the Artest logo. Artest will reimburse MLIN for all badges. Network. MLIN will provide access to the required databases within the ML internal network for all manufacturing needs. Over the next 90 days, these needs will be reviewed and any changes to the network access will be determined at that time. Artest will continue to sent the test data to the network in the same manner with no changes, unless mutually agreed upon. Contracts. Artest will be introduced to all MLIN subcontractors/major suppliers. They will negotiate with the said subcontractors/suppliers to assume responsibility for current contracts and/or future needs. Artest may choose to renegotiate these contracts to enable improvements in pricing and service, where possible and beneficial to MLIN. MLIN Long Range Demand Forecast. MLIN will provide a 3 month forecast for factory demand during the last week of each financial quarter. MLIN will also provide a 6 month outlook for capacity planning, each month, to cover any significant changes in forecast demand, to enable Artest to adjust their capability to respond. MLIN Weekly Demand Forecast. MLIN will provide a weekly demand for sort & test and a daily demand for assembly. Performance to demand will be reviewed weekly. Daily Production Meeting. Artest and MLIN will discuss all production and engineering issues and test equipment availability at a meeting held daily at 8 a.m. Samples Meeting. Artest and MLIN will review sample demand, production performance, and MSD (delivery to manufacturing schedule date) performance every Wednesday at 9:30 a.m. Engineering Requirements. MLIN will provide an engineering time demand forecast once a month. This will be updated daily at the 8:00 a.m. production meeting to reflect real time needs and changes. Production documentation. All production documentation requirements and procedures are to remain the same unless and until requested changes are mutually agreed upon. Samples. Samples testing for engineering characterization, QA&R reliability and customer returns, Customer Service, etc. will be charged to MLIN based on insertions/cpu time and index time for each product. Rescreens. All rescreens of material which are required as a result of test program and/or hardware changes will be charged as normal production. Bake and Pack. Artest will have responsibility for all supplies and equipment and charge MLIN at the rate of [*]/unit. Lead Scan. Lead scan is part of the cost of insuring quality of MLIN products. There will be no charge for SOIC parts going into tape & reel. The cost for all other devices will be [*]/device. Tape & Reel. Artest will have responsibility for all supplies and equipment and charge MLIN at the rate shown in the attached table.
Package Type Internal External - ------------ -------- -------- 8-16L(n)SOIC [*] [*] 16-28L(w)SOIC [*] [*] PLCC [*] [*] 32LTQFP [*] [*] 44LTQFP [*] [*] 64LTQFP [*] [*] 8LTSSOP [*] [*] 20LTSSOP [*] [*] 28LSSOP [*] [*]
Performance to Schedule. All issues or updates regarding Artest performance to schedule for any MLIN products should be communicated to the MLIN Production Control Supervisor as quickly as possible. Load Boards/Probe Cards/Interface Hardware. MLIN will provide the initial set of hardware for production at [*] to Artest. Additional sets of hardware needed for capacity will be supplied by MLIN and charged at [*] to Artest. All additional sets of hardware will have to be agreed upon by both parties before work can begin. All repair and modifications of hardware will be provided by Artest at [*] to MLIN. If limited MLIN engineering support is needed to repair the hardware, MLIN will support this effort at [*]. If the repair or modification is substantial or excessive, MLIN will charge [*] to Artest. Freight Charges. Artest will bill MLIN [*]. * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Backlap. Artest will coordinate all backlap requirements and will bill MLIN [*]. Remarking. Artest will coordinate all remarking requirements and will bill MLIN [*]. Invoicing. Artest to invoice MLIN after sort, assembly and final test. [*]. Payments. All payments referred to in this agreement are net 30 days. New Product Die Cast Formulas. Costs for new products and changes for existing products are calculated based on the following formulas and attached table for the first year: Sort cost/die = [*] Final test cost = [*] Assembly cost = [*] Backlap cost = [*] It is expected that there will be cost improvements in subsequent years that will be reflected in the product cost to Micro Linear. Table of sort/test costs/sec be tester platform. Tester WS $/sec FT $/sec ----- -------- -------- [*] [*] [*] * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. EXHIBIT C STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, May 01, 2000 is made by and between Micro Linear Corporation, a Delaware corporation, ("Lessor") and Artest Corporation, a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 (a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 2050 and 2092 Concourse Drive, located in the City of San Jose, County of Santa Clara, State of California, with zip code 95131, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): Two, one-story buildings located next door to one another, each consisting of approximately 47,000 square feet. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2 (b) Parking: 18.23% of the unreserved vehicle parking spaces ("Unreserved Parking Spaces") located in the Industrial Center. (Also see Paragraph 2.6.) 1.3 Term: 3 years and 0 months ("Original Term") commencing See Addendum ("Commencement Date") and ending on the day before the 3rd Anniversary of the Commencement Date ("Expiration Date"). (Also see Paragraph-3). 1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $ 25,024 per month ("Base Rent"), payable on the 1st day of each month commencing on the Commencement Date (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum ___, attached hereto. 1.6 (a) Base Rent Paid Upon Execution: $ N/A as Base Rent for the period N/A. 1.6 (b) Lessee's Share of Common Area Operating Expenses: N/A percent ( .%) ("Lessee's Share") as determined by [ ] prorata square footage of the Promises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum _____. 1.7 Security Deposit: $ N/A ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Semiconductor testing and manufacturing in the same manner and using the same equipment as Lessor immediately prior to the Commencement Date ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party: Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10 Addenda and Exhibits: Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 7 and Exhibits A, all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 [deleted] 2.3 [deleted] 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Promises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. Initials:________ ________ 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease provide the parking facilities required by Applicable Law. 2.7 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general now exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas-Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas-Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas-Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. Initials:_______ _______ -2- 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and ail other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 [deleted] 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. It Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the tuft amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, it any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit the use of the Promises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) [deleted] 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Promises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a Initials:________ ________ -3- timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be tiled with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any govern-mental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance, including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Promises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the Inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's Initials:_______ _______ -4- use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Promises in good order, condition and repair, shall exercise and perform good maintenance practices, Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Promises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) [deleted] (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (it located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all pans thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease other than Utility installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations and/or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non- structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the root or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall he deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon: and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at of for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. It Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested item claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. Initials:________ ________ -5- (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the properly of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease. become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility installations be removed by (he expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and fear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 [deleted] 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and properly damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises arid all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, bill shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Properly Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies, in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof it, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8 4. If the coverage is available arid commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for any additional costs resulting from debris removal and reasonable amounts of cove-rage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, arid inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price index for Ali Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues Initials:_______ _______ -6- from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the properly insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be In companies duly licensed to transact business in the state where the Promises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-, VIII or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby, 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The fore-going shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumb-ing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations. the repair cost of which damage or destruction is less than fifty percent Initials:________ ________ -7- (50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d)) of the Promises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Promises. 9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available. Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Promises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and it Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed. Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Promises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs it made by either Party. 9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day Initials:________ ________ -8- prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent. Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges. if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue. Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a (late not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. It a Hazardous Substance Condition occurs. unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substances Condition. If required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) it file estimated cost to investigate and remediate such condition exceeds twelve (12) limes the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor s desire to terminate this Lease as of the date sixty (60), days following the date of such notice. In the event Lessor elects to give such notice of Lessor s intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to Day for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to, waive (12) times the then monthly Base Rent or $100.000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee, if, such event this Lease shall continue in full force and effect. and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice, of termination. 