-----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, TecQxvf2ZZviHmPleUNK7abIV+VWped0Te4SHPra2Cxzitbg1Wxy1h4/+uLjcvHW UpgIauuVGhUWNA5FCEMIug== 0000891618-98-001130.txt : 19980318 0000891618-98-001130.hdr.sgml : 19980318 ACCESSION NUMBER: 0000891618-98-001130 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19980317 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN XTAL TECHNOLOGY CENTRAL INDEX KEY: 0001051627 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943031310 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-48085 FILM NUMBER: 98567270 BUSINESS ADDRESS: STREET 1: 4311 SOLAR WAY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106835900 MAIL ADDRESS: STREET 1: 4311 SOLAR WAY CITY: FREMONT STATE: CA ZIP: 94538 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AMERICAN XTAL TECHNOLOGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 94-3031310 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 4311 SOLAR WAY FREMONT, CALIFORNIA 94538 (510) 683-5900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MORRIS S. YOUNG PRESIDENT AND CHIEF EXECUTIVE OFFICER AMERICAN XTAL TECHNOLOGY, INC. 4311 SOLAR WAY FREMONT, CALIFORNIA 94538 (510) 683-5900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: PETER M. ASTIZ, ESQ. FRANCIS S. CURRIE, ESQ. DAVID A. HUBB, ESQ. JOHN T. SHERIDAN, ESQ. GRAY CARY WARE & FREIDENRICH, LLP WILSON SONSINI GOODRICH & ROSATI 400 HAMILTON AVENUE PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94301-1825 650 PAGE MILL ROAD (650) 328-6561 PALO ALTO, CALIFORNIA 94304-1050 (650) 493-9300
------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. 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, as amended (the "Securities Act"), check the following box. [ ] If this Form is to be 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 for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
======================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ Common Stock, $0.001 par value.... 2,875,000 $10.00 $28,750,000 $8,482.00 ========================================================================================================================
(1) Includes 375,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purposes of computing the amount of the registration fee in accordance with Rule 457(a). 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. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION -- DATED MARCH 17, 1998 PROSPECTUS - -------------------------------------------------------------------------------- 2,500,000 Shares [AXT LOGO] [AMERICAN XTAL TECHNOLOGY, INC. MARK] Common Stock - -------------------------------------------------------------------------------- All of the 2,500,000 shares of common stock, par value $0.001 per share (the "Common Stock"), offered hereby (the "Offering"), are being sold by American Xtal Technology, Inc. ("AXT" or the "Company"). Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for inclusion in The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "AXTI." SEE "RISK FACTORS" ON PAGES 6 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ====================================================================================================================== Underwriting Price to Discounts and Proceeds to Public(1) Commissions(1) Company(2) - ---------------------------------------------------------------------------------------------------------------------- Per Share............................... $ $ $ - ---------------------------------------------------------------------------------------------------------------------- Total(3)................................ $ $ $ ======================================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $900,000. (3) The Company has granted to the several Underwriters a 30-day over-allotment option to purchase up to 375,000 additional shares of the Common Stock on the same terms and conditions as set forth above. If all such additional shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ and the total Proceeds to Company will be $ . See "Underwriting." - -------------------------------------------------------------------------------- The shares of Common Stock are offered by the several Underwriters, subject to delivery by the Company and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the shares of Common Stock to the Underwriters is expected to be made through the facilities of the Depository Trust Company, New York, New York on or about , 1998. PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY , 1998 3 CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." American Xtal Technology, Inc. and its logo are trademarks of the Company. This Prospectus contains trademarks of other companies. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information under "Risk Factors," and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus: (i) gives effect to the reincorporation of the Company in Delaware prior to the effective date of this Prospectus; (ii) reflects the conversion of all outstanding preferred stock, par value $.001 (the "Preferred Stock") to Common Stock upon the closing of the Offering; and (iii) assumes that the Underwriters' over-allotment option will not be exercised. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Risk Factors." THE COMPANY American Xtal Technology, Inc. uses a proprietary vertical gradient freeze ("VGF") technique to produce high-performance compound semiconductor base materials, or substrates, for use in a variety of electronic and opto-electronic applications. The Company primarily manufactures and sells compound semiconductor substrates composed of gallium arsenide ("GaAs"). Sales of GaAs substrates accounted for 94.9% of the Company's product revenues for the year ended December 31, 1997. The Company also manufactures and sells indium phosphide ("InP") and germanium ("Ge") substrates and is currently developing other high-performance compound substrates such as gallium phosphide ("GaP") and gallium nitride ("GaN"). The Company manufactures substrates from crystals grown using the Company's proprietary VGF technique and then slices the substrates into wafers. The Company's substrates are sold to semiconductor device manufacturers for use in applications such as wireless and fiber optic telecommunications, lasers, light-emitting diodes ("LEDs"), satellite solar cells and consumer electronics. The Company's customers include EMCORE Corporation ("EMCORE"), Hewlett Packard Company ("Hewlett Packard"), Motorola, Inc. ("Motorola"), NEC Kansai, Ltd. ("NEC"), Nortel, Siemens AG ("Siemens"), Sony Corporation ("Sony"), Spectrolab, Inc. (a Hughes Electronics Company) ("Spectrolab") and TRW, Inc. ("TRW"). In recent years, semiconductor device manufacturers have increasingly utilized substrates other than silicon to improve the performance of semiconductor devices or to enable new applications. These alternative substrates are composed of a single element such as Ge, or multiple elements which may include, among others, gallium, aluminum, indium, arsenic, phosphorus and nitrogen. Substrates that consist of more than one element are referred to as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently the most widely used compound substrate. Compound substrates have electrical properties which allow semiconductor devices to operate at much higher speeds than silicon-based devices or at the same speed with lower power consumption. For example, electrons move up to five times faster in GaAs than in silicon. Compound substrates also have better opto-electronic characteristics than silicon which enable them to convert energy into light and lasers, or to detect light and convert light into electrical energy. The Company believes that its proprietary VGF technique, which it has developed over the past 11 years, provides certain significant advantages over traditional manufacturing methods for growing crystals for the production of high-performance semiconductor substrates. The Company believes that its proprietary technique produces high-quality crystals which are characterized by greater physical and chemical uniformity and fewer defects than crystals grown by competing methods. This may result in substrates with lower breakage rates, which increases manufacturing yields and reduces manufacturing costs for the Company and its customers. The Company believes that it is currently the only high-volume supplier of GaAs substrates manufactured using the VGF technique and is positioned to become a leading manufacturer and supplier of other high-performance substrates. 3 5 Key elements of the Company's business strategy include the following: - Advance its leadership in VGF technology through continued investment in research and development and participation in government sponsored research programs. - Extend its leadership in the GaAs market by continuing to provide high-quality, price-competitive substrates and leveraging its demonstrated success in certain segments of the GaAs market to further increase sales. - Leverage its VGF technology as a platform to rapidly develop and cost-effectively manufacture high-quality substrates for emerging applications in various markets. - Target high-volume markets by increasing its manufacturing capacity in order to lower unit production costs and provide high-performance substrates at competitive prices. - Leverage existing customer relationships by supplying customers with high-performance substrates in addition to GaAs and establishing arrangements to jointly develop GaAs and other substrates. For the years ended December 31, 1995, 1996 and 1997, the Company generated total revenues of $14.5 million, $16.2 million and $25.3 million, respectively, and during the same period, generated net income of $2.7 million, $2.0 million and $3.3 million, respectively. The Company was incorporated in the State of California in December 1986. The Company will reincorporate in the State of Delaware in connection with the Offering. The Company's executive offices and manufacturing facilities are located at 4311 Solar Way, Fremont, California 94538, and its telephone number is (510) 683-5900. 4 6 THE OFFERING Common Stock Offered Hereby................................. 2,500,000 shares Common Stock to be Outstanding after the Offering(1)........ 15,670,268 shares Use of Proceeds............................................. For capital expenditures, product development, sales and marketing and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol...................... AXTI
- --------------- (1) Excludes 1,342,950 shares of Common Stock issuable upon exercise of outstanding options at December 31, 1997 with a weighted average exercise price of $4.77 per share. See "Management -- Benefit Plans" and Note 8 of Notes to Consolidated Financial Statements. RISK FACTORS Investors should consider the material risk factors involved in connection with an investment in the Common Stock and the impact to investors from various events which could adversely affect the Company's business. See "Risk Factors." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues............................................ $ 4,403 $ 7,457 $14,478 $16,227 $25,335 Gross profit........................................ 1,485 2,944 6,214 6,162 10,108 Income from operations.............................. 416 1,874 4,050 3,537 5,860 Net income.......................................... 125 1,161 2,739 2,046 3,258 Basic net income per share.......................... $ 0.05 $ 0.44 $ 0.97 $ 0.71 $ 1.11 Diluted net income per share........................ $ 0.01 $ 0.10 $ 0.23 $ 0.17 $ 0.25 Shares used in basic net income per share calculations...................................... 2,555 2,634 2,821 2,882 2,938 Shares used in diluted net income per share calculations...................................... 11,549 11,676 11,813 11,811 12,839
DECEMBER 31, 1997 --------------------- AS ACTUAL ADJUSTED(1) ------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................... $ 3,054 $23,079 Working capital............................................. 14,209 34,234 Total assets................................................ 30,613 50,683 Long-term debt, net of current portion...................... 7,728 7,728 Stockholders' equity........................................ 18,591 38,616
- --------------- (1) Reflects (i) the conversion of all outstanding shares of the Company's Preferred Stock into 10,128,738 shares of Common Stock upon completion of the Offering and (ii) the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share after deducting the underwriting discounts and commissions and estimated Offering expenses payable by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 7 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, as well as the other information set forth in this Prospectus, in evaluating an investment in the Common Stock offered hereby. This Prospectus contains statements that constitute forward-looking statements. Those statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's revenues; (ii) the Company's research and development efforts; (iii) potential acquisitions by the Company; (iv) the use of the proceeds of the Offering; (v) the Company's financing plans; (vi) trends affecting the Company's financial condition or results of operations; (vii) the Company's growth, operating and financing strategies; and (viii) the declaration and payment of dividends. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including, without limitation, the information set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," identifies important factors that could cause such differences. FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and annual revenues and operating results have varied in the past, are difficult to forecast, are subject to numerous factors both within and outside the Company's control and may fluctuate significantly in the future. Although the Company has been profitable on an annualized basis since 1990, there can be no assurance that the Company will continue to be profitable in future periods. The Company believes that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indicative of future operating results. The financial markets in Japan, Singapore, South Korea, Taiwan and other Asian nations have recently experienced significant turmoil. Such turmoil in the financial markets may negatively impact and/or delay the decision by the Company's customers to purchase the Company's substrates. Any reduction in the value of Asian currencies, in particular the Japanese yen, would make it more difficult for the Company to sell substrates into the Asian market and would provide the Company's Asian competitors with the ability to compete more effectively in the U.S. market. As a result, the turmoil in the Asian financial markets may materially and adversely affect the Company's business, financial condition and results of operations. In 1997, 23.5% of the Company's total revenues were from customers located in Japan and other Asian countries. The Company's expense levels are based in large part on its current expectations for future revenues and its expected research and development and marketing requirements. In the event revenues do not meet expectations, the Company may be unable to adjust its spending levels on a timely basis to compensate for unexpected revenue shortfalls. In addition, the Company has significantly increased its expense levels to support its recent growth and intends to continue to make significant investments in research and development, facility expansion, capital equipment and customer service and support capabilities worldwide. These investments will make it difficult for the Company to reduce its operating expenses in a particular period if the Company's revenue expectations for that period are not met. There can be no assurance that the Company will achieve a rate of revenue growth in any future period commensurate with its increased level of operating expenses and the failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's revenues and operating results are substantially dependent upon the volume and timing of orders received by the Company from its customers. The Company's lengthy sales cycle limits its visibility regarding future financial performance. The Company's revenue is subject to demand for GaAs substrates and is also subject to the risks to which the markets for its customers' products are subject, including technological or other changes in those markets. In addition, the ordering patterns of some of the Company's existing large customers have been unpredictable in the past, and the Company expects ordering patterns of such customers will continue to be unpredictable in the future. Because the Company's customers may cancel or reschedule orders without significant penalty and because such orders are often large and intended to satisfy customers' 6 8 long-term needs, backlog is not necessarily indicative of future product sales. The Company has in the past experienced customer cancellations and reschedulings of orders, or returns of such orders, for reasons beyond the Company's control, and significant cancellations or returns could occur again at any time in the future. Other factors which may affect the Company's revenues and operating results include the availability of raw materials; fluctuations in manufacturing yields; changes in product mix; the Company's ability to develop and bring to market new products on a timely basis; introduction of products and technologies by the Company's competitors; funds received from the federal government for research and development; market acceptance of the Company's and its customers' products; timing of investments in research and development and sales and marketing; fluctuations in exchange rates; changes in the international business climate and economic conditions generally. The Company's operating results in a future quarter or quarters may fall below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock will likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MARKET ACCEPTANCE OF VGF TECHNOLOGY. The traditional crystal growing processes for producing semi-insulating and semi-conducting GaAs substrates are the liquid-encapsulated Czochralski ("LEC") and horizontal Bridgman ("HB") techniques, respectively. The Company currently believes it is the only high- volume supplier of semi-insulating and semi-conducting GaAs substrates which are produced utilizing VGF technology. In order to establish the VGF technique as a preferred process for producing substrates, the Company must offer products with superior price/performance characteristics on a timely basis and in sufficient volumes to satisfy customers' requirements. A significant portion of the Company's prospective customers are manufacturers of wireless communications, fiber optic communications and other high-speed semiconductor devices that generally use GaAs substrates produced using either the LEC or HB techniques. The Company must overcome any reluctance of these customers to purchase the Company's GaAs substrates because of perceived risks relating to the newer VGF technology generally and concerns about the relative quality and cost-effectiveness of the Company's GaAs substrates as compared to substrates produced using the traditional LEC or HB techniques. In addition, potential GaAs substrate customers may be reluctant to rely on a relatively small company for critical materials used to manufacture their semiconductor devices. There can be no assurance that additional companies will purchase the Company's products using the VGF technique or that the companies that currently use AXT's VGF produced substrates will continue to do so in the future. The failure to achieve increased market acceptance of the Company's VGF technique by either current or prospective customers would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Technology." MANUFACTURING RISKS. The growing of crystals and the other steps required to manufacture substrates are highly complex processes. Manufacturing yields can be adversely affected by a number of factors, including chemical or physical defects in the crystals, contamination of the manufacturing environment, substrate breakage, equipment failure and the performance of manufacturing personnel. A combination of these factors has, in the past, adversely affected the Company's yields and resulted in product shipment delays. Because a significant portion of the Company's manufacturing costs are fixed, increases in the production volume of substrates and improvements of yields are critical to reducing unit costs, increasing margins and maintaining and improving the Company's results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect operating results. There can be no assurance that the Company will not suffer periodic yield problems, which could materially and adversely affect the Company's business, financial condition and results of operations. In addition, the Company has experienced and may continue to experience occasional difficulties manufacturing substrates which satisfy its customers' requirements. There can be no assurance that the Company will not experience such difficulties in the future and its failure to resolve such difficulties with its customers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is in the process of significantly expanding its substrate manufacturing capacity. The Company has also recently commenced production and shipment of Ge and InP substrates. The Company 7 9 also expects that it will need to successfully manufacture GaAs substrates in commercial quantities with six inch diameters in the near future. To date, the Company has only manufactured substrates with such size diameters on a test basis. There can be no assurance that the Company will successfully manufacture new or larger substrates in commercial volumes with acceptable yields. In the event the Company experiences low yields as a result of any of the foregoing, the Company's business, financial condition and results of operations would be materially adversely affected. The Company does not maintain any long-term supply agreements with any of its suppliers, and a number of raw materials required to grow crystals are obtained from a single or limited number of suppliers. For example, a single entity has significant control over commercial sources of gallium. The Company's reliance on a limited group of suppliers involves several risks, including the potential inability to obtain an adequate supply of materials and reduced control over pricing and delivery time. To date, the Company has from time to time experienced delays in obtaining certain materials and may in the future experience delays or increased costs as a result of shortages of materials, such as gallium. Although the Company attempts to maintain adequate levels of inventory of those materials which are supplied by limited sources to offset supply interruptions and attempts to obtain additional suppliers, the Company believes it will continue to be dependent upon a limited number of suppliers for its critical raw materials. There can be no assurance that delays, shortages or price increases caused by suppliers will not occur in the future. The failure to obtain adequate and timely deliveries of materials and components could prevent the Company from meeting scheduled shipment dates, which could damage relationships with current and prospective customers and could materially adversely affect the Company's business, financial condition and results of operations. The Company grows all of its crystals and manufactures all of its substrates at its facility in Fremont, California. Due to the centralization of its operations, the Company is susceptible to business interruptions resulting from fire, natural disasters, equipment failures or other localized conditions. Prolonged business interruptions could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." LIMITATIONS OF EXISTING MANUFACTURING CAPACITY. The Company currently produces all of its substrates at its approximately 50,000 square foot facility located in Fremont, California. The Company is in the process of expanding the size of this manufacturing facility by approximately 30,000 square feet to meet its anticipated future production needs through 1999. The expansion is scheduled for completion and operations are expected to commence in such space in the third quarter of 1998. Any disruptions in manufacturing as a result of the facility expansion could have a material adverse effect on the Company's business, financial condition and results of operations. The Company experienced manufacturing disruptions in the summer of 1996 as a result of the move to its current facility. In connection with the expansion of its current facility, the Company will be required to purchase equipment and hire, train and manage additional production personnel in order to successfully increase its production capacity in accordance with its time schedule. In the event the Company's expansion plans are not implemented on a timely basis for any reason, the Company could become subject to production capacity constraints. Such constraints could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is currently planning the construction of an additional facility of up to 50,000 square feet in Northern California. The new facility is expected to cost at least $10.0 million and take up to 15 months to construct. The Company believes that this planned new facility will not begin commercial production of substrates prior to the end of 1999. The Company anticipates that it may finance the new planned facility with funds obtained from outside sources. No assurance can be given that such funds will be available on terms favorable to the Company or at all. The construction of a new facility entails significant risks, including shortages of materials and skilled labor, unavailability or late delivery of process equipment, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the construction and production start-up of the new facility. In addition, unexpected charges or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the new facility. In the event the Company is unable to successfully complete construction of and commence operations in the new facility prior to the end 8 10 of 1999, whether as a result of an inability to obtain required financing or any other reason, the Company's business, financial condition and results of operations could be materially adversely affected. The operation of the expanded facility and the new facility will also subject the Company to additional risks. For example, the Company will have additional fixed operating expenses associated with the new facility which can only be offset by sufficient increases in product revenues. There can be no assurance that market demand for the Company's products will grow as currently expected. If demand for the Company's products does not grow as the Company anticipates, the Company would not be able to offset the costs of operating the new facility and as a result, the Company's business, financial condition and results of operations may be materially adversely affected. See "Use of Proceeds" and "Business -- Manufacturing." DEPENDENCE ON LIMITED PRODUCT OFFERINGS. To date, substantially all of the Company's revenues have resulted from sales of its GaAs substrates and the Company anticipates that a significant majority of its revenues for the next several years will continue to be derived from sales of its GaAs substrates. GaAs substrates are primarily used in electronic applications such as wireless communications, fiber optic communications and other high-speed semiconductor devices, as well as in opto-electronic applications such as lasers and LEDs. If demand for GaAs substrates by semiconductor device manufacturers diminishes or if new substrates for these electronic and opto-electronic applications are developed and successfully introduced by competitors, the Company's business, financial condition and results of operations could be materially adversely affected. The Company is aware that other companies, including International Business Machines Corp. ("IBM"), are actively involved in developing silicon germanium ("SiGe") based devices for use in certain wireless and other applications. SiGe-based devices could potentially provide the same high- performance, power-efficient capabilities as GaAs-based devices at competitive prices. If these SiGe-based devices are successfully developed and are adopted by semiconductor device manufacturers, demand for GaAs substrates could diminish, which could materially adversely affect the Company's business, financial condition and results of operations. The Company's future success depends on its ability to develop and introduce in a timely manner new substrates and to continue to improve its current substrates to address customer requirements and to compete effectively on the basis of price and performance. Recently, the Company has begun commercial shipments of Ge and InP substrates and is currently developing other substrates, including GaP and GaN. The success of product improvements and new product introductions is dependent upon several factors, including the development of markets for such improvements and substrates, achievement of acceptable yields, and price and market acceptance. No assurance can be given that the Company's product development efforts will be successful or that its new products will achieve market acceptance. To the extent that new product introductions do not achieve market acceptance, the Company's business, financial condition and results of operations would be materially adversely affected. See "Business -- Products" and "-- Research and Development." RAPID TECHNOLOGICAL CHANGE; RELIANCE UPON CONTINUED PRODUCT DEVELOPMENT. The markets in which the Company and its customers compete are characterized by rapid technological change and continuous improvements in substrates. Accordingly, the Company's future success will depend upon whether it can apply its proprietary VGF technique to develop new substrates for existing and new markets that adequately address customer requirements and compete effectively on the basis of quality, price and performance. There can be no assurance that the Company's research and development efforts will result in the timely development of new products or in products with sufficient performance characteristics to meet market demands. If a competing process technology emerges that permits production of substrates that are superior to those produced using the Company's VGF technology, and if the Company is unable to develop competitive or alternative products that are economically viable and that can be delivered in sufficient quantity, the Company's business, financial condition and results of operation could be materially adversely affected. Because it is generally not possible to predict with accuracy the time required and costs involved in reaching certain research, development and engineering objectives, actual development costs could exceed budgeted amounts and estimated product development schedules could require extension. The Company has experienced product development delays in the past and may experience similar delays in the future which could materially adversely affect the Company's business, financial condition and results of operations. In addition, if new products experience reliability or quality problems, the Company could encounter a number of 9 11 difficulties, including reduced orders, higher manufacturing costs, product returns and additional service expense, all of which could materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Products," "-- Research and Development" and "-- Competition." LENGTHY SALES CYCLES. Sales of the Company's GaAs substrates depend, in significant part, upon the decision of a prospective customer to choose products developed using the Company's proprietary VGF technique instead of substrates developed using the more traditional LEC and HB techniques. As a result, the amount of time from the initial contact with the customer to the customer's placement of an order, which typically ranges from three months to a year or more, depends on such factors as the amount of time required to test and qualify substrates from new vendors. Because the Company's substrates are generally incorporated into a customer's products at the design stage, the customer's decision to use the Company's substrates often precedes volume sales, if any, by a significant period. If a customer decides at the design stage not to incorporate the Company's substrates into its products, the Company may not have another opportunity to sell its substrates for those products for many months or years. The Company has experienced delays in obtaining orders while customers evaluate the Company's GaAs substrates. For these and other reasons, the Company's GaAs substrates typically have a lengthy sales cycle during which the Company may expend substantial funds and sales, marketing and management effort. The Company anticipates that sales of any future products currently under development will have similarly lengthy sales cycles and will therefore be subject to risks substantially similar to those inherent in the lengthy sales cycle for its GaAs substrates. There can be no assurance that the Company's expenditures or efforts during the lengthy sales process with any potential customer will result in sales. CUSTOMER CONCENTRATION. A small number of customers have historically accounted for a substantial portion of the Company's revenues, and the Company expects a significant portion of its future sales will remain concentrated within a limited number of customers. The Company's top five customers accounted for approximately 35.5% and 34.9% of the Company's revenues in 1996 and 1997, respectively. The Company's customers are not presently obligated to purchase any specified quantity of products or to provide the Company with binding forecasts of product purchases for any period and may reduce, delay or cancel orders at any time without significant penalty to the customer. The Company's substrates are typically one of many components used in semiconductor devices produced by the Company's customers. Demand for the Company's products is therefore subject to many risks beyond the Company's control, including, among others, demand for the Company's customers' products, competition faced by the Company's customers in their particular industries, the technical, sales and marketing and management capabilities of the Company's customers, and the financial and other resources of the Company's customers. The Company has experienced reductions, cancellations and delays in customer orders in the past and there can be no assurance that any of the Company's customers will not reduce, cancel or delay orders in the future. The reduction, delay or cancellation of significant orders from one or more of the Company's major customers could materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Customers." COMPETITION. The markets for GaAs substrates are intensely competitive. The Company's principal competitors in the market for semi-insulating GaAs substrates currently include Freiberger Compound Materials GmbH ("Freiberger"), Hitachi Cable, Ltd. ("Hitachi Cable"), Litton Airtron ("Litton") and Sumitomo Electric Industries Ltd. ("Sumitomo Electric"). In the semi-conducting GaAs substrate market, the Company's principal competitors currently are Sumitomo Electric and Hitachi Cable. The Company also faces competition from manufacturers that produce GaAs substrates for their own use. In addition, the Company faces competition from companies such as IBM that are actively developing alternative materials to GaAs. As the Company enters new markets, such as the Ge and InP substrate markets, the Company expects to face competitive risks similar to those for its GaAs substrates. Many of the Company's competitors and potential competitors have been in the business longer than the Company and have greater manufacturing experience, more established technologies than the Company's VGF technique, broader name recognition and significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will compete successfully against these competitors in the future or that the Company's competitors or potential competitors will not develop enhancements to the LEC, HB or VGF 10 12 techniques that will offer price and performance features that are superior to those of the Company. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices and margins, which would materially adversely affect the Company's business, financial condition and results of operations. The Company's ability to compete in its target markets also depends on such factors as the timing and success of the development and introduction of new products by the Company and its competitors, the availability of adequate sources of raw materials, protection of Company products by effective utilization of intellectual property laws and general economic conditions. In order to remain competitive, the Company believes it must invest significant resources in developing new substrates and in maintaining customer satisfaction worldwide. There can be no assurance that the Company's products will continue to compete favorably or that the Company will be successful in the face of competition from existing competitors or new companies entering the Company's target markets. Failure of the Company to compete successfully would materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Competition." DEPENDENCE ON SALES OUTSIDE THE UNITED STATES. International sales represented 38.2% of the Company's total revenues in 1997. Sales to customers located in Japan and other Asian countries represented 23.5% of the Company's total revenues in 1997. The Company expects that a significant portion of its revenues will continue to be from sales to customers outside of the United States, including device manufacturers located in Japan and other Asian countries who sell their products worldwide. These sales are subject to a variety of risks including tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles and export license requirements. In addition, the Company is subject to the risks inherent in conducting business internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. In particular, the economies of Japan and certain other Asian countries are currently experiencing considerable economic instability and downturns. Because the Company's sales to date, except for sales by the Company's Japanese subsidiary, have been denominated in U.S. dollars, increases in the value of the dollar could increase the price in local currencies of the Company's products in non-U.S. markets and make the Company's products more expensive than competitors' products that are denominated in local currencies. There can be no assurance that one or more of the factors described above will not have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY EMPLOYEES. The Company's success depends to a significant extent upon the continued service of its executive officers and other key management and technical personnel, and on its ability to continue to attract, retain and motivate qualified personnel, such as experienced engineers. The competition for such employees is intense. The loss of the services of one or more of the Company's executive officers, engineers or other key personnel or the Company's inability to recruit replacements for such personnel or to otherwise attract, retain and motivate qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not have long-term employment contracts and does not maintain life insurance policies on any of its key employees. See "Business -- Employees" and "Management." DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company relies on a combination of patents, trade secret, copyright and trademark laws, nondisclosure agreements, and other contractual provisions and technical measures to protect its proprietary rights. There can be no assurance that such measures will be adequate to safeguard the proprietary technology underlying the Company's VGF technique and the Company's products, or that its agreements with employees, consultants and others who participate in the development of its products will not be breached, that the Company will have adequate remedies for any breach or that the Company's proprietary information or trade secrets will not otherwise become known. Moreover, notwithstanding the Company's efforts to protect its intellectual property, there is no assurance that competitors will not be able to develop substrates which are equal or superior to the Company's products without infringing any of the Company's intellectual property rights. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. Accordingly, there can be no 11 13 assurance that the Company's means of protecting its intellectual property will be adequate or that the Company's competitors will not independently develop similar technologies or products. To date, Company has been issued one U.S. patent and has two patent applications pending. The Company has one pending application for a Japanese patent but no issued foreign patents. There can be no assurance that the Company's pending U.S. applications or any future U.S. or foreign patent applications will be approved, that any issued patents will protect the Company's intellectual property or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Moreover, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company believes that, due to the rapid pace of technological innovation in the GaAs and other substrate markets, the Company's ability to establish and maintain a position of technology leadership in the industry depends more on the skills of its development personnel than upon the legal protections afforded its existing technologies. Although there are currently no pending lawsuits against the Company or unresolved notices that the Company is infringing intellectual property rights of others, the Company may be notified in the future that it is infringing certain patent and/or other intellectual property rights of others. Litigation may be necessary in the future to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company's favor or settled by the Company, would be costly and would divert the efforts and attention of the Company's management and technical personnel from normal business operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in litigation could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Intellectual Property and Other Proprietary Rights." RISKS RELATED TO ENVIRONMENTAL REGULATIONS. The Company is subject to federal, state and local laws and regulations concerning the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials used in its research and development and production operations, as well as laws and regulations concerning environmental remediation and employee health and safety. The growing of crystals and the production of substrates involve the use of certain hazardous raw materials, including, but not limited to, arsenic. There can be no assurance that the Company's control systems will be successful in preventing a release of these materials or other adverse environmental conditions. Any such release or other failure to comply with present or future environmental laws and regulations could result in the imposition of significant fines on the Company, the suspension of production or a cessation of operations. In addition, there can be no assurance that existing or future changes in laws or regulations will not require expenditures or liabilities to be incurred by the Company, or in restrictions on the Company's operations. MANAGEMENT OF GROWTH. The Company's business is currently experiencing a period of growth that has placed and is expected to continue to place a significant strain on the Company's personnel and resources. The Company's ability to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls. To support any future growth, the Company will need to hire more engineering, manufacturing, sales, marketing, support and administrative personnel and expand customer service capabilities. Competition worldwide for the necessary personnel in the Company's industry is intense. There can be no assurance that the Company will be able to attract and retain the necessary personnel in response to any future growth. Although the Company believes its current management information systems are adequate to address its current needs, the Company is in the process of implementing a new system to accommodate any future growth in operations. The difficulty and costs associated with implementing new management information systems may place a burden on the Company's management and internal resources. In addition, international growth may require the Company to expand its worldwide operations and enhance its 12 14 communications infrastructure. The inability of the Company's management to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE. The Company uses a significant number of computer software programs and operating systems in its internal operations, including applications used in financial business systems and various administration functions. To the extent that these software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000," some level of modification or even possibly replacement of such source code or applications will be necessary. The Company is in the process of identifying the software applications that are not "Year 2000" compliant. The new management information system the Company is currently implementing will be "Year 2000" compliant. Given the information known at this time about the Company's systems, coupled with the Company's ongoing efforts to upgrade or replace business critical systems as necessary, it is currently not anticipated that these "Year 2000" costs will have a material adverse impact on the Company's business, financial condition and results of operations. However, the Company is still analyzing its software applications and, to the extent they are not fully "Year 2000" compliant, there can be no assurance that the costs necessary to update software or potential systems interruptions would not have a material adverse effect on the Company's business, financial condition and results of operations. POTENTIAL FUTURE ACQUISITIONS. As part of its business strategy, the Company may make acquisitions of, or significant investments in, complementary companies, products or technologies, although no such acquisitions or investments are currently pending. Any such future acquisitions would be accompanied by the risks commonly encountered in acquisitions of companies. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of the acquired technology into the Company's products and services, additional expense associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of any integration of new management personnel. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered with such acquisitions. See "Use of Proceeds." FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company currently anticipates that its available cash resources will be sufficient to meet its presently anticipated cash requirements through the next 12 months. Thereafter, if available cash resources are insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company will be required to raise additional funds. No assurance can be given that additional financing will be available on terms favorable to the Company or its stockholders. If additional funds are raised through the issuance of equity securities, the percentage ownership of then current stockholders of the Company will be reduced and such equity securities may have rights, preferences or privileges senior to those of holders of the Company's Common Stock. If adequate funds are not available to satisfy either short- or long-term capital requirements, the Company may be required to limit its operations significantly. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER; ANTI-TAKEOVER PROVISIONS. Upon the closing of the Offering (assuming no exercise of the Underwriters' over-allotment option), officers, directors and affiliates of the Company will beneficially own approximately 22.2% of the Company's outstanding Common Stock. As a result, these stockholders as a group will be able to substantially influence the management and affairs of the Company and, if acting together, would be able to influence most matters requiring the approval by the stockholders of the Company, including election of directors, any merger, consolidation or sale of all or substantially all of the Company's assets and any other significant corporate transactions. The concentration of ownership could have the effect of delaying or preventing a change in control of the Company and reducing the likelihood of any acquisition of the Company at a premium price. Upon the closing of the Offering, the Company's Board of Directors will have the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those 13 15 shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of shares of Preferred Stock, while potentially providing desirable flexibility in connection with possible acquisitions and for other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present intention to issue shares of Preferred Stock. In addition, certain provisions of the Company's Certificate of Incorporation, which will become effective upon consummation of the Offering, may have the effect of delaying or preventing a change of control of the Company, which could adversely affect the market price of the Company's Common Stock. These provisions provide, among other things, that the Board of Directors is divided into three classes to serve staggered three-year terms, that stockholders may not take action by written consent, that the ability of stockholders to call special meetings of stockholders and to raise matters at meetings of stockholders is restricted and that certain amendments of the Company's Certificate of Incorporation, and all amendments of the Company's Bylaws, require the approval of holders of at least 66 2/3% of the voting power of all outstanding shares. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit the Company 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 also could have the effect of delaying or preventing a change of control of the Company. See "Principal Stockholders" and "Description of Capital Stock." BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS. A significant portion of the anticipated net proceeds to the Company from the Offering has not been designated for specific uses. Accordingly, management of the Company will have broad discretion with respect to the use of these funds. See "Use of Proceeds." SHARES ELIGIBLE FOR FUTURE SALE. Upon the closing of the Offering, the Company will have a total of 15,670,268 shares of Common Stock outstanding (16,045,268 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, the 2,500,000 shares of Common Stock offered hereby (2,875,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or registration under the Securities Act by persons other than "affiliates" of the Company, as defined under the Securities Act. The remaining shares of Common Stock outstanding will be "restricted securities" as that term is defined by Rule 144 as promulgated under the Securities Act. Under Rule 144 (and subject to the conditions thereof, including volume limitations), all of the restricted shares will become eligible for sale after the Offering. However, 12,466,028 of such restricted shares are also subject to lock-up restrictions as described below. The Company, its executive officers and directors and certain stockholders of the Company have agreed that they will not, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any other securities convertible into, or exercisable or exchangeable for, shares of Common Stock or other similar securities of the Company, currently beneficially owned or hereafter acquired by such holders, for a period of 180 days following the date of this Prospectus. After such 180-day period, this restriction will expire and all the restricted shares will become eligible for sale, subject to the limitations under Rule 144. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all or any portion of the shares subject to such lock-up agreements. Prior to the Offering, there has been no public market for the Common Stock and no predictions can be made of the effect, if any, that the sale or availability for sale of additional shares of Common Stock will have on the market price of the Common Stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could materially adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. See "Management -- Benefit Plans" and "Shares Eligible for Future Sale." 14 16 NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if developed, will continue following the Offering, or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price for the Common Stock will be determined by negotiations among the Company and the representatives of the Underwriters based on several factors, and may not be indicative of the market price for the Common Stock after the Offering. The Company believes that various factors unrelated to the Company's performance, such as general economic conditions, changes or volatility in the financial markets and changing market conditions, as well as various factors related to the Company's performance, such as quarterly or annual variations in the Company's financial results, announcements of technological innovations, large customer orders, order cancellations or new product introductions by the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, in recent years the stock market in general and the market for shares of small capitalization companies, particularly semiconductor related companies, have experienced extreme price fluctuations which have been unrelated to the operating performance of the affected companies. See "Underwriting." DILUTION. Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of $6.54 in the net tangible book value per share of their Common Stock assuming an initial public offering price of $9.00 per share, while the net tangible book value of the shares of Common Stock owned by the existing stockholders will increase by $1.05 per share. See "Dilution." NO INTENT TO PAY DIVIDENDS. The Company has never declared or paid dividends on its Common Stock since its formation. The Company currently does not intend to declare or pay dividends in the foreseeable future. The Company intends to retain any earnings for future growth. The payment of dividends, if any, will be at the discretion of the Board of Directors and will require the prior approval of certain financial institutions with whom the Company has entered into loan agreements. See "Dividend Policy." 15 17 USE OF PROCEEDS The net proceeds to the Company from the sale of 2,500,000 shares of Common Stock offered hereby are estimated to be approximately $20,025,000 (approximately $23,164,000 if the Underwriters' over-allotment option is exercised in full) assuming an initial public offering price of $9.00 per share and after deducting underwriting discounts and commissions and estimated Offering expenses. The Company intends to use approximately $6.0 million of the net proceeds for capital expenditures, approximately $4.0 million for product development, and approximately $1.0 million for sales and marketing, with the remainder of the net proceeds to be used for general working capital purposes. Pending such uses, the Company intends to invest the net proceeds from the Offering in short-term, investment-grade, interest-bearing securities or guaranteed obligations of the United States government. The Company may also use a portion of the net proceeds to acquire businesses, technologies or products complementary to the Company's business. Although the Company has from time to time engaged in discussions with respect to possible acquisitions, it has no present understandings, commitments or agreements, nor is it currently engaged in any discussions or negotiations with respect to any such transaction. DIVIDEND POLICY The Company has never declared or paid dividends on its Common Stock since its formation. The Company currently does not intend to declare or pay dividends in the foreseeable future. The Company intends to retain any earnings for future growth. In addition, the Company's loan agreements contain covenants that expressly prohibit the payment of any cash dividends without prior bank approval. 16 18 CAPITALIZATION The following table sets forth as of December 31, 1997: (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company reflecting the conversion of all outstanding Preferred Stock into 10,128,737 shares of Common Stock, and (iii) the pro forma capitalization of the Company as adjusted to give effect to the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share, after deducting underwriting discounts and commissions and estimated Offering expenses and the application of the estimated net proceeds therefrom. The information set forth below should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
DECEMBER 31, 1997 ----------------------------------- ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Long-term debt, net of current portion(1).................. $ 7,728 $ 7,728 $ 7,728 Stockholders' equity: Convertible Preferred Stock, no par value: 25,000,000 shares authorized, 10,128,737 shares issued and outstanding, actual; $0.001 par value, 2,000,000 authorized, no shares issued and outstanding pro forma and as adjusted....................................... 8,553 -- -- Common Stock, no par value: 100,000,000 shares authorized, 3,041,531 shares issued and outstanding, actual; $0.001 par value, 40,000,000 shares authorized, 13,170,268 and 15,670,268 shares issued and outstanding, pro forma and as adjusted, respectively(2)....................................... 867 13 16 Additional paid in capital............................... -- 9,407 29,429 Deferred compensation.................................... (220) (220) (220) Retained earnings........................................ 9,584 9,584 9,584 Cumulative translation adjustments....................... (193) (193) (193) ------- ------- ------- Total stockholders' equity............................... 18,591 18,591 38,616 ------- ------- ------- Total capitalization.................................. $26,319 $26,319 $46,344 ======= ======= =======
- --------------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) Excludes 1,342,950 shares of Common Stock issuable upon exercise of outstanding options at December 31, 1997 with a weighted average exercise price of $4.77 per share. See "Management -- Benefit Plans" and Note 8 of Notes to Consolidated Financial Statements. 17 19 DILUTION Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of $6.54 per share (assuming an initial public offering price of $9.00 per share) in the pro forma net tangible book value of the Common Stock from the assumed initial public offering price. The pro forma net tangible book value of the Company as of December 31, 1997 was $18.6 million or $1.41 per share. Pro forma net tangible book value per share is determined by dividing the net tangible book value of the Company (tangible assets less liabilities) by the number of shares of the Company's Common Stock outstanding (assuming the conversion of all then outstanding Preferred Stock into Common Stock) as of December 31, 1997. After giving effect to the receipt of the net proceeds from the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and deducting the underwriting discounts and commissions and estimated Offering expenses, the pro forma net tangible book value of the Common Stock as of December 31, 1997 would have been $38.6 million, or $2.46 per share. This represents an immediate dilution in pro forma net tangible book value of $6.54 per share to new investors purchasing shares in the Offering. The following table illustrates the per share dilution as of December 31, 1997: Assumed initial public offering price....................... $9.00 Pro forma net tangible book value at December 31, 1997................................................. $1.41 Increase attributable to new investors................. 1.05 ----- Pro forma net tangible book value after the Offering........ 2.46 ----- Dilution to new investors................................... $6.54 =====
The following table sets forth, on an as adjusted basis as of December 31, 1997, after giving effect to the conversion of all outstanding Preferred Stock into Common Stock, the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and purchasers of Common Stock in the Offering at an assumed initial public offering price of $9.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders(1)................. 13,170,268 84.0% $ 9,420,000 29.5% $0.72 New investors............................ 2,500,000 16.0 22,500,000 70.5 9.00 ---------- ------ ----------- ------ Total.................................. 15,670,268 100.0% $31,920,000 100.0% ========== ====== =========== ======
- --------------- (1) If the Underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to 2,875,000 shares, or approximately 17.9% of the total number of shares to be outstanding after the Offering. The foregoing table assumes no exercise of stock options outstanding at December 31, 1997 or of the Underwriters' over-allotment option. At December 31, 1997, there were 1,342,950 shares of Common Stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $4.77 per share. To the extent that outstanding options are exercised in the future, there will be further dilution to new investors. See "Management -- Benefit Plans" and Note 8 of Notes to Consolidated Financial Statements. 18 20 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The consolidated balance sheet data as of December 31, 1996 and 1997 and the consolidated statement of operations data for the years ended December 31, 1995, 1996 and 1997 are derived from the audited consolidated financial statements included herein. The consolidated balance sheet data as of December 31, 1994 and 1995 and the consolidated statement of operations data for the year ended December 31, 1994 are derived from audited consolidated financial statements of the Company not included herein. The consolidated balance sheet data as of December 31, 1993 and the consolidated statement of operations data for the year ended December 31, 1993 are derived from unaudited financial statements not included herein. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements referred to above and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's results of operations for the indicated periods. Operating results for the year ended December 31, 1997 are not necessarily indicative of the results that may be expected in future years.