9.8 Term I nation-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10 2.1a), applicable to the Industrial Center. 10.2 Real Property Tax Definitions. (a) As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof. Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" stall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. Initials:_______ _______ -9- (b) As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises. Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees of by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed. Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from life real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. [deleted] 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent which may be withheld in Lessor's sole and absolute discretion. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five per-cent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may withhold its consent in its sole discretion "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If lessor elects to treat such unconsented to assignment or subletting as a non-curable Broach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall he increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. Initials:_______ _______ -10- 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Pont and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any-one else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security hold by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit Increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists In the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. Initials:_______ _______ -11- (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessors prior written consent which may be withheld in Lessor's sole discretion. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that it the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure with-in said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. It Lessee fails to perform any affirmative duly or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice). Lessor may at its option (but Initials:________ _______ -12- without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. It any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand. and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lesser may reserve the right to recover all or any part thereof in a separate suit to for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of !leases for unlawful detainer shall also constitute, the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both in unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitation. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment or a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the, Promises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be doomed conditioned upon Lessee's hill and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no, further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor 10 111CM costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) M Such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive Initials:________ _______ -13- installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall. at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease it performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. It more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor. whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation, matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such not severance damages required to complete such repair. 15. [deleted] 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid. the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges. not received by Lessor within ten (10) days follow-ing the date on which it was due, shall bear interest from the date due at the prime rate charged by [he largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Initials: ____ ____ -14- 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mail-ing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or it no delivery date is shown, the postmark thereon. If sent by regular mail. the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term. covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to. or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording. purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires owner- ship of the Promises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (it) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from Initials: ____ ____ -15- the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder. the Prevailing Party (as here- after defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Promises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Promises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof. which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided. however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of. or response to. a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance. shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may. as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act. assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists. nor shall such consent be doomed a waiver of any then existing Default of Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reason-able with reference to the particular matter for which consent is being given. Initials: ____ ____ -16- 37. Guarantor. 37.1 Form of Guaranty. It there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association. and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses. upon reason-able request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease. including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf. (b) current financial statements of Guarantor as may from time to time be requested by Lessor. (c) a Tenancy Statement. or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Promises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease. Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease. the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor: (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor: (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises. or the right of first offer to purchase the Promises. or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor. or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Promises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee am not assignable, either as a pan of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether of not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility race-ways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 42. [deleted] 43. Performance Under Protest. It at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that Initials: ____ ____ -17- there was no legal obligation on the pan of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. It Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or hand written provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional Insurance company or pension plan Lender In connection with the obtaining of normal financing or refinancing of the property of which the Promises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity Is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, Initials: ____ ____ -18- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR YOUR ATTORNEYS REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT. OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: ______________________________________________________ Executed at: ______________________________________________ on: _______________________________________________________________ on: _______________________________________________________ By LESSOR: By LESSEE: MICRO LINEAR CORPORATION ARTEST CORPORATION, a Delaware corporation a California corporation Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ By: _______________________________________________________________ By: _______________________________________________________ Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ Address: __________________________________________________________ Address: __________________________________________________ ___________________________________________________________________ ___________________________________________________________ Telephone: ( ) _______________________________________________ Telephone: ( ) _______________________________________
NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. Initials: ____ ____ -19- FIRST ADDENDUM TO STANDARD INDUSTRIAL/ COMMERCIAL MULTI-TENANT LEASE - GROSS THIS FIRST ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE (this "Addendum") is made by and between Micro Linear Corporation, a Delaware corporation ("Lessor") and Artest Corporation, a California corporation ("Lessee"), to be a part of that certain lease (the "Lease") of even date herewith between Lessor and Lessee concerning premises located at 2050 and 2092 Concourse Drive, San Jose, California (the "Premises"). Lessor and Lessee agree that, notwithstanding anything to the contrary in the Lease, the Lease is hereby modified and supplemented as set forth below. 1. Term. The Lease shall commence (the "Commencement Date") on the date ---- of the "Closing" of that certain Agreement for Purchase and Sale of Assets by and between Lessor and Lessee dated as of the date hereof. 2. Common Areas. The Common Areas shall be limited to the lobby, ------------ restrooms, lunch rooms and hallways leading directly between the foregoing and the Premises in each Building, as well as the parking areas and exterior sidewalks of the Industrial Center. 3. Hazardous Materials. Lessee shall not use, store or bring onto the ------------------- Premises or the Industrial Center any Hazardous Materials other than those of a type and in quantities used in the Premises by Lessor immediately before the Commencement Date. 4. Utilities. Lessor shall provide to the Premises electricity, water, --------- heating, ventilating and air conditioning and garbage disposal services at the levels provided to the Premises immediately prior to the Commencement Date. In addition, Lessor shall provide, at Lessee's cost, telephone service to the Premises at the level provided to the Premises immediately prior to the Commencement Date. Lessee shall pay any invoices for such telephone services within ten (10) days of receipt thereof. If such telephone service is not separately metered or billed to the Premises, Lessee shall pay to Lessor a reasonable portion to be determined by Lessor of any jointly metered or billed within ten (10) days of Lessee's receipt of an invoice therefor from Lessor. If, in Lessor's reasonable determination, Lessee uses any utilities or services (other than telephone services) in excess of levels used immediately before the Commencement Date, Lessor shall have the right to charge Lessee with the cost of any excess usage as reasonably calculated by Lessor, and Lessee shall pay such charges within ten (10) days of receipt of an invoice therefor. Lessor shall not be liable for the interruption of any such services or utilities for causes beyond Lessor's reasonable control. 5. Annual Negotiations. On or about each anniversary of the Commencement ------------------- Date, the parties shall meet upon the request of either party to discuss the possibility of increasing or decreasing the size of the Premises. In the event that the parties agree to change the size of the Premises, the Base Rent, Lessee's Share and Lessee's percentage of parking spaces shall be equitably adjusted based on any adjustment to the size of the Premises. 6. Lessor's Termination Right. In the event that (a) the agreement -------------------------- between Lessor or Lessee with respect to Lessee's performance of production, test and shipping functions for Lessor terminates for any reason, or (b) Lessee for any reason ceases carrying out such functions in the Premises, Lessor shall have the right at any time thereafter to terminate this Lease by delivering at least thirty (30) days prior written notice hereof to Lessee. 7. Effect of Addendum. All terms with initial capital letters used herein ------------------ as defined terms shall have the meanings ascribed to them in the Lease unless specifically defined herein. In the event of any inconsistency between this Addendum and the Lease, the terms of this Addendum shall prevail. LESSOR: LESSEE: MICRO LINEAR CORPORATION, ARTEST CORPORATION, a Delaware corporation a California corporation By: /s/ David L. Gellatly By: /s/ Jen Kao -------------------------------- ------------------------------ Name: David L. Gellatly Name: Jen Kao ------------------------------ ---------------------------- Its: President and CEO Its: President and CEO ------------------------------- ----------------------------- Initials: ____ ____ EXHIBIT A1 - Floor plan [FLOOR PLAN] EXHIBIT A2 - Floor plan [FLOOR PLAN] Addendum to Sub-lease: At the termination of the sub-lease Artest will remove all of Artest's assets and return that portion of the building which Artest has occupied to MLIN in an "As is" condition. Disclosure Schedule Exhibit D