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Product revenues.......................................... $ 4,129 $ 5,666 $11,520 $14,222 $23,014 Contract revenues......................................... 274 1,791 2,958 2,005 2,321 ------- ------- ------- ------- ------- Total revenues..................................... 4,403 7,457 14,478 16,227 25,335 Cost of revenues: Cost of product revenues.................................. 2,672 3,091 6,030 9,270 13,674 Cost of contract revenues................................. 246 1,422 2,234 795 1,553 ------- ------- ------- ------- ------- Total cost of revenues............................. 2,918 4,513 8,264 10,065 15,227 ------- ------- ------- ------- ------- Gross profit................................................ 1,485 2,944 6,214 6,162 10,108 Operating expenses: Selling, general and administrative....................... 826 921 1,716 2,033 2,959 Research and development.................................. 243 149 448 592 1,289 ------- ------- ------- ------- ------- Total operating expenses........................... 1,069 1,070 2,164 2,625 4,248 ------- ------- ------- ------- ------- Income from operations...................................... 416 1,874 4,050 3,537 5,860 Interest expense............................................ -- (3) (12) (170) (570) Other income (expense)...................................... (60) 65 282 (72) (34) ------- ------- ------- ------- ------- Income before provision for income taxes.................... 356 1,936 4,320 3,295 5,256 Provision for income taxes.................................. 231 775 1,581 1,249 1,998 ------- ------- ------- ------- ------- Net income.................................................. $ 125 $ 1,161 $ 2,739 $ 2,046 $ 3,258 ======= ======= ======= ======= ======= Basic net income per share.................................. $ 0.05 $ 0.44 $ 0.97 $ 0.71 $ 1.11 ======= ======= ======= ======= ======= Diluted net income per share................................ $ 0.01 $ 0.10 $ 0.23 $ 0.17 $ 0.25 ======= ======= ======= ======= ======= Shares used in basic net income per share calculations...... 2,555 2,634 2,821 2,882 2,938 Shares used in diluted net income per share calculations.... 11,549 11,676 11,813 11,811 12,839
DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 1,052 $ 1,446 $ 835 $ 756 $ 3,054 Working capital............................................. 1,821 2,859 3,760 5,542 14,209 Total assets................................................ 3,497 5,757 11,316 17,384 30,613 Long-term debt, net of current portion...................... -- -- 2,350 5,582 7,728 Stockholders' equity........................................ 3,014 4,213 7,005 8,999 18,591
19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW American Xtal Technology, Inc. uses a proprietary VGF technique to produce high-performance compound semiconductor substrates for use in a variety of electronic and opto-electronic applications. The Company was founded in 1986 and commenced product sales in 1990. The Company currently sells GaAs, InP and Ge substrates to manufacturers of semiconductor devices for use in applications such as wireless and fiber optic telecommunications, lasers, LEDs, satellite solar cells and consumer electronics. The Company has been profitable on an annual basis since 1990 and its total revenues were $14.5 million, $16.2 million and $25.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. Total revenues consist of product revenues and contract revenues. The Company's product revenues were $11.5 million, $14.2 million and $23.0 million for the years ended December 31, 1995, 1996 and 1997, respectively. Product revenues are generally recognized upon shipment of products to customers. Historically, virtually all of the Company's product revenues have been derived from sales of GaAs substrates, which, in 1997, accounted for 94.9% of the Company's product revenues. The Company began selling InP and Ge substrates to its customers in late 1997. The Company's contract revenues were $3.0 million, $2.0 million and $2.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. Contract revenues are recognized under the percentage of completion method and related research costs are included in cost of contract revenues. Contract revenues consist of research and development contracts with U.S. government agencies and customer-funded research projects. The largest of the government contracts was a four-year U.S. Department of Defense Title III Program for development of GaAs substrates (the "Title III GaAs contract"), which was awarded to the Company in March 1994 and under which the Company was paid an aggregate of $6.1 million. The Title III GaAs contract was completed in March 1998. The Company retains rights to the VGF and wafer fabrication technology developed under these government and customer-funded research contracts and is therefore able to leverage these programs to continue to broaden its product and technology offerings. In 1995, the Company established a wholly-owned subsidiary in Japan to distribute the Company's products. This subsidiary serves primarily as a direct sales and support office for the Company's customers in Japan. The Company also utilizes independent sales representatives in France, Japan, South Korea, Taiwan and the United Kingdom. Domestic sales are generated by the Company's direct sales force. International sales accounted for 38.2% of total revenues for each of the years ended December 31, 1996 and 1997, respectively. Except for sales in Japan, which are denominated in yen, the Company denominates and collects its international sales in U.S. dollars. Doing business in Japan subjects the Company to fluctuations in exchange rates between the U.S. dollar and the Japanese yen. The Company incurred foreign exchange losses of $114,000 and $186,000 for the years ended December 31, 1996 and 1997, respectively. Since July 1996, the Company has conducted all of its operations in a 50,000 square foot office and production facility located in Fremont, California. Prior to transitioning its manufacturing operations to this facility, the Company leased a manufacturing facility in Dublin, California. The Company is in the process of expanding the size of its current manufacturing facility by approximately 30,000 square feet to meet its anticipated future production needs through 1999. The expansion is scheduled for completion and operations are expected to commence in such space in the third quarter of 1998. In addition, the Company is currently planning the construction of an additional facility of up to 50,000 square feet in Northern California. The Company believes that this planned new facility will not begin production of substrates prior to the end of 1999. 20 22 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated.
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ----- ----- ----- Revenues: Product revenues.......................................... 79.6% 87.6% 90.8% Contract revenues......................................... 20.4 12.4 9.2 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 Cost of revenues: Cost of product revenues.................................. 41.6 57.1 54.0 Cost of contract revenues................................. 15.4 4.9 6.1 ----- ----- ----- Total cost of revenues............................ 57.0 62.0 60.1 ----- ----- ----- Gross margin................................................ 43.0 38.0 39.9 Operating expenses: Selling, general and administrative....................... 11.9 12.5 11.7 Research and development.................................. 3.1 3.6 5.1 ----- ----- ----- Total operating expenses.......................... 15.0 16.1 16.8 ----- ----- ----- Income from operations...................................... 28.0 21.9 23.1 Interest expense............................................ (0.1) (1.0) (2.2) Other income (expense)...................................... 1.9 (0.5) (0.1) ----- ----- ----- Income before provision for income taxes.................... 29.8 20.4 20.8 Provision for income taxes.................................. 10.9 7.7 7.9 ----- ----- ----- Net income.................................................. 18.9% 12.7% 12.9% ===== ===== =====
The following table sets forth product and contract gross profits and gross margins for the periods indicated.
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ (DOLLARS IN THOUSANDS) Product gross profit........................................ $5,490 $4,952 $9,340 Product gross margin........................................ 47.7% 34.8% 40.6% Contract gross profit....................................... $ 724 $1,210 $ 768 Contract gross margin....................................... 24.5% 60.3% 33.1%
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenues. Total revenues increased 56.1% from $16.2 million for the year ended December 31, 1996 to $25.3 million for the year ended December 31, 1997. Product revenues increased 61.8% from $14.2 million for the year ended December 31, 1996 to $23.0 million for the year ended December 31, 1997. The increase in product revenues reflected increased sales to existing domestic and international customers across all GaAs substrate product lines, sales to new customers and the introduction of Ge substrates in the fourth quarter of 1997. International revenues were 38.2% of total revenues for each of the years ended December 31, 1996 and 1997. Should revenues attributable to sales of Ge substrates, which are expected to be sold exclusively within the U.S., increase as a percentage of total revenues in future periods, international revenues will decline as a percentage of total revenues in future periods. 21 23 Contract revenues increased 15.8% from $2.0 million for the year ended December 31, 1996 to $2.3 million for the year ended December 31, 1997. The increase was primarily due to revenues recognized from a $1.2 million customer-funded Ge research contract that was completed in 1997. This increase was partially offset by a reduction in government contract revenues. Contract revenues declined from 12.4% of total revenues for the year ended December 31, 1996 to 9.2% for the year ended December 31, 1997 as a result of product revenue growth exceeding contract revenue growth. In future periods, the Company expects contract revenues to continue to decline as a percentage of total revenues. Gross Margin. Gross margin increased from 38.0% of total revenues for the year ended December 31, 1996 to 39.9% of total revenues for the year ended December 31, 1997. Product gross margin increased from 34.8% for the year ended December 31, 1996 to 40.6% for the year ended December 31, 1997. The lower product gross margin in 1996 resulted primarily from manufacturing start-up costs relating to the transition to the new production facility. Contract gross margin declined from 60.3% for the year ended December 31, 1996 to 33.1% for the year ended December 31, 1997. This decrease was due to a shift in contract revenue mix from higher margin government research contracts in 1996 to a lower margin customer-funded contract for Ge research. In addition, in 1996 gross margin was favorably impacted by large incentive awards which were paid to the Company upon completion of certain milestones of the Title III GaAs contract. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 45.5% from $2.0 million for the year ended December 31, 1996 to $3.0 million for the year ended December 31, 1997. The increase resulted primarily from increased domestic and international sales personnel and administrative expenses required to support increased sales volume. Research and Development Expenses. Research and development expenses increased 117.7% from $592,000 for the year ended December 31, 1996 to $1.3 million for the year ended December 31, 1997. This increase resulted primarily from the hiring of additional engineers to develop new products and to enhance existing products. In addition to Company funded research and development, the Company has incurred research and development expenses relating to government and customer-funded research contracts, which are included in the cost of contract revenues. For the year ended December 31, 1997, total research and development costs, including both contract funded and internally funded research and development expenses, totaled $2.8 million, or 11.2% of total revenues. Interest Expense. Interest expense increased from $170,000 for the year ended December 31, 1996 to $570,000 for the year ended December 31, 1997. This increase resulted primarily from additional borrowings incurred in 1996 to finance the Company's new manufacturing facility, the expansion of production facilities in 1997 and related equipment purchases. Other Income (Expense). Other expense decreased from $72,000 for the year ended December 31, 1996 to $34,000 for the year ended December 31, 1997. This decrease was due to higher interest income generated on investments from the proceeds of a $5.9 million private equity financing completed in March 1997, partially offset by foreign currency transaction losses incurred due to the increase in the value of the U.S. dollar compared to the Japanese yen. Provision for Income Taxes. Income tax expense was virtually unchanged from 37.9% of income before provision for income taxes for the year ended December 31, 1996 to 38.0% of income before provision for income taxes for the year ended December 31, 1997. Compensation Expense. During the year ended December 31, 1997, the Company granted options for the purchase of 1,315,100 shares of Common Stock to employees at a weighted average exercise price of $4.95 per share. Management has calculated deferred compensation of $322,000 related to options granted during the year ended December 31, 1997. Such deferred compensation will be amortized over the vesting period relating to these options, of which $102,000 has been amortized during the year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues. Total revenues increased 12.1% from $14.5 million for the year ended December 31, 1995 to $16.2 million for the year ended December 31, 1996. Product revenues increased 23.5% from $11.5 million for 22 24 the year ended December 31, 1995 to $14.2 million for the year ended December 31, 1996. This increase in product revenues was primarily attributable to increased acceptance by both domestic and international customers of the Company's VGF technology. Product revenues in the third quarter of 1996 were adversely impacted by the Company's move from its former production facility that was operating at full capacity to a new manufacturing facility, which required significant start-up time. International revenues increased from 36.0% of total revenues for the year ended December 31, 1995 to 38.2% of total revenues for the year ended December 31, 1996. This increase was primarily attributable to the growth in the European and Japanese markets. Contract revenues decreased 32.2% from $3.0 million for the year ended December 31, 1995 to $2.0 million for the year ended December 31, 1996 primarily as a result of the Company's completion, in March 1996, of the first phase of the Title III GaAs contract, under which it received a significant portion of the total $6.1 million awarded to it. Following March 1996, the Company began recognizing lower contract revenues under this contract than it had recognized in 1995 and the first three months of 1996. As a result, contract revenues declined from 20.4% of total revenues for the year ended December 31, 1995 to 12.4% for the year ended December 31, 1996. Gross Margin. Gross margin decreased from 43.0% of total revenues for the year ended December 31, 1995 to 38.0% of total revenues for the year ended December 31, 1996. Product gross margin decreased from 47.7% for the year ended December 31, 1995 to 34.8% for the year ended December 31, 1996. This decrease was primarily due to manufacturing start-up costs relating to the transition to the new production facility. Contract gross margin increased from 24.5% for the year ended December 31, 1995 to 60.3% for the year ended December 31, 1996 because of the Company's shift from the first to the second phase of the Title III GaAs contract. The second phase of the Title III GaAs contract had higher margins because, during that phase, the Company received significant incentive awards upon the achievement of certain milestones. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 18.5% from $1.7 million for the year ended December 31, 1995 to $2.0 million for the year ended December 31, 1996. The increase was primarily attributable to the establishment of the Japanese subsidiary and the hiring of additional sales and administrative staff to support the overall increased sales volume. Research and Development Expenses. Research and development expenses increased 32.1% from $448,000 for the year ended December 31, 1995 to $592,000 for the year ended December 31, 1996. This increase resulted primarily from increased staff levels for further development of GaAs substrates and the initial research on InP substrates. For the year ended December 31, 1996, research and development costs, including both contract funded and internally funded research and development costs, totaled $1.4 million, or 8.5% of total revenues. Interest Expense. Interest expense increased from $12,000 for the year ended December 31, 1995 to $170,000 for the year ended December 31, 1996. This increase was primarily the result of additional borrowings incurred to finance the Company's new manufacturing facility and related equipment. Prior to 1995, the Company had not incurred any long-term debt. Other Income (Expense). Other income (expense) decreased from income of $282,000 for the year ended December 31, 1995 to $72,000 of expense for the year ended December 31, 1996. The decrease resulted primarily from the realization in 1995 of gains on sales of equipment and investments of $232,000, and foreign currency transaction losses recognized in 1996 which resulted from the increase in value of the U.S. dollar compared to the Japanese yen. Provision for Income Taxes. Income tax expense increased from 36.6% of income before provision for taxes for the year ended December 31, 1995 to 37.9% of income before provision for income taxes for the year ended December 31, 1996. 23 25 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly results in dollars for the eight quarters ended December 31, 1997. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly information. The operating results for any quarter are not necessarily indicative of results for any subsequent period.
QUARTERS ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 1997 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- -------- (IN THOUSANDS) Revenues: Product revenues...................... $3,274 $3,543 $3,376 $4,029 $4,494 $5,360 $6,060 $7,100 Contract revenues..................... 739 508 332 426 600 842 447 432 ------ ------ ------ ------ ------ ------ ------ ------ Total revenues................. 4,013 4,051 3,708 4,455 5,094 6,202 6,507 7,532 Cost of revenues: Cost of product revenues.............. 2,153 2,400 2,201 2,516 2,805 3,167 3,604 4,098 Cost of contract revenues............. 321 179 126 169 498 654 210 191 ------ ------ ------ ------ ------ ------ ------ ------ Total cost of revenues......... 2,474 2,579 2,327 2,685 3,303 3,821 3,814 4,289 ------ ------ ------ ------ ------ ------ ------ ------ Gross profit............................ 1,539 1,472 1,381 1,770 1,791 2,381 2,693 3,243 Operating expenses: Selling, general and administrative... 500 457 507 569 642 674 703 940 Research and development.............. 98 148 172 174 222 296 306 465 ------ ------ ------ ------ ------ ------ ------ ------ Total operating expenses....... 598 605 679 743 864 970 1,009 1,405 ------ ------ ------ ------ ------ ------ ------ ------ Income from operations.................. 941 867 702 1,027 927 1,411 1,684 1,838 Interest expense........................ (19) 17 (74) (94) (115) (151) (158) (146) Other income (expense).................. 14 (33) (49) (4) (91) 77 (8) (12) ------ ------ ------ ------ ------ ------ ------ ------ Income before provision for income taxes................................. 936 851 579 929 721 1,337 1,518 1,680 Provision for income taxes.............. 355 323 219 352 274 508 577 639 ------ ------ ------ ------ ------ ------ ------ ------ Net income.............................. $ 581 $ 528 $ 360 $ 577 $ 447 $ 829 $ 941 $1,041 ====== ====== ====== ====== ====== ====== ====== ======
The following table sets forth selected consolidated financial information as a percentage of total revenues for each of the Company's last eight quarters.
QUARTERS ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 1997 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- -------- Revenues: Product revenues...................... 81.6% 87.5% 91.0% 90.4% 88.2% 86.4% 93.1% 94.3% Contract revenues..................... 18.4 12.5 9.0 9.6 11.8 13.6 6.9 5.7 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues: Cost of product revenues.............. 53.7 59.2 59.4 56.5 55.0 51.1 55.4 54.4 Cost of contract revenues............. 8.0 4.4 3.4 3.8 9.8 10.5 3.2 2.5 ----- ----- ----- ----- ----- ----- ----- ----- Total cost of revenues......... 61.7 63.6 62.8 60.3 64.8 61.6 58.6 56.9 ----- ----- ----- ----- ----- ----- ----- ----- Gross margin............................ 38.3 36.4 37.2 39.7 35.2 38.4 41.4 43.1 Operating expenses: Selling, general and administrative... 12.5 11.3 13.7 12.8 12.6 10.8 10.8 12.5 Research and development.............. 2.4 3.7 4.6 3.9 4.4 4.8 4.7 6.2 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses....... 14.9 15.0 18.3 16.7 17.0 15.6 15.5 18.7 ----- ----- ----- ----- ----- ----- ----- ----- Income from operations.................. 23.4 21.4 18.9 23.0 18.2 22.8 25.9 24.4 Interest expense........................ (0.5) 0.4 (2.0) (2.1) (2.3) (2.4) (2.4) (1.9) Other income (expense).................. 0.3 (0.8) (1.3) (0.1) (1.7) 1.2 (0.2) (0.2) ----- ----- ----- ----- ----- ----- ----- ----- Income before provision for income taxes................................. 23.2 21.0 15.6 20.8 14.2 21.6 23.3 22.3 Provision for income taxes.............. 8.8 8.0 5.9 7.9 5.4 8.2 8.9 8.5 ----- ----- ----- ----- ----- ----- ----- ----- Net income.............................. 14.4% 13.0% 9.7% 12.9% 8.8% 13.4% 14.4% 13.8% ===== ===== ===== ===== ===== ===== ===== =====
24 26 The following table sets forth product and contract gross profits and gross margins for the eight quarters ended December 31, 1997.
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 1997 1997 1997 1997 -------- -------- --------- -------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS) Product gross profit............. $1,121 $1,143 $1,175 $1,513 $1,689 $2,193 $2,456 $3,002 Product gross margin............. 34.2% 32.3% 34.8% 37.6% 37.6% 40.9% 40.5% 42.3% Contract gross profit............ $ 418 $ 329 $ 206 $ 257 $ 102 $ 188 $ 237 $ 241 Contract gross margin............ 56.6% 64.8% 62.0% 60.3% 17.0% 22.3% 53.0% 55.8%
The Company's total revenues have increased in each of the eight quarters ended December 31, 1997, except for the quarter ended September 30, 1996. These quarterly increases reflect increased product shipments to both the semi-insulating and semi-conducting GaAs markets. The decline in product revenues for the quarter ended September 30, 1996 was primarily due to the Company's move from a leased facility that was operating at full capacity to a new manufacturing facility, which had significant start-up time. The decline in contract revenues for the quarters ended June 30 and September 30, 1996 was primarily due to completion of the first phase of the Title III GaAs contract in the quarter ended March 30, 1996, under which the Company received a significant portion of the total $6.1 million awarded to it. Contract revenues increased in the quarters ended March 31 and June 30, 1997 primarily as a result of revenues recognized from a $1.2 million customer-funded GE research contract. In the quarter ended December 31, 1997, product revenues increased primarily because the Company began selling Ge substrates. The Company experienced lower product gross margins in the first three quarters of 1996 primarily as a result of manufacturing start-up costs relating to the transition to the new production facility. As a result of a recycling program implemented in the quarter ended December 31, 1997, the Company was able to recycle scrapped inventory that had accumulated over prior quarters. This recycling program had a significant positive impact on the product gross margin for the quarter ended December 31, 1997. While the Company will continue the recycling program, the Company expects the program to have a less significant impact on product gross margins in the future. The increase in product gross margin in the quarter ended December 31, 1997 was partially offset by lower product gross margins from sales of Ge substrates. The Company experienced significantly lower contract gross margins for the quarters ended March 31, 1997 and June 30, 1997 due to a shift in contract revenue mix from higher margin government research contracts in prior quarters to a lower margin customer-funded contract for Ge research. Selling, general and administrative expenses for the quarter ended June 30, 1996 were lower than for the quarter ended March 31, 1996 primarily due to expenses incurred in the prior quarter associated with preparing for the closing of the Company's Dublin facility. Selling, general and administrative expenses for the quarters ended September 30, 1996, December 31, 1996 and March 30, 1997 were higher than previous quarters as a result of the Company's incurrence of additional administrative costs relating to the transition to the new production facility. Selling, general and administrative expenses for the quarter ended December 31, 1997 were higher than the quarters ended June 30 and September 30, 1997, as the Company built its management infrastructure to support its increased sales volume. Research and development expenses for the quarter ended December 31, 1997 significantly increased primarily due to material purchased for research on InP substrates and for the GaAs LED market. The Company believes that its quarterly and annual revenues, expenses and operating results could vary significantly in the future and that period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that the Company's revenues will grow in future periods or that it will sustain its level of total revenues or its rate of revenue growth on a quarterly or annual basis. The Company may, in some future quarter, have operating results that will be below the expectations of stock market analysts and investors. In such event, the price of the Company's Common Stock could be materially adversely affected. See "Risk Factors -- Fluctuations in Operating Results." 25 27 LIQUIDITY AND CAPITAL RESOURCES During the past five years, the Company has funded its operations primarily from cash provided by operations, short-term and long-term borrowings and a private financing of $5.9 million for Preferred Stock completed in March 1997. At December 31, 1997, the Company had working capital of $14.2 million, including cash of $3.1 million, compared to working capital at December 31, 1996 of $5.5 million, including cash of $756,000, and working capital at December 31, 1995 of $3.8 million, including cash of $835,000. During the year ended December 31, 1995, net cash provided by operations of $744,000 was due primarily to net income of $2.7 million, depreciation of $513,000 and an increase in accounts payable of $215,000, partially offset by increases in accounts receivable, inventory, other assets and deferred income taxes of $2.3 million and a decrease in accrued liabilities of $398,000. The increases in accounts receivable and inventory were related to the 94.2% increase in revenues from the prior year and the increase in other assets was primarily the result of an increase in unbilled revenues for contract research projects. During the year ended December 31, 1996, net cash provided by operations of $474,000 was due primarily to net income of $2.0 million, depreciation of $867,000 and an increase in accounts payable and accrued liabilities of $629,000, offset in part by increases in inventory of $2.3 million, and accounts receivable and other assets of $727,000. The increase in inventory was primarily due to increases in raw material and work-in-process inventory to provide an adequate supply of material in anticipation of large orders for the upcoming year. The increase in accounts receivable was primarily a result of increased sales in Japan, which require a longer payment period. During the year ended December 31, 1997, net cash used in operations of $1.2 million was primarily due to increases in inventories of $4.4 million and accounts receivable of $3.0 million, offset in part by net income of $3.3 million, depreciation of $1.2 million, increases in accounts payable and accrued liabilities of $1.6 million. The increase in inventory during this period included additional Ge inventory. The increases in accounts payable and accrued liabilities, accounts receivable and inventory were primarily the result of a 56.1% increase in revenues from the prior year. Net cash used in investing activities was $3.9 million, $3.9 million and $4.9 million for the years ended December 31, 1995, 1996 and 1997, respectively and was due primarily in each period to the purchase of property, plant and equipment. Net cash provided by financing activities was $3.0 million, $3.5 million and $8.4 million for the years ended December 31, 1995, 1996 and 1997, respectively. For the year ended December 31, 1995, net cash provided by financing activities resulted primarily from long-term borrowings of $2.4 million for construction-in-progress of the Company's manufacturing facility and short-term borrowings of $600,000 for general operating purposes. For the year ended December 31, 1996, net cash provided by financing activities resulted primarily from long-term borrowings of $3.5 million to complete the Company's manufacturing facility. For the year ended December 31, 1997, net cash provided by financing activities resulted primarily from the issuance of $5.9 million of Preferred Stock and $2.7 million for long-term bank borrowings, partially offset by the payment of $300,000 of short-term borrowings. The Company has generally financed its equipment purchases through secured equipment loans over five-year terms at interest rates ranging from 7.7% to 9.0% per annum. The Company's manufacturing facility was financed by a $3.5 million bank loan and a $1.0 million SBA loan. The bank loan has an interest rate of 8.3% per annum, matures in 2006 and is secured by the land and building. The bank loan is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which have all been met as of December 31, 1997. The SBA loan has an interest rate of 7.3% per annum, matures in 2016 and is subordinate to the bank loan. At December 31, 1997, $4.4 million was outstanding under the bank and SBA loans. The Company's addition of approximately 30,000 square feet to its manufacturing facility currently in process is being financed by a construction loan of $1.4 million. At December 31, 1997, $106,000 was outstanding under the construction loan. The construction loan is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which have all been met as of December 31, 26 28 1997. The construction loan will convert into a term loan at the time of building completion. This term loan will have a maturity of ten years with an interest rate fixed at the nine-year U.S. Treasury Bond yield plus 2.3% and will be secured by the land and building. The Company currently has a $15.0 million line of credit with a commercial bank at an interest rate equal to the prime rate plus one-half percent. This line of credit is secured by all business assets, less equipment, and expires in May 1999. The line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which have all been met as of December 31, 1997. As of December 31, 1997, there was no outstanding borrowing on this line of credit. See Note 3 to Notes to Consolidated Financial Statements. The Company anticipates that the combination of existing working capital and the borrowings available under current credit agreements will be sufficient to fund working capital and capital expenditure requirements for the next 12 months. The Company's future capital requirements will be depend on many factors, including the rate of revenue growth, the Company's profitability, the timing and extent of spending to support research and development programs, the expansion of selling and marketing and administrative activities, and market acceptance of the Company's products. The Company expects that it may need to raise additional equity or debt financing in the future, although it is not currently negotiating for additional financing nor does it have any plans to obtain additional financing following the Offering. There can be no assurance that additional equity or debt financing, if required, will be available on the acceptable terms or at all. If the Company is unable to obtain such additional capital, if needed, the Company may be required to reduce the scope of its planned product development and selling and marketing activities, which would have a material adverse effect on the Company's business, financial condition and results of operations. In the event that the Company does raise additional equity financing, further dilution to investors in the Offering will result. See "Risk Factors -- Future Capital Needs; Uncertainty of Additional Financing." RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," and Statements of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." The adoption of both statements is required for fiscal years beginning after December 15, 1997. Under SFAS 130, the Company is required to report in the financial statements, in addition to net income, comprehensive income including, as applicable, foreign currency items and unrealized gains and losses on certain investments in debt and equity securities. The adoption of SFAS 130 will require the Company to report comprehensive income including foreign currency items. SFAS 131 requires that companies report separately, in the financial statements, certain financial and descriptive information about operating segments, profit or loss, certain specific revenue and expense items, and segment assets. Additionally, companies are required to report information about the revenues derived from their products and service groups, about geographic areas in which the Company earns revenues and holds assets, and about major customers. The adoption of SFAS 131 will not have any impact on the Company's financial statements. 27 29 BUSINESS COMPANY OVERVIEW American Xtal Technology, Inc. uses a proprietary VGF technique to produce high-performance compound semiconductor substrates for use in a variety of electronic and opto-electronic applications. The Company primarily manufactures and sells compound semiconductor substrates composed of GaAs. Sales of GaAs substrates accounted for 94.9% of the Company's product revenues for the year ended December 31, 1997. The Company also manufactures and sells InP and Ge substrates and is currently developing other high-performance compound substrates such as GaP and GaN. The Company manufactures substrates from crystals grown using the Company's proprietary VGF technique and then slices the substrates into wafers. The Company's substrates are sold to semiconductor device manufacturers for use in applications such as wireless and fiber optic telecommunications, lasers, LEDs, satellite solar cells and consumer electronics. The Company's customers include EMCORE, Hewlett Packard, Motorola, NEC, Nortel, Siemens, Sony, Spectrolab and TRW. INDUSTRY OVERVIEW Recent advances in communications and information technologies have created a growing need for power-efficient, high-performance electronic systems that operate at very high frequencies, have increased computational and display capabilities, and can be produced cost-effectively in commercial volumes. In the past, electronic systems manufacturers have relied on advances in silicon semiconductor technology to meet many of these demands. Silicon-based semiconductor devices, however, have performance limitations in power efficient, high-performance electronic applications. In addition, silicon-based semiconductor devices currently do not possess the electrical properties necessary to be used effectively in most opto-electronic applications such as LEDs and lasers. As a result of the limitations of silicon, semiconductor device manufacturers are increasingly utilizing alternative substrates to improve the performance of semiconductor devices or to enable new applications. These alternative substrates are composed of a single element such as Ge, or multiple elements which may include, among others, gallium, aluminum, indium, arsenic, phosphorus and nitrogen. Substrates that consist of more than one element are referred to as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently the most widely used compound substrate. In comparison to silicon, compound substrates have electrical properties which allow semiconductor devices to operate at much higher speeds or at the same speed with lower power consumption, or to generate light signals. For example, electrons move up to five times faster in GaAs than in silicon. Compound substrates also have better opto-electronic characteristics than silicon which allow them to convert energy into light and lasers, or to detect light and convert light into electrical energy. The GaAs substrate market is divided into two segments, semi-insulating and semi-conducting. Semi-Insulating GaAs Substrates. The market for semi-insulating GaAs substrates is the fastest growing segment of the GaAs market. According to a January 1997 