Vendor Address Service ------ ------- ------- DEVICE DYNAMICS (1824) 2340 Harris Way San Jose CA 95131 REMARKING HGM 655 N. Pastoria Ave Sunnyvale CA 94086 REMARKING APT (Formerly ADVANCE PACKAGING) 1040 Commerical St. Ste 103 San Jose CA 95112 TAPE & REEL SUPPLIES GDSI (4532) 247 Humboldt Ct Sunnyvale CA 94089 BACKLAP On Q (Formerly COFER (2101)) 214 Devcon Drive San Jose CA 95112 TAPE & REEL MULTITECH DESIGN & TEST (3272) 1152 Morse Avenue Sunnyvale CA 94089 BAKE, DRYPACK, LEAD SCAN Betterply Business Forms P.O. Box 209 Santa Clara CA Sales orders/packing slips Economic Packaging 1310 Piper Drive Milpitas CA 95035 Shipping supplies, boxes, etc Weber marking System 711 W. Algonquin Rd Arlington H IL 60005 Bar code labels and ribbons
[*] Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Section 2.1a
DEPT ACCT ASSET TAG VENDOR DESCRIPTION COST BOOK MO YR MONTHLY CUMUL DEPREC 3 MTH DEPR 4310 1730 [*] 3-WAY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ABSCO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ACCLAIM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ACCLAIM TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ACCLAIM TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ACCLAIM TECHNOLOGY INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AETRIUM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AMERICAN PACKAGING CO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AMERICAN TECH MANUFACTURING [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AMERICAN TECHNICAL MANUFACTURING [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ANZA TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASA COMPUTERS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASA COMPUTERS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASA COMPUTERS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASECO CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ASSOCIATED AIR FREIGHT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AT&T COMMERICAL FINANCE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AVISA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] AVISA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] BUCKLE & SMITH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CABLETRON [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CABLETRON [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CABLETRON SYSTEM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CABLETRON SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CALTEK [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CERPROBE CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CERPROBE CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CHEMICAL SAFETY TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CHEMICAL SAFETY TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CHEMICAL SAFETY TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CHEMICAL SAFETY TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CHEMICAL SAFETY TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CLAFLIN & CLAYTON [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] COMP USA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] COMP USA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] COMP USA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] COMPU-BYTE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] COMPU-BYTE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD COMMERCIAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORD COMMERCIAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CONCORDE GROUP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CRANEL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CRANEL INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CRANEL INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CRANEL INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CRANEL INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] CUSTOM SEMICONDUCTOR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] CWP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] CWP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] CWP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DALCO PRECISION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] DAVID K LINDEMUTH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] EBERTS ELECTRONIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] EBERTS ELECTRONIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] EBERTS ELECTRONIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] EBERTS ELECTRONIC SALES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ELECTRO MECHANICAL SYSTEM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ELECTRO RENT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] EXIDE ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FAIRCHILD SCHLUMBERGER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] GATX LEASING CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] GATX LEASING CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] GOLDEN STATE AUCTION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] HAMERSLAG [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HEWLETT PACKARD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HEWLETT PACKARD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HIGH DEFINITION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HINES AND ASSOCIATES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HINES AND ASSOCIATES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HINES AND ASSOCIATES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] HP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] HUMMINGBIRD COMM LTD [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] INMAC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] INNOVATIVE CIRCUITS ENGINEER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] INNOVATIVE CIRCUITS ENGINEER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] INNOVATIVE CIRCUITS ENGR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTERVISION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTERVISION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] IVAR HAGBERK [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] J-3 ASSOCIATED INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] KANEMATSU USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] KANEMATSU USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] KANEMATSU USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] KANEMATSU USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] KANEMATSU USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] LSI LOGIC CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] LTX [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] LTX CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] LTX CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MANCO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MANCO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MARKEM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MARKEM [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MATSCO FINANCIAL CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MAYFLOWER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MAYFLOWER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MAYFLOWER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MCT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO CENTER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO CENTER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMP TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MICRO COMPONENT TECHNOLO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MOBERG [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MOBERG ELEC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MOBERG ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELEC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONIC SYS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] MULTITEST ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] NEVIL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PACIFIC WESTERN SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PACIFIC WESTERN SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*]
* Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Section 2.1a (Continued)
DEPT ACCT ASSET TAG VENDOR DESCRIPTION COST BOOK MO YR MONTHLY CUMUL DEPREC 3 MTH DEPR 4310 1730 [*] PACIFIC WESTERN SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PBCC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PENINSULA CRANE & RIGGING [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PERFORMANCE TECHNOLOGIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PRIMEYIELD SYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PRIMEYIELD SYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PRIMEYIELD SYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PRIMEYIELD SYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PRIMEYIELD SYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] PYRAMID ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] QPL ASSOCIATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] QPL ASSOCIATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] QPL ASSOCIATION [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] REID-ASHMAN INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] ROADWAY EXPRESS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SCHLUMBERGER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SCHLUMBERGER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SCHLUMBERGER [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SEMITOOL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SESA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SESA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SESA INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] STEPTECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] STEPTECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] STEPTECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICRO [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SYM-TEK SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SYM-TEK SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SYSTEMATION ENGINEERED [*] [*] [*] [*] [*] [*] [*] [*] PR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SYSTEMATION ENGINEERED PR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SYSTEMATION ENGINEERED PR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] T&R COMMUNICATION INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEKTRONIX [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEKTRONIX [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEKTRONIX [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEKTRONIX INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TELENET [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEMPTRONIC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TERADYNE INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TESTDESIGN CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] THERMONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] THERMONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TMT INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1781 [*] TMT INC. 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[*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TOVAR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1760 [*] TOVAR [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TOVAR INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TOYKO SEIMITSU [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TOYKO SEIMITSU [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON IND. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON IND. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TRIGON INDUSTRIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TSK AMERICA [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] U S INSTRUMENT RENTALS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] U S INSTRUMENT RENTALS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] U S INSTRUMENT RENTALS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] U S INST. RENTALS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WAVE TECH [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WAVE TECHNOLOGIES CORP [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WAVECREST, A TECHNOLOGIES [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEBER MARKING SYSTEMS INC [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WENTWORTH LABORATORIES [*] [*] [*] [*] [*] [*] [*] [*] 4350 1730 [*] TERRY HUGGINS [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] CERPROBE [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] CERPROBE CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] CERPROBE CORP. [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] INTEST [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] INTEST CORPORATION [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] INTEST INC. [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JOHNSTECH INTL [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1730 [*] JTI [*] [*] [*] [*] [*] [*] [*] [*] 4360 1781 [*] TMT INC [*] [*] [*] [*] [*] [*] [*] [*] 4360 1781 [*] TMT INC [*] [*] [*] [*] [*] [*] [*] [*] 4360 1781 [*] WISE SOFTWARE SOLUTIONS, INC [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] COMP USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] COMP USA, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] DATA IDENTIFICATION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] DATA IDENTIFICATION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] DATA IDENTIFICATION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] DATA IDENTIFICATION SYSTEMS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4370 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] FRY'S ELECTRONICS [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] SUN MICROSYSTEMS, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TIGER DIRECT [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] WEDGE TECHNOLOGY [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] BL ASSOCIATES, INC. [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] JOHNSTECH INTERNATIONAL [*] [*] [*] [*] [*] [*] [*] [*] 4310 1730 [*] TEMPTRONIC [*] [*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. EX-10.2 3 0003.txt EQUIPMENT PURCHASE AND TEST AGREEMENT EXHIBIT 10.2 EQUIPMENT PURCHASE AND ENGINEERING TEST SERVICES AGREEMENT This EQUIPMENT PURCHASE AND ENGINEERING TEST SERVICES AGREEMENT (the "Agreement") is entered into on this 29th day of September, 1999 by and among Fairchild Semiconductor Corporation ("Fairchild") and Artest Corporation ("Artest"). I. RECITALS Whereas, Fairchild is in the business of designing, manufacturing and marketing high performance semiconductors for multiple end market uses; and Whereas, Artest is, among other things, in the business of performing test services for semiconductors; and Whereas, Artest desires to purchase from Fairchild backend test equipment used by the Fairchild Mixed Signal Business Unit ("MBU") (such equipment collectively referred to as "TEST") and to provide engineering services and production testing of products for MBU; and Whereas, Fairchild desires to subcontract to Artest all or a significant portion of the MBU backend production test and shipping functions it currently performs for itself, providing Artest can do so at competitive prices for this service; Now, Therefore, Fairchild and Artest hereto agree as follows: II. DEFINITIONS 1. The definitions set forth below shall apply wherever they appear in this Agreement and all exhibits hereto. 1.1 "Confidential Information" shall mean any information written or otherwise disclosed in any medium by one party to the other under this Agreement which is marked or otherwise designated as "Confidential" or is clearly by its nature confidential. Confidential Information shall include, but is not limited to, confidential information of subcontractors and suppliers to either party. 1.2 "Engineering Test Services" shall mean those services Artest agrees to perform for Fairchild pursuant to this contract including, but not limited to providing Fairchild employees access to the TEST, and providing Fairchild with final test and shipping for Fairchild products listed in the Old 26MM Table of Exhibit 3. 1.3 "Retention Amount" shall mean an amount of money to be paid over time by Fairchild to Artest, which agrees to pay such amounts to the TEST Personnel in order to assure the retention of necessary TEST Personnel. The Retention Amount shall be * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. equal to the sum of Fairchild's current identified severance program for each of the TEST Personnel as specified in Exhibit 2 (for a total of [*]). Any part of the Retention Amount, which has not been paid to the TEST Personnel at the end of twelve (12) months following the effective date of this Agreement, shall be returned to Fairchild. 1.4 "TEST" shall mean the backend test equipment of the Fairchild Mixed Signal Business Unit which is listed in Exhibit 1. 1.5 "TEST Facilities" shall mean the current location of TEST until June of 2000. After June of 2000, the location of the TEST Facilities shall be moved to another facility agreed upon by Fairchild and Artest. 1.6 "TEST Personnel" shall mean the operators and test personnel listed in Exhibit 2, Table I who are currently employed by Fairchild and work with the TEST equipment. III. EQUIPMENT PURCHASE, FACILITIES AND PERSONNEL 2. Sale of TEST Equipment. Artest shall purchase from Fairchild, in accordance with and subject to the terms, covenants and conditions hereinafter set forth, the TEST equipment. 2.1 Purchase Price. Upon execution of the Agreement, Artest shall pay to Fairchild for TEST the sum of $865,000.00 in cash or readily available funds, which price the parties agree is fair and reasonable. The purchase price shall be paid on the date of the execution of this Agreement. At receipt of payment, Fairchild will deliver good title of equipment free of all liens and security interest and documentation that identifies that testers are in working condition and meeting manufacturers specifications. 2.2 Finality of Sale. The sale of the TEST equipment shall be final upon execution of this Agreement regardless of whether the Engineering Test Services portion of the Agreement is terminated for cause or otherwise. 2.3 No Warranties; Limited Liability. ARTEST PURCHASES THE TEST EQUIPMENT FROM FAIRCHILD IN ITS PRESENT CONDITION, AS IS AND WITH ALL FAULTS. ARTEST ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO INSPECT THE TEST EQUIPMENT AS FULLY AS IT DESIRES. THE PARTIES ACKNOWLEDGE THAT FAIRCHILD MAKES NO WARRANTY, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO THE TEST EQUIPMENT, AND THERE IS EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. FAIRCHILD SHALL HAVE NO LIABILITY UNDER THIS AGREEMENT FOR ANY DAMAGES SUFFERED BY ARTEST OR ANY THIRD PARTY INCLUDING BUT NOT LIMITED TO DAMAGES FOR PERSONAL * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. INJURIES OR LOSS OF PROFITS, OR CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES. 3. Facilities Usage. Artest will take over the facilities of TEST and maintain TEST at the current Fairchild location for the benefit of Fairchild (the "TEST Facilities") and pay Fairchild a user fee for the space at the full service rate listed in Exhibit 2, Table 2. Artest agrees to comply in all respects with any requirements imposed on Fairchild under its Master Lease with Naoto Ohtsuki. Fairchild will notify Naoto Ohtsuki of Artest's usage of the TEST facilities. 3.1 User Fee. As specified in Exhibit 2, Table 2, the user fee for the TEST Facilities shall be $5,840.00 which rate the parties agree is fair and reasonable. The user fee shall be payable on or before the third day of each month. 3.2 Default. Artest shall be in default of its obligations under the Facilities Usage portion of this Agreement if it fails to pay the monthly user fee as specified in Exhibit 2, Table 2 when due, or takes any other action inconsistent with Fairchild's Master Lease, and such failure is not cured within three business days after Artest's receipt of written notice. In the event of Artest's default, Fairchild shall have the following rights and remedies, in addition to all other rights and remedies provided by law: (1) Fairchild may keep the Facilities Usage portion of this Agreement in effect and recover unpaid rents, (2) Fairchild may release the TEST Facilities to another tenant, (3) Fairchild may terminate the Facilities Usage portion of this Agreement by written notice to Artest. 3.3 Utilities. Fairchild will provide phone system access and separate billing of phone usage. Artest will pay all charges for Artest's phone usage while at the current Fairchild facilities. All other utilities and building maintenance services are included in the full service rate listed in Exhibit 2, Table 2. 3.4 Length of Usage. Artest will sublease from Fairchild the space described in Exhibit 2, Table 2, from the date of the execution of this Agreement until June 30, 2000. 3.5 Relocation of TEST. Upon the expiration of the term of the sublease, but in no event later than June 30, 2000, Artest shall relocate TEST at its own cost to a new facility that allows full access by Fairchild product and test engineering personnel. Notwithstanding the foregoing, Artest shall ensure the continuous operation of TEST during the relocation with uninterrupted access by Fairchild employees. The TEST Facilities after June of 2000 shall be of the same quality and proximity to Fairchild's product and test engineering personnel as are the current TEST Facilities. Artest and Fairchild shall use their best efforts to jointly seek new space to allow for a coordinated move to the new facilities. All facility items purchased by Artest will remain the property of Artest after the expiration of the current lease and not part of Facility left behind for landlord. * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. 4. Personnel. Artest shall offer employment, at comparable pay and benefits, to the operators and test personnel listed in Exhibit 2, Table I who are currently employed by Fairchild, to maintain continuity and knowledge of Fairchild products (the "TEST Personnel"). The TEST Personnel shall become employees of Artest and shall be the sole responsibility of Artest. In addition to the personnel listed in Exhibit 2, Artest shall provide to the TEST Personnel team two additional positions to be filled from current Artest personnel or to be newly hired by Artest at its discretion. These two positions shall be a shipping clerk and a supervisor of the TEST Personnel. 4.1 Retention of TEST Personnel. Artest, with the cooperation of Fairchild, shall use its best efforts to jointly develop a retention program to assure employment continuity of the TEST Personnel to be hired by Artest from Fairchild. Fairchild shall pay to Artest a Retention Amount to foster this continuity. The Retention Amount shall be paid in four (4) quarterly retainer payments to Artest during the twelve (12) months following the effective date of the Agreement. Any additional retention program to either new personnel or to personnel listed in Exhibit 2 is the sole responsibility of Artest. The Retention Amount shall be intended to meet any severance obligation of Fairchild to the TEST Personnel and they shall be notified of this fact. Any other obligations to employees of TEST prior to the transfer are the sole responsibility of Fairchild. IV. ENGINEERING TEST SERVICES 5. Engineering Test Services. Fairchild agrees to contract with Artest for production test and shipping services (the "Engineering Test Services"). Artest shall provide these services to Fairchild in the same manner as they are currently done by Fairchild. Artest shall use commercially reasonable efforts to perform its obligations under this Engineering Test Services Agreement and Fairchild agrees to cooperate in good faith to allow Artest to perform the Engineering Test Services. 