Dataquest report, the market for semi-insulating GaAs substrates was estimated at $95 million in 1997 and is expected to grow to approximately $227 million by the year 2000. This growth is being driven by increasing demand for semi-insulating GaAs substrates in a variety of power-efficient, high-performance applications, including cellular phones, radars, satellite communication systems and direct broadcast systems. Manufacturers integrate semi-insulating GaAs substrates into devices using either an ion implantation or epitaxial process. Ion implantation is the process of implanting ions directly into the semi-insulating GaAs substrate to modify the electrical parameters of the substrate so that it can be used to manufacture many of today's high-performance electronic devices. This process requires the electrical parameters of the substrate to be as uniform as possible. Epitaxy, a more recently developed process, involves the growth of layers of other materials onto the semi-insulating GaAs substrate. While generally more expensive than the ion implantation process, the epitaxial process enables devices to achieve even greater performance advantages. The epitaxial process requires that the GaAs substrate have an extremely smooth surface, few physical imperfections, 28 30 uniform electrical properties and low dislocation density (i.e., a measurement of the crystalline perfection of the substrate material). Traditionally, crystals for semi-insulating GaAs substrates for the ion implantation and epitaxy markets have been grown using the LEC technique. The LEC technique requires a high temperature gradient in the manufacturing process. Because the temperature gradient in the LEC technique is high, the resulting crystals have a relatively high dislocation density which weakens a crystal's physical structure and increases the risk of breakage of the GaAs substrate during device manufacturing. In addition, as semi-insulating GaAs substrates continue to grow in size to support increasingly complex devices, the manufacturing challenges of the LEC technique increase. Semi-Conducting GaAs Substrates. The Company believes that the market for semi-conducting GaAs substrates was approximately $80 million in 1997 and expects that the market will continue to grow. The market for semi-conducting GaAs substrates is being driven by the demand for a number of opto-electronic applications such as LEDs and lasers, which are incorporated into such products as traffic lights, digital versatile discs ("DVDs"), CD players, CD-ROMs, laser printers, automobile lights and electronic displays. In contrast to semi-insulating GaAs substrates which undergo either an ion implantation or epitaxial process, semi-conducting GaAs substrates only undergo an epitaxial process. As with semi-insulating GaAs substrates, semi-conducting GaAs substrates that undergo the epitaxial process must have a smooth surface, few physical imperfections, uniform electrical properties and a low dislocation density. The traditional method of growing crystals for producing semi-conducting GaAs substrates is the HB technique. With the HB technique, the crystal is grown in a semi-cylindrical container which results in a semi-circular, or D-shaped, substrate. In order to produce a round semi-conducting GaAs substrate, the HB technique requires that the D-shaped substrate be cut into a circle, resulting in a large amount of discarded substrate. In addition, crystals grown using the HB technique generally have a relatively high dislocation density and less uniform electrical properties. These and other inherent technical difficulties limit the ability of the HB technique to be used to cost-effectively produce high-quality substrates greater than three inches in diameter. Other High-Performance Substrates. The Company believes there are significant growth opportunities in manufacturing other high-performance substrates. For example, the Company believes that the markets for InP and GaP substrates, based on 1996 market data and annual growth rates projected by Business Communications, were an aggregate of approximately $129 million in 1997 and the Company expects that these markets will continue to grow. Semi-insulating InP substrates are used in power-efficient, high-performance electronic applications such as wireless and high-bandwidth communications and semi-conducting InP substrates are used in such applications as fiber optic communications and lasers. GaP substrates are used by manufacturers of LEDs. The traditional method for growing crystals for InP and GaP substrates has been the LEC technique. In addition to compound substrates, the market for the element Ge is developing in response to the growing demand for solar cells in satellite communications. The Company believes that the market for Ge substrates used to manufacture solar cells was approximately $50 million in 1997 and expects that the market will continue to grow. This application requires the use of Ge substrates which must be manufactured with few defects and minimal breakage. The Company believes the further development of these markets depends on the ability of suppliers to cost-effectively manufacture power-efficient, high-performance compound and single-element substrates. THE AXT SOLUTION AXT uses a proprietary VGF technique to produce high-performance GaAs and other substrates for use in a variety of electronic and opto-electronic applications. The Company believes that its VGF technique, which it has developed over the past 11 years, provides certain significant advantages over traditional manufacturing methods for growing crystals used in the production of semi-insulating and semi-conducting GaAs substrates. The Company believes that it is currently the only high-volume supplier of GaAs substrates manufactured using the VGF technique and is positioned to become a leading manufacturer and supplier of other compound and Ge substrates. 29 31 In the GaAs substrate market, crystals grown using the Company's proprietary VGF technique have a dislocation density that is significantly lower than crystals grown using the either the LEC or HB technique. As a result, the Company believes its GaAs substrates have greater mechanical strength and reduced breakage during the ion implantation and epitaxial growth processes. Furthermore, the Company believes the low dislocation density of the Company's semi-insulating and semi-conducting GaAs substrates translates into fewer defects in the materials layered onto the substrate during the epitaxy process. In addition, semi-insulating GaAs substrates, produced using the Company's VGF technique have more uniform electrical properties than LEC-produced GaAs substrates, which is important for the ion implantation process. In the semi-conducting GaAs substrate market, VGF-grown crystals, unlike those grown using the traditional HB technique, can be processed into round substrates with minimal wasted material. Using its VGF technique, the Company has been able to produce GaAs substrates as large as six inches in diameter. In addition to the GaAs substrate market, the Company believes that it can leverage its expertise in the VGF technique to manufacture and produce commercial volumes of other compound and single-element substrates. For example, in 1997, the Company began shipping InP and Ge substrates to customers and delivered GaP substrates to certain customers for their evaluation. STRATEGY The Company's strategy is to be the leading developer and supplier of high-performance GaAs substrates for both the semi-insulating and semi-conducting markets, and to continue to expand into the development and supply of other substrates. The key elements of the Company's strategy include: Advance VGF Technology Leadership. The Company pioneered the commercial use of the VGF technique and has continued to develop and enhance its technology over the course of 11 years through substantial investments in research and development. The Company's efforts have led to significant improvements in the dislocation density, mechanical strength and uniformity of the electrical properties of GaAs substrates. The Company believes that its experience and expertise in VGF technology provides it with a competitive advantage over more recent market entrants who are utilizing variations of the VGF technology. The Company intends to continue to advance its VGF technology through continued investment in research and development and participation in certain government sponsored research programs. Extend Leadership in GaAs Market. The Company is currently one of the largest suppliers of GaAs substrates worldwide. Historically, the Company has been a leading supplier of GaAs substrates in the epitaxy segment of the semi-insulating market and in the semi-conducting market for GaAs substrates for lasers. The Company intends to increase its share of these markets by continuing to provide high-quality, price-competitive substrates. In addition, in the semi-insulating GaAs substrate market, the Company intends to leverage its demonstrated success in the epitaxy segment to further penetrate the ion implantation segment. In the semi-conducting GaAs substrate market, the Company also intends to leverage its leadership to further penetrate the high-volume, cost-sensitive LED market. Leverage VGF Technology to Manufacture Additional Substrates. The Company believes its VGF technology is a platform which it can leverage to rapidly develop and cost-effectively manufacture additional high-quality compound substrates for emerging applications in markets such as wireless and fiber optic communications. For example, the Company recently began shipping InP and Ge substrates developed using its VGF technique to customers. Unlike the more traditional methods of growing crystals, the Company can use its VGF technology to grow the crystals for these other substrates without having to make a significant investment in new capital equipment. Increase Manufacturing Capacity to Target High-Volume Markets. The Company is currently increasing its manufacturing capacity by approximately 30,000 square feet and expects that this additional space will be available in the third quarter of 1998. In addition, the Company is planning the construction of an additional facility of up to 50,000 square feet in Northern California and does not believe this new facility will begin commercial production of substrates prior to the end of 1999. The Company believes that the increased production capacity will enable it to further lower unit production costs and provide its high-performance substrates at competitive prices for high-volume markets such as LEDs. 30 32 Leverage Existing Customer Relationships. The Company currently sells its GaAs substrates to over 200 customers, including EMCORE, Hewlett Packard, Motorola, NEC, Nortel, Siemens, Sony, Spectrolab and TRW. The Company believes its past success in providing high-quality GaAs substrates to these customers will provide it with a competitive advantage in supplying them additional substrates as their needs develop. For example, the Company recently began shipments of InP substrates to TRW, which currently purchases a significant portion of its GaAs substrates from the Company. In addition, the Company intends to establish alliances and joint development arrangements with customers to develop new products, increase manufacturing efficiencies and more effectively serve its customers' needs. For example, the Company is currently working with one customer to develop Ge substrates which can significantly increase the energy efficiency of the customer's solar cells. CUSTOMERS The Company sold its products to over 200 customers during the Company's last fiscal year. Each of the customers listed below purchased substrates in excess of $500,000 during the Company's last fiscal year: Alpha Industries, Inc. Opto Tech Corporation EMCORE Siemens Epitaxial Products International Ltd. Sony Hewlett Packard Spectra-Physics Lasers, Inc. Motorola Spectrolab NEC Sumitomo Chemical Co., Ltd. Nortel TRW
The Company has historically entered into significant contracts with a number of government agencies and customers for the development of certain products. See "-- Research and Development." No customer accounted for more than 10.0% of the Company's revenues in 1997. In 1996 and 1997, the Company's five largest customers accounted for 35.5% and 34.9%, respectively, of the Company's total revenues. Generally, the Company does not have long-term or other non-cancelable commitments from its customers and usually sells products pursuant to customer purchase orders. The loss of any major customer could have a material adverse effect on the Company. 31 33 TECHNOLOGY The Company's VGF Technique. The Company's proprietary VGF technique produces high-quality crystals from which the Company produces high-performance compound and single-element substrates for use in a variety of electronic and opto-electronic applications. The diagram below illustrates the VGF technique: [VGF DIAGRAM] The Company's VGF technique is designed to allow control of the crystal-growth process with minimal temperature variation. Unlike traditional techniques, the Company's VGF technique places the hot GaAs melt above the cool crystal, thereby reducing the turbulence of the GaAs melt which results when the melt and crystal are inverted. The temperature gradient between the melt and the crystal in the VGF technique is significantly lower than in traditional techniques. These aspects of the VGF technique enable the Company to grow crystals that have a relatively low dislocation density and high uniformity. One of the benefits of these characteristics is that the crystal, and the substrate into which the crystal is manufactured, are mechanically strong. The mechanical strength may result in substrates with lower breakage rates during a customer's manufacturing process. In the VGF technique, the GaAs melt and growing crystal are contained in a closed chamber. A number of benefits result from the use of this closed system. Because the VGF system is sealed and the crystal growth 32 34 is isolated, both semi-insulating and semi-conducting crystals can be grown in the same system without the time consuming and expensive process of completely reconfiguring the system. The closed system isolates the crystal from the outside environment during growth and significantly reduces potential contamination of the crystal by impurities. The closed system also allows for more precise control of the gallium-to-arsenic ratio which results in better consistency and uniformity of the crystals. Therefore, crystals grown using the VGF technique are consistently of a high quality. In addition, the use of cylindrical crucibles, which are sized to meet a customer's requirements, enables the Company to produce circular substrates with a minimum amount of discarded material. The VGF technique is highly automated and the temperature gradient is controlled electronically rather than by physically moving the crystal or furnace. As a result, there is no physical movement to disturb the sensitive crystal. The entire crystal growth process is run under computer control with minimal operator intervention. A single operator can supervise the control of many VGF furnaces which results in significant cost savings. The Company believes its VGF technology is a platform which it can leverage to rapidly develop and cost-effectively manufacture additional high-quality substrates. Unlike the more traditional methods of growing crystals, the Company can use its VGF technology to grow the crystals for these other substrates without having to make a significant investment in new capital equipment. For example, the Company uses its proprietary VGF technique to manufacture InP and Ge substrates. VGF Compared to Traditional Techniques for Producing GaAs Substrates. The Company believes that its proprietary VGF technique provides significant advantages over the traditional crystal growth techniques. The LEC technique is the traditional method for producing semi-insulating GaAs substrates. Unlike the VGF technique, the LEC technique is designed so that the hotter GaAs melt is located beneath the cooler crystal, which results in greater turbulence in the melt. The LEC technique requires a temperature gradient between the GaAs melt and the cool crystal which is approximately 50 to 200 times higher than the temperature gradient of the VGF technique. The turbulence and the high temperature gradient cause LEC-grown crystals to have a higher dislocation density than VGF-grown crystals. This characteristic results in a higher rate of breakage of the LEC-developed substrate during the device manufacturing process. In addition, the LEC technique is essentially an open process whereby the melt and growing crystal are exposed to the environment for the entire duration of the crystal growth process. This exposure results in greater propensity for impurity contamination as well as difficulty in controlling the ratio of gallium to arsenic. Because the crystal is not contained in a crucible, fluctuations in temperature cause the diameter of the crystal to vary. Thus, to ensure proper size with the LEC technique, the crystal must be grown significantly larger than the desired size of the resulting substrate. During the LEC process, the crystal is grown by dipping a seed crystal through molten boric oxide into a melt and slowly pulling the seed up into the cool zone above the boric oxide where the crystal hardens. As the GaAs melt is consumed, the crucible containing the remaining liquid must be raised in coordination with the pulling of the crystal. These moving parts and the relative complexity of the system result in higher maintenance costs. Unlike the VGF technique, the LEC technique uses large, complex electro-mechanical systems that are expensive to acquire and require highly skilled personnel to operate. The HB technique is the traditional method for producing semi-conducting GaAs substrates. The HB technique holds the GaAs melt in a semi-cylindrical "boat." Because of the semi-cylindrical shape of the boat, semi-conducting GaAs crystals grown using the HB technique have a semi-circular cross-section. As a result of this semi-circular shape, more crystal material must be discarded to cut the crystal ingot into a cylindrical shape from which round substrates can be produced. Furthermore, crystals grown using the HB technique have a higher dislocation density than VGF-grown crystals. These and other inherent technical difficulties limit the ability of the HB technique to be used to cost-effectively produce high-quality substrates greater than three inches in diameter. Since the HB technique uses a quartz crucible during the growth process which can contaminate the GaAs melt with silicon impurities, the HB technique is also unsuitable for making semi-insulating GaAs substrates. 33 35 PRODUCTS The Company currently sells the compound substrates GaAs and InP, and the single-element substrate Ge. In addition, the Company has delivered GaP substrates to certain customers for their evaluation. The Company supplies various sizes of substrates according to its customers' specifications and works closely with its customers to ensure that it manufactures substrates to each customer's particular specifications. See "Risk Factors -- Manufacturing Risks." The table below sets forth the Company's products, their available sizes and selected applications:
SUBSTRATE MATERIAL DIAMETER (IN INCHES) APPLICATIONS ------------------ -------------------- ------------ GaAs Semi-Insulating 2, 3, 4, 6 Cellular phones, direct broadcast television, high-performance transistors, satellite communications GaAs Semi-Conducting 2, 3, 4 LEDs, lasers, optical couplers, displays InP Semi-Insulating 2, 3 Fiber optic communications, satellite communications, high-performance transistors, automotive collision avoidance radars InP Semi-Conducting 2 Fiber optic communications, lasers Ge 4 Solar cells
MANUFACTURING The Company's manufacturing operations, which include crystal growth, slicing, testing, edge grinding, polishing, inspecting and packaging the substrates for shipment, are located at the Company's headquarters in Fremont, California. The Company's facility is ISO 9002 certified. Many of the Company's manufacturing operations are computer monitored or controlled, enhancing reliability and yield. The Company depends on a single or limited number of suppliers for certain critical materials, including gallium, for use in the production of substrates. The Company generally purchases these materials through standard purchase orders and not pursuant to long-term supply contracts. The Company seeks to maintain sufficient levels of inventory for certain materials to guard against interruptions in supply and to meet its near term needs. To date, the Company has generally been able to obtain sufficient supplies of materials in a timely manner. However, the Company's results of operations could be materially adversely affected by a stoppage or delay in supply, receipt of defective or contaminated materials, or increases in the pricing of such raw materials. The Company owns an approximately 50,000 square foot facility, of which approximately 45,000 square feet are used for manufacturing. The Company is in the process of expanding the size of this facility by approximately 30,000 square feet to meet its anticipated future production needs through 1999. The expansion is scheduled to be completed and operations are expected to commence in the third quarter of 1998. In addition, the Company is planning the construction in Northern California of an additional facility of up to 50,000 square feet to supplement its existing facility. The new facility is expected to cost at least $10.0 million and take up to 15 months to construct. The construction of a new facility entails significant risks, including shortages of materials and skilled labor, unavailability or late delivery of process equipment, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the construction and start-up of the new facility. Because the Company currently performs all steps in its manufacturing process at its Fremont facility, any interruption resulting from earthquake, fire, equipment failures or other causes would have a material adverse effect on the Company's results of operations. See "Risk Factors -- Manufacturing Risks" and "-- Limitations of Existing Manufacturing Capacity." SALES AND MARKETING The Company sells its products worldwide through its direct sales force as well as through independent international sales representatives. The Company's direct sales force consists of highly trained, technically 34 36 sophisticated sales engineers who are knowledgeable in the manufacturing and use of compound and single-element substrates. The Company's direct sales force operates out of the Company's corporate office in Fremont, California and its Japanese subsidiary. The Company's sales engineers work with customers during all stages of the substrate manufacturing process, from developing the precise composition of the substrate through manufacturing and processing the substrate to the customer's exact specifications. The Company believes that maintaining a close relationship with customers and providing customers with ongoing technical support improves customer satisfaction and will provide the Company with a competitive advantage in selling other substrates to its customers. International sales as a percentage of total revenues in 1995, 1996 and 1997 were 36.0%, 38.2% and 38.2%, respectively. In addition to the Company's direct sales force in Japan, the Company has independent sales representatives in France, Japan, South Korea, Taiwan, and the United Kingdom. Except for sales by its Japanese subsidiary, which are denominated in yen, the Company receives all payments for products in U.S. dollars. In order to raise market awareness of its products, the Company advertises in trade publications, distributes promotional materials, publishes technical articles, conducts marketing programs and participates in industry trade shows and conferences. See "Risk Factors -- Dependence on Sales Outside the United States." RESEARCH AND DEVELOPMENT The Company's research and development efforts are focused on developing new substrates, improving the performance of existing products and processes, and reducing costs in the manufacturing process. The Company has assembled a multi-disciplinary team of highly skilled scientists, engineers and technicians to meet its research and development objectives. Among other projects, the Company has research and development projects involving the development of GaN and high purity GaAs epitaxy substrates. The Company's research and development expenses in 1995, 1996 and 1997 were $448,000, $592,000 and $1.3 million, respectively. In addition to internally funded research and development, the Company has also funded a significant portion of its research and development efforts through contracts with the U.S. government and customer funded research projects. In 1995, 1996 and 1997, the Company received $3.0 million, $2.0 million and $2.3 million, respectively, from U.S. government agencies and customer funded research contracts. Under the Company's contracts, the Company retains rights to the VGF and wafer fabrication technology which it developed. The U.S. government retains rights to utilize the technologies that the Company develops for government purposes only. The Company's total research and development costs, including both contract funded and internally funded research and development expenses, for the years ended December 31, 1995, 1996 and 1997 totaled $2.7 million, $1.4 million and $2.8 million, respectively. The Company expects that it will continue to expend substantial resources on research and development. The development of compound and single-element substrates is highly complex. There can be no assurance that the Company will successfully develop and introduce new products in a timely and cost-effective manner or that its development efforts will successfully permit the Company's products to meet changing market demands. See "Risk Factors -- Rapid Technological Change; Reliance Upon Continued Product Development" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The markets for GaAs substrates are intensely competitive. The Company's principal competitors in the market for semi-insulating GaAs substrates currently include Freiberger, Hitachi Cable, Litton and Sumitomo Electric. In the semi-conducting GaAs substrate market, the Company's principal competitors currently are Sumitomo Electric and Hitachi Cable. The Company also faces competition from manufacturers that produce GaAs substrates for their own use. In addition, the Company faces competition from companies such as IBM that are actively developing alternative materials to GaAs. As the Company enters new markets, such as the Ge and InP substrate markets, the Company expects to face competitive risks similar to those for its GaAs 35 37 substrates. Many of the Company's competitors and potential competitors have been in the business longer than the Company and have greater manufacturing experience, more established technologies than the Company's VGF technique, broader name recognition and significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will compete successfully against these competitors in the future or that the Company's competitors or potential competitors will not develop enhancements to the LEC, HB or VGF techniques that will offer price and performance features that are superior to those of the Company. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices and margins, which would materially adversely affect the Company's business, financial condition and results of operations. The Company believes that the primary competitive factors in the markets in which the Company's products compete are quality, price, performance and customer support and satisfaction, as well as customer commitment to competing technologies. The Company's ability to compete in its target markets also depends on such factors as the timing and success of the development and introduction of new products by the Company and its competitors, the availability of adequate sources of raw materials, protection of Company products by effective utilization of intellectual property laws and general economic conditions. In order to remain competitive, the Company believes it must invest significant resources in developing new substrates and in maintaining customer satisfaction worldwide. There can be no assurance that the Company's products will continue to compete favorably or that the Company will be successful in the face of competition from existing competitors or new companies entering the Company's target markets. Failure of the Company to compete successfully would materially adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Competition." INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success and competitive position for its VGF technique depends materially on its ability to maintain trade secrets, patents and other intellectual property protections. In order to protect its trade secrets, the Company takes certain measures to ensure their secrecy, such as executing non-disclosure agreements with its employees, customers and suppliers. Despite the Company's efforts, there can be no assurance that others will not gain access to the Company's trade secrets, or that the Company can meaningfully protect its intellectual property. In addition, effective trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful. To date, Company has been issued one U.S. patent and has two patent applications pending. The Company has one pending application for a Japanese patent but no issued foreign patents. There can be no assurance that the Company's pending U.S. applications or any future U.S. or foreign patent applications will be approved, that any issued patents will protect the Company's intellectual property or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. Moreover, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company believes that, due to the rapid pace of technological innovation in the GaAs and other substrate markets, the Company's ability to establish and maintain a position of technology leadership in the industry depends more on the skills of its development personnel than upon the legal protections afforded its existing technologies. Although there are currently no pending lawsuits against the Company or unresolved notices that the Company is infringing intellectual property rights of others, the Company may be notified in the future that it is infringing certain patent and/or other intellectual property rights of others. Litigation may be necessary in the future to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company's favor or settled by the Company, would be costly and would divert the efforts and attention of the Company's management and technical personnel from normal business operations, which would have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in litigation could result in the 36 38 loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATIONS The Company is subject to federal, state and local laws and regulations concerning the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials used in its research and development and production operations, as well as laws and regulations concerning environmental remediation and employee health and safety. The growing of crystals and the production of substrates involve the use of certain hazardous raw materials, including, but not limited to, arsenic. There can be no assurance that the Company's control systems will be successful in preventing a release of these materials or other adverse environmental conditions. Any such release or other failure to comply with present or future environmental laws and regulations could result in the imposition of significant fines on the Company, the suspension of production or a cessation of operations. In addition, there can be no assurance that existing or future changes in laws or regulations will not require expenditures or liabilities to be incurred by the Company, or in restrictions on the Company's operations. BACKLOG The Company includes in backlog only those customer orders which have been accepted by the Company and which shipment is generally expected within 12 months. As of December 31, 1997, the Company's backlog was approximately $13.9 million. Backlog can fluctuate greatly based upon, among other matters, the timing of orders. In addition, purchase orders in the Company's backlog are subject to changes in delivery schedules or to reduction in size or cancellation at the option of the purchaser without significant penalty. The Company has experienced, and may continue to experience, cancellation, reduction and rescheduled delivery of orders in its backlog. The Company's backlog may vary significantly from time to time depending upon the level of capacity available to satisfy unfilled orders. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable indicator of sales for any future period. EMPLOYEES At February 28, 1998, the Company had approximately 246 full-time employees, of whom 204 were principally engaged in manufacturing, 25 in sales, general and administration and 17 in research and development. The Company's success is in part dependent on its ability to attract and retain highly skilled workers, who are in high demand. None of the Company's employees is represented by a union and the Company has never experienced a work stoppage. Management considers its relations with its employees to be good. See "Risk Factors -- Dependence on Key Employees." FACILITIES The Company owns approximately 50,000 square feet of office, research and development and manufacturing space in Fremont, California. The Company is in the process of expanding the size of this facility by approximately 30,000 square feet to meet its anticipated future production needs through 1999. The expansion is scheduled for completion and operations are expected to commence in such space in the third quarter of 1998. In addition, the Company is currently planning the construction of an additional facility of up to 50,000 square feet in Northern California. The Company believes that this planned new facility will not begin commercial production of substrates prior to the end of 1999. See "Risk Factors -- Limitations of Existing Manufacturing Capacity." 37 39 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information as of February 28, 1998 with respect to the executive officers and directors of the Company.