6. Relationship of the Parties. For all purposes of this agreement Artest shall be acting as an independent contractor and not as an employee or agent of Fairchild. Artest further understands that, except as specifically provided in this Agreement, Fairchild is under no obligation to contract for any work exclusively from Artest, and Artest is free to contract to supply work to others. 7. Access to Teradyne and Trillium Equipment. Artest will provide access to TEST for Fairchild product and test engineers for test development and yield enhancement during the daytime shift (8 A.M - 5 P.M., Monday - Friday). Artest shall provide to Fairchild at the request of Fairchild, up to [*] hours per month of Teradyne and up to [*] hours per month of Trillium machine time during the daytime shift. The Teradyne and Trillium equipment that Fairchild may use is described in Exhibit 1. Fairchild's time on said machines shall be allocated evenly throughout each month. 7.1 Notice of Change in Usage. Fairchild shall notify Artest if it doesn't need the minimum guarantee time and will release any unused machine time to Artest for its use. Conversely, Artest will notify Fairchild if it doesn't need the machine time * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. beyond the minimum time listed above and release to Fairchild the right to use the machines beyond the agreed to hours. 7.2 User Fee. For the use of the Teradyne and Trillium machines described in Exhibit 1, Fairchild shall pay to Artest a user fee in the amount of [*] per year payable in equal monthly installments beginning on the date of the execution of this Agreement. The user fee shall be payable on or before the third day of each month. Any hours used in excess of the amounts listed in section 7 shall be billed at "most favorable price" offered by Artest to other customers but in no event are to exceed [*]/hour for Teradyne and [*]/hour for Trillium. 7.3 License. Artest and Fairchild shall use their best efforts to work to transfer to Artest any Fairchild "right to use" license on the Teradyne or any other piece of the TEST equipment. Artest and Fairchild shall use their reasonable best efforts to minimize the cost of this transfer but any costs associated with the transfer of the license shall be born by Artest alone and Fairchild shall have no obligation to assure the transfer. 8. Eagle Test System. Artest shall purchase an Eagle test system and related interface hardware satisfactory to Fairchild to be located at the TEST Facilities. The Eagle test system and interface hardware shall be satisfactory to Fairchild and shall enable both production test and test development. Fairchild will use its best efforts to negotiate with the Eagle Test Company to allow Artest access to Fairchild's favorable price, but Fairchild shall not be obligated to obtain such price for Artest. 8.1 Access to Eagle Test System. Artest will provide access to the Eagle Test system to Fairchild product and test engineers for test development and yield enhancement during the daytime shift (8 A.M - 5 P.M., Monday - Friday). Artest shall provide to Fairchild at Fairchild's request up to 90 hours per month of machine during the daytime shift each month. Fairchild's time shall be allocated evenly throughout each month. 8.2 Notice of Change in Usage. Fairchild shall notify Artest when it doesn't need the minimum guarantee time and will release any unused machine time to Artest for its use. Conversely, Artest will notify Fairchild if it doesn't need the Eagle machine beyond the minimum time listed above and release to Fairchild the right to use the machines beyond the agreed to hours. 8.3 User Fee. For the use of the Eagle Test system as listed above, Fairchild shall pay to Artest a user fee in the amount of [*] per year payable in equal monthly installments beginning on the date of the execution of this Agreement. The user fee shall be payable on or before the third day of each month. Any hours used in excess of the amounts listed in section 8 shall be billed at "most favorable price" offered by Artest to other customers but in no event are to exceed [*]/hour. 9. Production Test Services. Fairchild agrees to use Artest to perform all final test and shipping responsibilities for all currently sold Fairchild products listed in the Old 26MM Table of Exhibit 3 for a period of at least three (3) years, provided that Artest can maintain * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. competitive costs, service and quality for test and shipping. While the costs for the production test services supplied by Artest must be competitive with equivalent services provided in the semiconductor industry, the costs shall not exceed the costs for test and shipping listed in Exhibit 3. The parties agree to meet from time to time during the course of the term of this agreement to discuss the services and quality for the testing provided by Artest to Fairchild under this agreement. If Fairchild determines that Artest's services are in any way non-competitive, then Fairchild shall give Artest written notice of such inadequacy and Artest shall have reasonable time to correct the deficiency. If Artest shall fail to correct then Fairchild can upon written notice obtain services from another source. 9.1 Test Services for Fairchild's Mixed Signal Business Unit. Fairchild shall endeavor to use Artest as its subcontractor for all final test and shipping for any new products Fairchild develops at its Mixed Signal Business facility provided that Artest's costs, service and quality are competitive with equivalent services provided in the semiconductor industry and meet Fairchild's needs; provided, however that nothing herein is intended to delay Fairchild with its business planning or ability to sell products. Exhibit 3, Table 2 lists some of these new products, along with estimated final test revenue. Fairchild is not bound by the projections listed in Exhibit 3, Table 2. 9.2 Test Services at Other Fairchild Owned Facilities. Artest agrees that any products developed by Fairchild that can be assembled at its other owned facilities (usually products with less than 20 pins) will be tested by Fairchild and not Artest. 9.3 Yearly Run Rates. Fairchild agrees to provide Artest yearly run rates of its products for all Engineering and Test Services set forth in Section IV of this Agreement, that can meet or exceed $825,000 of equivalent production probe and/or final test volume as estimated in Exhibit 3 for a period of three (3) years provided that Artest's cost, service and quality for these services are competitive with equivalent cost, service and quality provided in the semiconductor industry. In addition, Fairchild does not guarantee any specific product mix. If at the end of each 12-month period from the execution of this agreement, Fairchild has not met the minimum guaranteed production revenue, then Fairchild shall pay any remaining difference between actual testing services revenue and $825,000 within 30 days of the end of each 12-month period. 10. Term of Services Contract. Unless otherwise specified, the term of the Engineering Test Services part of the Agreement shall be for a minimum of three (3) years from the date of the execution of this Agreement. 11. Termination and Renewal. At least 90 but not more that 180 days before the expiration of this Agreement, the parties shall notify each other in writing whether the Agreement will terminate. If the parties do not provide such notification, the Agreement will automatically renew for a period of one year at prices to be agreed upon. Thereafter, the agreement will automatically renew each year until the parties provide written notice of its termination. 12. Termination for Cause. If either party materially breaches a provision and fails to cure such breach within the thirty (30) days after receiving written notice from the other party, such other party shall have the right at its option to terminate the Engineering Test Services portion of this Agreement. Upon termination of the Engineering Test Services portion of this * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Agreement for cause, the parties shall pay to each other any fees or rents due at the time of the termination. 13. Bankruptcy. Should either party: (i) become insolvent, (ii) make an assignment for the benefit of creditors; (iii) file or have filed against it a petition in bankruptcy or reorganization; (iv) have a receiver, manager, administrator, or administrative receiver appointed; or (v) institute any proceedings for liquidation or winding up; then the other party may, in addition to other rights and remedies it may have, terminate this Agreement immediately by written notice. 14. Property Upon Termination. Upon expiration or termination of this Agreement, both parties will deliver to the other all property of the other party that they may have in their possession or control. V. MISCELLANEOUS 15. Invoices. Unless otherwise provided in this Agreement, Artest and Fairchild shall invoice each other for fees for any Engineering Test Services provided pursuant to this agreement. All invoices shall be due and payable when invoiced, and shall be deemed overdue if they remain unpaid thirty (30) days after they become payable. Overdue amounts shall accrue interest at the rate of two (2) percent per month, or at the highest legal interest rate, if less. 16. Confidential Information. During the term of this Agreement and subsequent thereto, the receiving party will keep all Confidential Information of the other party in confidence and will not, without prior written consent of the disclosing party, publish, disclose or otherwise make available, directly or indirectly, any item of Confidential Information to any person other than those of the receiving party's employees, agents or contractors who need to know the same in the performance of their duties for the receiving party. 17. Dispute Resolution. The parties shall attempt in good faith to resolve any dispute arising out of this Agreement, including but not limited to any dispute regarding the interpretation of or performance under said Agreement, promptly by negotiations. If these negotiations should fail, the parties shall resolve any dispute by submitting it to binding arbitration in San Jose, California under the rules of the American Arbitration. Notwithstanding the foregoing, either party shall have the right to seek preliminary injunctive relief at any time. The prevailing party shall have all reasonable legal fees reimbursed. 18. Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and the State of California. The parties agree that the United Nations Convention on Contracts for the International Sale of goods is specifically excluded from application to this Agreement. 19. Notices. Any notices required or permitted hereunder will be given to the appropriate party at the address specified below or at such other address as the party may specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or, if sent by certified or registered mail, three (3) days after the date of mailing. As to: Fairchild Semiconductor Sam Lee Fairchild Semiconductor 350 Ellis Street Mountain View, CA 94043 with a copy to Joel Pond Fairchild Semiconductor 333 Western Ave. South Portland, ME 04106 Artest Corporation: Jen Kao Artest Corporation 678 Almanor Ave. Sunnyvale, CA 94086 20. Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, and all of which shall together constitute one and the same Agreement. 21. Complete Understanding and Modification. This Agreement and the Exhibits attached hereto constitute the full and complete understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior understandings and agreements relating to such subject matter. Any waiver, modification, or amendment of any provision of this Agreement shall be effective only if in writing and signed by each of the parties hereto. 22. Waiver. The failure of either party to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time be deemed a waiver or relinquishment of that right or power for all or any other time. 23. Force Majeure. The parties shall not be liable for any delay or failure to perform, in whole or in part, caused by the occurrence of any contingency beyond its reasonable control, including but not limited to, war, sabotage, insurrection, rebellion, riot or other act of civil disobedience, act of public enemy, failure or delay in transportation, act of any government or any agency or subdivision thereof, judicial action, labor disputes, shortages of materials, fire, accident, explosion, epidemic, quarantine restrictions, storm, flood or earthquake. In Witness Whereof, the duly authorized representative of the parties has executed this Agreement as of the effective Date.
FAIRCHILD SEMICONDUCTOR ARTEST CORPORATION Signed: /s/ Michael Hollabaugh Signed: /s/ Jen Kao ------------------------------------- ---------------------------------- Printed Name: Michael Hollabaugh Printed Name: Jen Kao Title: V.P., Mixed Signal Business Unit Title: President & CEO Date: September 28, 1999 Date: September 30, 1999
Exhibit 1
Asset Description Artest # Location Comments - ----------------- -------- -------- -------- [*] 001 test floor [*] [*] 001 test floor [*] [*] 001 test floor [*] [*] 001 test floor [*] [*] 002 test floor [*] [*] 002 test floor [*] [*] 002 test floor [*] [*] 003 test floor [*] [*] 004 test floor [*] [*] 005 test floor [*] [*] 006 test floor [*] 007 test floor [*] [*] 008 test floor [*] 009 test floor [*] 010 test floor [*] 011 test floor [*] 012 test floor [*] [*] 013 test floor [*] [*] 014 test floor [*] 015 test floor [*] 016 test floor [*] 017 test floor [*] 018 test floor [*] 019 test floor [*] 020 test floor [*] 021 test floor [*] 022 test floor [*] 023 test floor [*] [*] 024 test floor [*] [*] 025 test floor [*] [*] 026 test floor [*] 027 test floor [*] 028 test floor [*] 029 test floor [*] 030 test floor [*] 031 test floor [*] 032 Test floor [*] 033 Test floor [*] 034 Shipping [*] 035 Shipping [*] 036 Shipping [*] 037 Shipping [*] 038 Shipping [*] 039 Shipping [*] 040 Shipping [*] 041 Shipping [*] 043 Assembly [*] 044 Assembly [*] 044 Shipping [*] 045 Assembly [*] 046 Assembly [*] 047 Assembly [*] 048 Burn in area [*] 049 Burn in area [*] 050 Burn in area [*] 051 Burn in area [*] 052 Burn in area [*] 053 Burn in area [*] MTV Misc [*] Maint. Room [*] [*]
[*] * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Exhibit 2 Table 1: Employees to be transferred to Artest. ----------------------------------------------
# of weeks Total Name DOH Years of Hourly Shift Total Severance Hours/ Severance Service Rate Differential Rate Pay Week $ Amount - ----------------------------------------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] [*] 40 [*] [*] [*] [*] [*] [*] [*] [*] 40 [*] [*] [*] [*] [*] [*] [*] [*] 35 [*] [*] [*] [*] [*] [*] [*] [*] 35 [*] [*] [*] [*] [*] [*] [*] [*] 35 [*] [*] [*] [*] [*] [*] [*] [*] 40 [*] ------- [*]
Table 2: Facility Rental Details -------------------------------- Rent based on 4,000 Sq. Ft. @ full service rate of $1.46 per Sq. Ft. = $5840/month Square Footage includes: Test Floor 2,805 Sq. Ft. Shipping Area 483 Sq. Ft. One Office 230 Sq. Ft. Warehouse Space 482 Sq. Ft. (Mark & Pack) * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. Exhibit 3 [*] * Confidential treatment has been requested with respect to certain portions of this exhibit. Such portions are marked with a "[*]" in place of the redacted language. Omitted portions are filed separately with the Securities and Exchange Commission. EX-10.9 4 0004.txt REGISTRANT'S 2000 STOCK INCENTIVE PLAN EXHIBIT 10.9 ARTEST CORPORATION 2000 STOCK INCENTIVE PLAN ------------------------- ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 2000 Stock Incentive Plan is intended to promote the interests of Artest Corporation, a Delaware corporation, by providing eligible persons in the Corporation's service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in such service. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity incentives programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, - the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, - the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), - the Automatic Option Grant Program under which eligible non- employee Board members shall automatically receive option grants at designated intervals over their period of continued Board service, and - the Director Fee Option Grant Program under which non- employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special stock option grant. B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. However, any discretionary option grants or stock issuances for members of the Primary Committee must be authorized by a disinterested majority of the Board. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of those programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any stock option or stock issuance thereunder. D. The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. 2 F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such issuances, the time or times when the issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals who first become non-employee Board members on or after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant 3 under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed six million (6,000,000) shares. Such reserve shall consist of (i) the number of shares estimated to remain available for issuance, as of the Plan Effective Date, under the Predecessor Plan as last approved by the Corporation's stockholders, including the shares subject to outstanding options under the Predecessor Plan, (ii) plus an additional increase of approximately one million two hundred fifty- nine thousand five hundred sixty-seven (1,259,567) shares to be approved by the Corporation's stockholders prior to the Underwriting Date. B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2001, by an amount equal to three percent (3%) of the total number of shares of Common Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed one million (1,000,000) shares. C. No one person participating in the Plan may receive stock options, separately exercisable stock appreciation rights and direct stock issuances for more than one million (1,000,000) shares of Common Stock in the aggregate per calendar year. D. Shares of Common Stock subject to outstanding options (including options transferred to this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and 4 not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under Section IV of Article Two, Section III of Article Three, Section II of Article Five or Section III of Article Six of the Plan shall not be available for subsequent issuance under the Plan. E. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan, (v) the number and/or class of securities and exercise price per share in effect under each outstanding option transferred to this Plan from the Predecessor Plan and (vi) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year pursuant to the provisions of Section V.B of this Article One. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 5 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM ---------------------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document -------- shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. -------------- 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Seven and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 6 B. Exercise and Term of Options. Each option shall be exercisable at ---------------------------- such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. -------------------------------- 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the Optionee's designated beneficiary or beneficiaries of that option. (iii) Should the Optionee's Service be terminated for Misconduct or should the Optionee otherwise engage in Misconduct while holding one or more outstanding options under this Article Two, then all those options shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 7 (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no ------------------ stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the ----------------- discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. During the lifetime of the ---------------------------------- Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of inheritance following the Optionee's death. Non-Statutory Options shall be subject to the same restriction, except that a Non-Statutory Option may be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's family or to a trust established exclusively for one or more such family members or to Optionee's former spouse, to the extent such assignment is in connection with the Optionee's estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. --- 8 A. Eligibility. Incentive Options may only be granted to Employees. ----------- B. Dollar Limitation. The aggregate Fair Market Value of the shares ----------------- of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. C. 10% Stockholder. If any Employee to whom an Incentive Option is --------------- granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option under the Discretionary Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. However, an outstanding option shall not become exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights under the Discretionary Option Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options under the Discretionary Option Grant Program shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). 9 D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriateadjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain - -------- the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year and (iv) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Discretionary Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. E. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of such Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock, whether or not those options are to be assumed in the Corporate Transaction. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate Transaction and shall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. F. The Plan Administrator shall have full power and authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall become exercisable for all the shares of Common Stock at the time subject to those options in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. In addition, the Plan Administrator may structure one or more of the Corporation's repurchase rights so that those rights shall immediately terminate with respect to any shares held by the Optionee at the time of his or her Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time. 10 G. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of a Change in Control, become exercisable for all the shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation's outstanding repurchase rights under such program upon the subsequent termination of the Optionee's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under the Federal tax laws. I. The outstanding options shall in no way affect the right of the Corporation 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. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or a different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and 11 the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the ----- rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock at the time subject to such option (whether or not the option is otherwise at that time vested and exercisable for those shares) over (B) the aggregate exercise price payable for those shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) At the time such limited stock appreciation right is granted, the Plan Administrator shall pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. 12 ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM -------------------------------------- I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for such calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely authorization shall automatically be granted an option under the Salary Investment Option Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, -------- that each such document shall comply with the terms specified below. A. Exercise Price. -------------- 1. The exercise price per share shall be thirty-three and one- third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Number of Option Shares. The number of shares of Common Stock ----------------------- subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, 13 A is the dollar amount by which the Optionee's base salary is to be reduced for the calendar year pursuant to his or her election under the Salary Investment Option Grant Program, and B is the Fair Market Value per share of Common Stock on the option grant date. C. Exercise and Term of Options. The option shall become ---------------------------- exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. Effect of Termination of Service. Should the Optionee cease -------------------------------- Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option ------- term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of the option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)- ------- year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed shall remain exercisable for the fully vested shares until the earlier of (i) the expiration of the ten (10)-year ------- option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. 14 B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) - -------- the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service, (iii) the termination of the option in connection with a Corporate Transaction or (iv) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over while the Optionee remains in Service, such Optionee shall have a thirty (30)-day period in which to surrender the Corporation each outstanding option held by him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the option is otherwise at the time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant Program, pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board shall be required at the time of the actual option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price -------- payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Salary Investment Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. E. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation 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. 15 IV. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 16 ARTICLE FOUR STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals. A. Purchase Price. -------------- 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. ------------------ 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or 17 other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. 6. Outstanding share right awards under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards, if the performance goals established for such awards are not attained. The Plan Administrator, however, shall have the discretionary authority to issue shares of Common Stock under one or more outstanding share right awards as to which the designated performance goals have not been attained. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. 18 B. The Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall also have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, either upon the occurrence of a Change in Control or upon the subsequent termination of the Participant's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of that Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 19 ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM ------------------------------ I. OPTION TERMS A. Grant Dates. Option grants shall be made on the dates specified ----------- below: 1. Each individual who is first elected or appointed as a non- employee Board member at any time on or after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase forty thousand (40,000) shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary. 2. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as a non- employee Board member, whether or not that individual is standing for re- election to the Board at that particular Annual Meeting, shall automatically be granted a Non-Statutory Option to purchase ten thousand (10,000) shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 10,000-share option grants any one non-employee Board member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received one or more stock option grants from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. Exercise Price. -------------- 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. Option Term. Each option shall have a term of ten (10) years ----------- measured from the option grant date. D. Exercise and Vesting of Options. Each option shall be ------------------------------- immediately exercisable for any or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. The shares subject to each initial 40,000-share grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) successive equal annual installments upon the Optionee's completion 20 of each year of service as a Board member over the four (4)-year period measured from the option grant date. The shares subject to each annual 10,000-share option grant shall vest in one installment upon the Optionee's completion of the one (1)-year period of service measured from the grant date. E. Limited Transferability of Options. Each option under this ---------------------------------- Article Five may be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's family or to a trust established exclusively for one or more such family members or to Optionee's former spouse, to the extent such assignment is in connection with the Optionee's estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Five, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. F. Termination of Board Service. The following provisions shall ---------------------------- govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or the designated beneficiary or beneficiaries of such option) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for any or all of those shares as fully vested shares of Common Stock. 21 (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)- month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER A. In the event of a Corporate Transaction while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option held by such Optionee under this Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In the event of a Change in Control while the Optionee remains a Board member, the shares of Common Stock at the time subject to each outstanding option held by such Optionee under this Automatic Option Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Each such option shall remain exercisable for such fully vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. All outstanding repurchase rights under this under this Automatic Option Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction or Change in Control. D. Upon the occurrence of a Hostile Take-Over while the Optionee remains a Board member, such Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding options under this Automatic Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those 22 shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and cash distribution. E. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price -------- payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Automatic Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. F. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation 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. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 23 ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM --------------------------------- I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years for which the Director Fee Option Grant Program is to be in effect. For each such calendar year the program is in effect, each non-employee Board member may irrevocably elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board for that year to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to the first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the retainer fee election is in effect. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. Exercise Price. -------------- 1. The exercise price per share shall be thirty-three and one- third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Number of Option Shares. The number of shares of Common Stock ----------------------- subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non- employee Board member's election under this Director Fee Option Grant Program, and 24 B is the Fair Market Value per share of Common Stock on the option grant date. C. Exercise and Term of Options. The option shall become ---------------------------- exercisable in a series of twelve (12) equal monthly installments upon the Optionee's completion of each calendar month of Board service during the calendar year for which the retainer fee election is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. Limited Transferability of Options. Each option under this ---------------------------------- Article Six may be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's family or to a trust established exclusively for one or more such family members or to Optionee's former spouse, to the extent such assignment is in connection with Optionee's estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Six, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. E. Termination of Board Service. Should the Optionee cease Board ---------------------------- service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the - ------- expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. F. Death or Permanent Disability. Should the Optionee's service as ----------------------------- a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully vested shares until the earlier of (i) the expiration of the ten ------- (10)-year option term or (ii) the expiration of the three (3)-year period measured from 25 the date of such cessation of Board service. To the extent such option is held by the Optionee at the time of his or death, that option may be exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three - ------- (3)-year period measured from the date of the Optionee's cessation of Board service. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully vested shares until the earliest to occur of (i) the expiration of the ten (10)- -------- year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service or (iii) the surrender of the option in connection with a Hostile Take-Over. B. In the event of a Change in Control while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. The option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) - -------- the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service, (iii) the termination of the option in connection with a Corporate Transaction or (iv) the surrender of the option in connection with a Hostile Take-Over. 26 C. Upon the occurrence of a Hostile Take-Over while the Optionee remains a Board member, such Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option held by him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the option is otherwise at the time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price -------- payable for such securities shall remain the same. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Corporate Transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Director Fee Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Corporate Transaction. E. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation 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. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 27 ARTICLE SEVEN MISCELLANEOUS ------------- I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest-bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value of such shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Withholding Taxes to which such holders may become subject in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation withhold, ----------------- from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at -------------- the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. 28 III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately on the Plan Effective Date. However, the Salary Investment Option Grant Program and the Director Fee Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date, and the initial option grants under the Automatic Option Grant Program shall also be made on the Plan Effective Date to any non-employee Board members eligible for such grants at that time. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Plan Effective Date. All options outstanding under the Predecessor Plan on the Plan Effective Date shall be transferred to the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so transferred shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such transferred options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest to occur of (i) -------- _________, 2010, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Should the Plan terminate on __________, 2010, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. 29 B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 30 APPENDIX -------- The following definitions shall be in effect under the Plan: A. Automatic Option Grant Program shall mean the automatic option ------------------------------ grant program in effect under Article Five of the Plan. B. Board shall mean the Corporation's Board of Directors. ----- C. Change in Control shall mean a change in ownership or control of ----------------- the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. Code shall mean the Internal Revenue Code of 1986, as amended. ---- E. Common Stock shall mean the Corporation's common stock. ------------ F. Corporate Transaction shall mean either of the following --------------------- stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. A-1. G. Corporation shall mean Artest Corporation, a Delaware corporation, ----------- and any corporate successor to all or substantially all of the assets or voting stock of Artest Corporation which shall by appropriate action adopt the Plan. H. Director Fee Option Grant Program shall mean the special stock --------------------------------- option grant in effect for non-employee Board members under Article Six of the Plan. I. Discretionary Option Grant Program shall mean the discretionary ---------------------------------- option grant program in effect under Article Two of the Plan. J. Employee shall mean an individual who is in the employ of the -------- Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. K. Exercise Date shall mean the date on which the Corporation shall ------------- have received written notice of the option exercise. L. Fair Market Value per share of Common Stock on any relevant date ----------------- shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there ----------------------- is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If ----------------------- there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. A-2. M. Hostile Take-Over shall mean the acquisition, directly or ----------------- indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. N. Incentive Option shall mean an option which satisfies the ---------------- requirements of Code Section 422. O. Involuntary Termination shall mean the termination of the Service ----------------------- of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. P. Misconduct shall mean the commission of any act of fraud, ---------- embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct. Q. 1934 Act shall mean the Securities Exchange Act of 1934, as -------- amended. R. Non-Statutory Option shall mean an option not intended to satisfy -------------------- the requirements of Code Section 422. S. Optionee shall mean any person to whom an option is granted under -------- the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. A-3. T. Parent shall mean any corporation (other than the Corporation) in ------ an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. U. Participant shall mean any person who is issued shares of Common ----------- Stock under the Stock Issuance Program. V. Permanent Disability or Permanently Disabled shall mean the -------------------------------------------- inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. W. Plan shall mean the Corporation's 2000 Stock Incentive Plan, as ---- set forth in this document. X. Plan Administrator shall mean the particular entity, whether the ------------------ Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Y. Plan Effective Date shall mean the date the Plan shall become ------------------- effective and shall be coincident with the Underwriting Date. Z. Predecessor Plan shall mean the Corporation's 1998 Stock Plan in ---------------- effect immediately prior to the Plan Effective Date hereunder. AA. Primary Committee shall mean the committee of two (2) or more ----------------- non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program solely with respect to the selection of the eligible individuals who may participate in such program. BB. Salary Investment Option Grant Program shall mean the salary -------------------------------------- investment option grant program in effect under Article Three of the Plan. CC. Secondary Committee shall mean a committee of one or more Board ------------------- members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. A-4. DD. Section 16 Insider shall mean an officer or director of the ------------------ Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. EE. Service shall mean the performance of services for the ------- Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. FF. Stock Exchange shall mean either the American Stock Exchange or -------------- the New York Stock Exchange. GG. Stock Issuance Agreement shall mean the agreement entered into by ------------------------ the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. HH. Stock Issuance Program shall mean the stock issuance program in ---------------------- effect under Article Four of the Plan. II. Subsidiary shall mean any corporation (other than the ---------- Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. JJ. Take-Over Price shall mean the greater of (i) the Fair Market --------------- ------- Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. KK. 10% Stockholder shall mean the owner of stock (as determined --------------- under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). LL. Underwriting Agreement shall mean the agreement between the ---------------------- Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. MM. Underwriting Date shall mean the date on which the Underwriting ----------------- Agreement is executed and priced in connection with an initial public offering of the Common Stock. NN. Withholding Taxes shall mean the Federal, state and local income ---------------- employment withholding taxes to which the holder of Non-Statutory Options or and unvested shares of Common Stock may become subject in connection with the exercise of those options or the vesting of those shares. A-5. EX-10.10 5 0005.txt REGISTRANT'S 2000 EMPLOYEE STOCK PURCHASE PLAN ARTEST CORPORATION 2000 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- EXHIBIT 10.10 I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of Artest Corporation, a Delaware corporation, by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll deduction-based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The number of shares of Common Stock initially reserved for issuance over the term of the Plan shall be limited to two hundred fifty thousand (250,000) shares. B. The number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2001, by an amount equal to one percent (1%) of the total number of shares of Common Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed two hundred fifty thousand (250,000) shares. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date, (iii) the maximum number and class of securities purchasable in total by all Participants on any one Purchase Date, (iv) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year pursuant to the provisions of Section III.B of this Article One and (v) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. IV. OFFERING PERIOdS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date of such offering period. However, the initial offering period shall commence at the Effective Time and terminate on the last business day in October 2002. The next offering period shall commence on the first business day in November 2002, and subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall consist of a series of one or more successive Purchase Intervals. Purchase Intervals shall run from the first business day in May to the last business day in October each year and from the first business day in November each year to the last business day in April in the following year. However, the first Purchase Interval in effect under the initial offering period shall commence at the Effective Time and terminate on the last business day in April 2001. D. Should the Fair Market Value per share of Common Stock on any Purchase Date within an offering period be less than the Fair Market Value per share of Common Stock on the start date of that offering period, then that offering period shall automatically terminate immediately after the purchase of shares of Common Stock on such Purchase Date, and a new offering period shall commence on the next business day following such Purchase Date. The new offering period shall have a duration of twenty-four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any offering period under the Plan may enter that offering period on such start date or on any subsequent Semi-Annual Entry Date within that offering period, provided he or she remains an Eligible Employee. B. Each individual who first becomes an Eligible Employee after the start date of an offering period may enter that offering period on any subsequent Semi-Annual Entry Date within that offering period on which he or she is an Eligible Employee. 2. C. The date an individual enters an offering period shall be designated his or her Entry Date for purposes of that offering period. D. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock during an offering period may be any multiple of one percent (1%) of the Cash Earnings paid to the Participant during each Purchase Interval within that offering period, up to a maximum of fifteen percent (15%). The deduction rate so authorized shall continue in effect throughout the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Interval. (ii) The Participant may, prior to the commencement of any new Purchase Interval within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the fifteen percent (15%) maximum) shall become effective on the start date of the first Purchase Interval following the filing of such form. B. Payroll deductions shall begin on the first pay day administratively feasible following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. 3. VII. PURCHASE RIGHTS A. Grant of Purchase Rights. A Participant shall be granted a ------------------------ separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. Exercise of the Purchase Right. Each purchase right shall be ------------------------------ automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Interval ending on such Purchase Date to the purchase of whole shares of Common Stock at the purchase price in effect for the Participant for that Purchase Date. C. Purchase Price. The purchase price per share at which Common -------------- Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. Number of Purchasable Shares. The number of shares of Common ---------------------------- Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Interval ending with that Purchase Date by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed one thousand five hundred (1,500) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. In addition, the maximum number of shares of Common Stock purchasable in total by all Participants on any one Purchase Date shall not exceed sixty-two thousand five hundred (62,500) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. However, the Plan Administrator shall have the discretionary authority, exercisable prior to the start of any offering period under the Plan, to increase or decrease the limitations to be in effect for the number of shares purchasable per Participant and in total by all Participants on each Purchase Date during that offering period. 4. E. Excess Payroll Deductions. Any payroll deductions not applied to ------------------------- the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable per Participant or in total by all Participants on the Purchase Date shall be promptly refunded. F. Termination of Purchase Right. The following provisions shall ----------------------------- govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next scheduled Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Interval in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Interval in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the Purchase Interval in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf for that Purchase Interval or (b) have such funds held for the purchase of shares on his or her behalf on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service (x) within ninety (90) days following the commencement of such leave or (y) prior to the expiration of any longer period for which such Participant's right to reemployment with the Corporation is guaranteed by statute or contract, his or her payroll deductions under the Plan shall automatically resume at the rate in 5. effect at the time the leave began, unless the Participant withdraws from the Plan prior to his or her return. An individual who returns to active employment following a leave of absence that exceeds in duration the applicable (x) or (y) time period will be treated as a new Employee for purposes of subsequent participation in the Plan and must accordingly re- enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into the offering period. G. Change in Control. Each outstanding purchase right shall ----------------- automatically be exercised, immediately prior to the effective date of any Change in Control, by applying the payroll deductions of each Participant for the Purchase Interval in which such Change in Control occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into the offering period in which such Change in Control occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Change in Control. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase, but not the limitation applicable to the maximum number of shares of Common Stock purchasable in total by all Participants on any one Purchase Date. The Corporation shall use its best efforts to provide at least ten (10) days' prior written notice of the occurrence of any Change in Control, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Change in Control. H. Proration of Purchase Rights. Should the total number of shares ---------------------------- of Common Stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. Assignability. The purchase right shall be exercisable only by ------------- the Participant and shall not be assignable or transferable by the Participant. J. Stockholder Rights. A Participant shall have no stockholder ------------------ rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans 6. (within the meaning of Code Section 423)) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty- Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value per share on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000.00) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Interval, then the payroll deductions that the Participant made during that Purchase Interval with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on ___________, 2000, and shall become effective at the Effective Time, provided no purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until (i) the Plan shall have been approved by the stockholders of the Corporation and (ii) the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. In the event such stockholder approval is not obtained, or such compliance is not effected, within twelve (12) months after the date on which the Plan is adopted by the Board, the Plan shall terminate and have no further force or effect, and all sums collected from Participants during the initial offering period hereunder shall be refunded. 7. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in ____________ 2010, (ii) the date on which all shares available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Change in Control. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT OF THE PLAN A. The Board may alter, amend, suspend or terminate the Plan at any time to become effective immediately following the close of any Purchase Interval. However, the Plan may be amended or terminated immediately upon Board action, if and to the extent necessary to assure that the Corporation will not recognize, for financial reporting purposes, any compensation expense in connection with the shares of Common Stock offered for purchase under the Plan, should the financial accounting rules applicable to the Plan at the Effective Time be subsequently revised so as to require the Corporation to recognize compensation expense in the absence of such amendment or termination. B. In no event may the Board effect any of the following amendments or revisions to the Plan without the approval of the Corporation's stockholders: (i) increase the number of shares of Common Stock issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan or (iii) modify the eligibility requirements for participation in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation; however, each Plan Participant shall bear all costs and expenses incurred by such individual in the sale or other disposition of any shares purchased under the Plan. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of New York without resort to that State's conflict-of-laws rules. 8. Schedule A Corporations Participating in Employee Stock Purchase Plan As of the Effective Time ------------------------ Artest Corporation APPENDIX -------- The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. ----- B. Cash Earnings shall mean (i) the regular base salary paid to a ------------- Participant by one or more Participating Companies during such individual's period of participation in one or more offering periods under the Plan plus (ii) all overtime payments, bonuses, commissions, profit-sharing distributions and other incentive-type payments received during such period. Such Cash Earnings shall be calculated before deduction of (A) any income or employment tax withholdings or (B) any contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate. However, Cash Earnings shall not include any contributions made by the Corporation or any Corporate Affiliate on the Participant's behalf to any employee benefit or welfare plan now or hereafter established (other than Code Section 401(k) or Code Section 125 contributions deducted from such Cash Earnings). C. Change in Control shall mean a change in ownership of the ----------------- Corporation pursuant to any of the following transactions: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation, or (iii) the acquisition, directly or indirectly, by a person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by or is under common control with the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders. D. Code shall mean the Internal Revenue Code of 1986, as amended. ---- E. Common Stock shall mean the Corporation's common stock. ------------ A-1 F. Corporate Affiliate shall mean any parent or subsidiary ------------------- corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. G. Corporation shall mean Artest Corporation, a Delaware ----------- corporation, and any corporate successor to all or substantially all of the assets or voting stock of Artest Corporation that shall by appropriate action adopt the Plan. H. Effective Time shall mean the time at which the Underwriting -------------- Agreement is executed and the Common Stock priced for the initial public offering of such Common Stock. Any Corporate Affiliate that becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. Eligible Employee shall mean any person who is employed by a ----------------- Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401 (a). J. Entry Date shall mean the date an Eligible Employee first ---------- commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. Fair Market Value per share of Common Stock on any relevant date ----------------- shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal. If there is no ----------------------- closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal. If ----------------------- there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period that begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. A-2 L. 1933 Act shall mean the Securities Act of 1933, as amended. -------- M. Participant shall mean any Eligible Employee of a Participating ----------- Corporation who is actively participating in the Plan. N. Participating Corporation shall mean the Corporation and such ------------------------- Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan are listed in attached Schedule A. O. Plan shall mean the Corporation's 2000 Employee Stock Purchase ---- Plan, as set forth in this document. P. Plan Administrator shall mean the committee of two (2) or more ------------------ Board members appointed by the Board to administer the Plan. Q. Purchase Date shall mean the last business day of each Purchase ------------- Interval. The initial Purchase Date shall be April 30, 2001. R. Purchase Interval shall mean each successive six (6)-month period ----------------- within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. Semi-Annual Entry Date shall mean the first business day in May ---------------------- and November each year on which an Eligible Employee may first enter an offering period. T. Stock Exchange shall mean either the American Stock Exchange or -------------- the New York Stock Exchange. U. Underwriting Agreement shall mean the agreement between the ---------------------- Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. A-3 EX-23.1 6 0006.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP San Jose, California October 16, 2000 -----END PRIVACY-ENHANCED MESSAGE-----