NAME AGE POSITION ---- --- -------- Morris S. Young, Ph.D........ 53 Chairman of the Board of Directors, President and Chief Executive Officer Theodore S. Young, Ph.D...... 57 Senior Vice President, Marketing and Director Davis Zhang.................. 42 Senior Vice President, Production Hsing Kung, Ph.D............. 53 Senior Vice President, Engineering and Business Development Gary S. Young................ 55 Vice President, Sales Guy D. Atwood................ 55 Vice President and Chief Financial Officer, Treasurer and Secretary Jesse Chen(1)(2)............. 40 Director B.J. Moore(1)(2)............. 61 Director Donald L. Tatzin(1)(2)....... 46 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Morris S. Young, Ph.D. co-founded the Company in 1986 and has served as the Company's Chairman of the Board of Directors since February 1998 and President and Chief Executive Officer, as well as a director of the Company since 1989. From 1985 to 1989, Dr. Young was a physicist at Lawrence Livermore National Laboratory. From 1979 to 1985, Dr. Young served as a member of the technical staff with AT&T Bell Laboratories. Dr. Young holds a B.S. in Metallurgical Engineering from Chengkung University, Taiwan, an M.S. in Metallurgy from Syracuse University and a Ph.D. in Metallurgy from Polytechnic University. Theodore S. Young, Ph.D. co-founded the Company in 1986 and has served as the Company's Senior Vice President, Marketing since 1989 and served as the Company's President from 1987 to 1989. He has also acted as a director since the Company's inception, including as the Chairman of the Board of Directors from January 1987 to January 1998. Dr. Young served as a senior physicist at Lawrence Livermore National Laboratory and Physics International from 1984 to 1987 and 1974 to 1984, respectively. Dr. Young holds a B.S. in Physics from National Taiwan University, an M.S. in Geophysics from the University of Alaska and a Ph.D. in Plasma Physics from the Massachusetts Institute of Technology. Davis Zhang co-founded the Company in 1986 and has served as its Senior Vice President, Production since January 1994. From 1987 to 1993, Mr. Zhang served as the Company's Senior Production Manager. Mr. Zhang owned and operated Universal Construction Company, a California corporation, from 1986 to 1987. From 1981 to 1985, Mr. Zhang also owned and operated a construction material company in Beijing, China. Mr. Zhang holds a B.S. in Mechanical Engineering from Northern Communication University, Beijing, China. Hsing Kung, Ph.D. joined the Company in March 1997 as its Senior Vice President, Engineering and Business Development. From July 1996 to February 1997, Dr. Kung served as Executive Vice President and a director of Actisys Corporation, a computer peripherals company. Dr. Kung co-founded SDL, Inc., an opto-electronic integrated circuit device company, in 1983 and served as its Vice President, Manufacturing from 1983 to 1996. Dr. Kung holds a B.S. from Chengkung University, an M.S. from the University of Texas, a Ph.D. from the University of California-Berkeley, all in Electrical Engineering and an M.B.A. from Santa Clara University. Gary S. Young joined the Company in 1991 and has served as its Vice President, Sales since July 1993. From 1991 to 1993, Mr. Young served as the Company's Sales and Administrative Manager. From 1973 to 1991, Mr. Young worked in various capacities with several companies, including as a Systems Engineer for 38 40 IBM and software engineer for Boole & Babbage, Inc., an independent software vendor. Mr. Young holds a B.S. in Mathematics from National Taiwan Normal University, an M.A. in Mathematics from Northeast Missouri State University and an M.S. in Operations Research from Purdue University. GUY D. ATWOOD joined the Company in August 1997 as its Vice President and Chief Financial Officer and has served as the Company's Treasurer and Secretary since February 1998. From 1991 to August 1997, Mr. Atwood served at various times as Chief Financial Officer for several private companies, most recently the alumni association for the University of California at Berkeley and AvenuSoftware, a film and video software company (of which he was also its President). Mr. Atwood was self-employed as a financial consultant from 1994 to 1995, and also provided services in such capacity to the Company from June to September 1995. Mr. Atwood holds a B.S. in Accounting from the University of California at Berkeley. JESSE CHEN has served as a director of the Company since February 1998. Since May 1997, Mr. Chen has served as a Managing Director of Maton Venture, an investment company. Prior to that, Mr. Chen co-founded BusLogic, Inc., a computer peripherals company and served as its Chief Executive Officer from 1990 to 1996. Mr. Chen serves on the Board of Directors of several private companies. Mr. Chen has a B.S. degree in Aeronautical Engineering from Chenkung University, Taiwan and an M.S. in Electrical Engineering from Loyola Marymount University. B.J. MOORE has served as a director of the Company since February 1998. Since 1991, Mr. Moore has been self-employed as a consultant and has served as a director to several technology-based companies. Mr. Moore currently serves on the Board of Directors for Adaptec, Inc., a computer peripherals company and Dionex Corporation, an ion chromatography systems company, as well as several private companies. From 1986 to 1991, Mr. Moore served as President and Chief Executive Officer of Outlook Technology, an electronics test equipment company. Mr. Moore holds a B.S. and an M.S. degree in Electrical Engineering from the University of Tennessee. DONALD L. TATZIN has served as a director of the Company since February 1998. Since 1993, Mr. Tatzin has served as Executive Vice President of Showboat, Inc., a gaming company. In addition, Mr. Tatzin served as a director for Sydney Harbour Casino, an Australian gaming company from 1995 to 1996 and as its Chief Executive Officer from April to October 1996. Prior to that, Mr. Tatzin was a director and consultant with Arthur D. Little, Inc. from 1976 to 1993. Mr. Tatzin holds an S.B. in Economics and an S.B. and masters degrees in City Planning from the Massachusetts Institute of Technology and an M.S. in Economics from Australian National University. The Company's Bylaws currently authorize five directors, which number may be changed from time to time by the Board of Directors. All directors hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. The Bylaws provide that, beginning with the first annual meeting of stockholders following the Offering, the Board of Directors will be divided into three classes, with each class serving staggered three-year terms. There are no family relationships among the directors or officers of the Company, except that Morris S. Young, Theodore S. Young and Gary S. Young are brothers (collectively, the "Youngs"), and Davis Zhang is related to the Youngs by marriage. BOARD COMMITTEES In February 1998, the Board of Directors established an Audit Committee. The Audit Committee reviews the results and scope of the annual audit and other services provided by the Company's independent auditors, reviews and evaluates the Company's internal audit and control functions, and monitors transactions between the Company and its employees, officers and directors. Messrs. Chen, Moore and Tatzin are the members of the Audit Committee. In February 1998, the Board of Directors established a Compensation Committee. The Compensation Committee administers the Company's stock option and stock purchase plans and designates compensation levels for the Company's employees and consultants. Messrs. Chen, Moore and Tatzin are the members of the Compensation Committee. 39 41 DIRECTOR COMPENSATION The Company's non-employee directors each receive $500 per Board or committee meeting, and are reimbursed for reasonable expenses. The directors are eligible to receive option grants pursuant to the Company's 1997 Stock Option Plan. See "-- Benefit Plans." EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chief Executive Officer and each of the Company's other executive officers whose salary and bonus for services in all capacities to the Company exceeded $100,000 during the fiscal year ended December 31, 1997 and Guy D. Atwood (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------- ------------------------------------------- SECURITIES ALL OTHER UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#)(2) --------------------------- --------- -------- ------------------ ------------- Morris S. Young........................ $152,339 $15,000 $648 130,000 Chairman of the Board of Directors, President and Chief Executive Officer Theodore S. Young...................... 133,675 12,000 855 120,000 Senior Vice President, Marketing Davis Zhang............................ 122,178 12,000 285 120,000 Senior Vice President, Production Gary S. Young.......................... 104,067 8,000 860 100,000 Vice President, Sales Guy D. Atwood(3)....................... 38,912 3,500 798 100,000 Vice President and Chief Financial Officer, Treasurer and Secretary
- --------------- (1) Represents premiums paid by the Company for life insurance coverage. (2) Such options were granted pursuant to the Company's 1997 Stock Option Plan. (3) The salary amount shown for Guy D. Atwood reflects amount earned from August 18, 1997, his initial date of employment with the Company, to December 31, 1997, and is based on his annual salary of $110,000. 40 42 OPTION GRANTS, EXERCISES AND HOLDINGS Option Grants. The following table sets forth certain information regarding options granted to the Named Executive Officers during the fiscal year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ---------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION OF UNDERLYING GRANTED TO EXERCISE OPTION TERM(4) OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------- NAME GRANTED(#) FISCAL YEAR(%)(1) ($/SHARE)(2) DATE(3) 5%($) 10%($) ---- ---------- ----------------- ------------ ---------- --------- --------- Morris S. Young(5)..... 130,000 9.9% $5.50 07/26/02 $197,541 $436,515 Theodore S. Young(5)... 120,000 9.1 5.00 07/26/07 377,337 956,245 Davis Zhang(5)......... 120,000 9.1 5.00 07/26/07 377,337 956,245 Gary S. Young(5)....... 100,000 7.6 5.00 07/26/07 314,447 796,871 Guy D. Atwood(5)....... 100,000 7.6 5.00 08/18/07 314,447 796,871
- --------------- (1) The Company granted options to employees to purchase an aggregate total of 1,315,100 shares of Common Stock pursuant to its 1997 Stock Option Plan and 1997 Employee Stock Purchase Plan during the year ended December 31, 1997. (2) The exercise price may be paid in cash, check, cash equivalents, promissory note, assignment of the proceeds of a sale or loan with respect to shares of the Company's Common Stock being acquired upon exercise or shares of the Company's Common Stock through a cashless exercise procedure or by any combination of such methods. (3) Options may terminate before their expiration date if the optionee's status as an employee or consultant is terminated or upon optionees' death or disability. (4) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), shown are the gains or "option spreads" that would exist for the respective options granted. These gains are based on the assumed rates of annual compound stock price appreciation of 5.0% and 10.0% from the date the option was granted over the full option term. These assumed annual compound rates of stock appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of future Common Stock prices. (5) Each option vests at the rate of 25.0% of the shares subject to the option at the end of 12 months and 2.1% of the shares subject to the option at the end of each monthly period thereafter as long as such optionee's employment has not terminated. 41 43 Option Exercise and Holdings. The following table sets forth certain information regarding exercised stock options during the year ended December 31, 1997 and unexercised options held as of December 31, 1997 by each of the Named Executive Officers. FISCAL YEAR-END OPTION VALUES
SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT ACQUIRED YEAR-END(#)(1) FISCAL YEAR-END($)(2) ON VALUE ----------------------------- --------------------------- NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Morris S. Young.......... -- $ -- -- 130,000 $ -- $ -- Theodore S. Young........ -- -- -- 120,000 -- -- Davis Zhang.............. 12,500 38,750 6,250 126,250 19,375 -- Gary S. Young............ 3,750 11,625 7,500 103,750 23,250 -- Guy D. Atwood............ -- -- -- 100,000 -- --
- --------------- (1) The Company has a right of repurchase as to any unvested shares upon optionee's termination of employment at their original exercise price. (2) The value of "in-the-money" stock options represents the difference between the exercise price of such stock options and the fair market value of Common Stock as of December 31, 1997, as determined by the Company's Board of Directors, multiplied by the total number of shares subject to such options on December 31, 1997. No compensation intended to serve as incentive for performance to occur over a period longer than one fiscal year was paid pursuant to a long-term incentive plan during the last fiscal year to any Named Executive Officer. The Company does not have any defined benefit or actuarial plan under which benefits are determined primarily by final compensation or average final compensation and years of service with any of the Named Executive Officers. BENEFIT PLANS 1993 Stock Option Plan. The 1993 Stock Option Plan (the "1993 Plan") provides for the grant of stock options to employees (including officers), directors and consultants of the Company and its subsidiaries. The 1993 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options, although incentive stock options may be granted only to employees. The 1993 Plan is administered by the Board of Directors or a duly approved committee (the "Administrator"). Subject to the provisions of the 1993 Plan, the Administrator determines the persons to whom options are to be granted, the number of shares subject to each option and all other terms and conditions of the options. As of December 31, 1997, options to purchase an aggregate of 107,950 shares of Common Stock were outstanding under the 1993 Plan. Options granted under the 1993 Plan will remain outstanding in accordance with their terms, but the Board of Directors has determined that no further options will be granted under the 1993 Plan. In the event of certain changes in control of the Company, the acquiror or successor corporation may assume or substitute for options outstanding under the 1993 Plan. If the options outstanding under the 1993 Plan are not assumed or substituted for, the Board of Directors may, in its sole discretion, (i) cancel the options in exchange for a cash payment to the optionee equal to the excess of the market value of the shares subject to the option over the option exercise price, or (ii) except in the event of a dissolution, liquidation or sale of substantially all of the Company's assets, terminate the outstanding options, provided that the optionees will be given at least 35 days' notice of the transaction and will have at least 30 days to exercise the unexpired options prior to the change in control. 1997 Employee Stock Purchase Plan. The 1997 Employee Stock Purchase Plan (the "1997 ESPP") provides for the grant of stock purchase rights to full-time employees of the Company and its subsidiaries. As of December 31, 1997, 67,000 shares of Common Stock had been issued pursuant to the exercise of stock purchase rights granted under the 1997 ESPP and no shares remained available for issuance thereunder. 42 44 1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997 Plan") was approved by the Board of Directors in July 1997 and by the stockholders as of July 1997. The 1997 Plan provides for the grant of incentive stock options to employees within the meaning of section 422 of the Code and for grants of nonstatutory stock options to employees, non-employee directors and consultants. Because non-employee directors are eligible to receive grants under the 1997 Plan, the Company has not adopted a separate plan which provides for the formula grant of stock options to nonemployee directors. The 1997 Plan is administered by the Board of Directors or a committee thereof. Subject to the provisions of the 1997 Plan, the Board or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including (i) the number of shares of Common Stock covered by the option, (ii) when the option becomes exercisable, (iii) the per share option exercise price, which, in the case of incentive stock options, must be at least 100% of the fair market value of a share of Common Stock as of the date of grant, in the case of options granted to persons who own 10.0% or more of the total combined voting power of the Company (or any parent or subsidiary of the Company) (a "10.0% Stockholder"), must be at least 110% of the fair market value of a share of Common Stock as of the date of grant, and, in the case of nonstatutory stock options, must be at least 85.0% of the fair market value of a share of Common Stock as of the date of grant, and (iv) the duration of the option (which may not exceed ten years, or 5 years for incentive stock options granted to 10.0% Stockholders). Generally, options granted under the 1997 Plan become exercisable as the shares vest pursuant to a schedule established by the Board of Directors or committee thereof. Options granted under the 1997 Plan are non-transferable other than by will or the laws of descent and distribution. In the event of certain changes in control of the Company, the acquiring or successor corporation may assume or substitute for options outstanding under the 1997 Plan. To the extent that the options outstanding under the 1997 Plan are not assumed, substituted for or exercised prior to such change in control, they will terminate. A total of 2,800,000 shares have been reserved for issuance under the 1997 Plan. Of the shares of Common Stock currently reserved for issuance under the 1997 Plan as of December 31, 1997, no shares have been issued upon the exercise of options, options for the purchase of a total of 1,235,000 shares at a weighted average exercise price of $5.05 per share were outstanding and a maximum of 1,565,000 shares were available for future option grants. 1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was approved by the Board of Directors in February 1998, subject to stockholder approval. A total of 250,000 shares of Common Stock have been reserved for issuance under the Purchase Plan, none of which have been issued as of the effective date of this Offering. The Purchase Plan, which is intended to qualify under section 423 of the Code, is administered by the Board of Directors or by a committee thereof. Employees (including officers and employee directors of the Company) of the Company or any subsidiary designated by the Board of Directors for participation in the Purchase Plan are eligible to participate in the Purchase Plan if they are customarily employed for more than 20 hours per week and more than five months per year. The Purchase Plan will be implemented by overlapping 24-month offerings, the first of which will commence on the effective date of this Offering and the initial offering period will terminate on January 31, 2000. Each offering will generally be comprised of four six-month purchase periods, with shares purchased on the last day of each purchase period (a "Purchase Date"). After the effective date of this Offering, offering periods under the Purchase Plan will generally begin on February 1 and August 1 of each year. The Board of Directors may change the dates or duration of one or more offerings, but no offering may exceed 27 months. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions at a price no less than 85.0% of the lower of the fair market value of the Common Stock on (i) the first day of the offering, or (ii) the Purchase Date. Participants generally may not purchase more than 5,000 shares in a 24-month offering or stock having a value (measured at the beginning of the offering) greater than $25,000 in any calendar year. In the event of certain changes in control of the Company, the Board may accelerate the Purchase Date of the then current purchase period(s) to a date prior to the change in control unless the acquiring corporation assumes or replaces the purchase rights outstanding under the Purchase Plan. 401(k) Plan. The Company provides a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers the Company's eligible employees. Pursuant to the 401(k) Plan, employees may elect to 43 45 reduce their current annual compensation up to the lesser of 15.0% or the statutorily prescribed limit ($9,500 in calendar year 1997 and $10,000 in calendar year 1998), and have the amount of such reduction ("elective deferrals") contributed to the 401(k) Plan. The 401(k) Plan provides for discretionary matching contributions by the Company in an amount not to exceed 66.7% of each participant's first 6.0% of elective deferrals, with a maximum matching contribution of 4.0% of compensation for each 12 consecutive months, ending on the 31st day of December. The 401(k) Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions will be deductible by the Company when made. The trustee of the 401(k) Plan invests the assets of the 401(k) Plan in the various investment options as directed by the participants. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS No interlocking relationship exists between any member of the Company's Compensation Committee and any member of any other company's board of directors or compensation committee. The Compensation Committee makes recommendations regarding the Company's employee stock plans and makes decisions concerning salaries and incentive compensation for employees and consultants of the Company. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS As permitted by the provisions of the Delaware General Corporation Law, the Company's Certificate of Incorporation provides that directors of the Company shall not be personally liable for monetary damages to the Company or its stockholders for a breach of fiduciary duty as a director, except for liability as a result of (i) a breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) an act related to the unlawful stock repurchase or payment of a dividend under Section 174 of Delaware General Corporation Law, and (iv) transactions from which the director derived an improper personal benefit. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Certificate of Incorporation also authorizes the Company to indemnify its officers, directors and other agents, by bylaws, agreements or otherwise, to the full extent permitted under Delaware law. The Company intends to enter into separate indemnification agreements with its directors and officers which may, in some cases, be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. The Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its employees to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of the indemnified party. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 44 46 CERTAIN TRANSACTIONS Since January 1995, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000, and in which any director, executive officer or holder of more than 5% of any class of voting securities of the Company and members of such person's immediate family had or will have a direct or indirect material interest other than the transactions described below. In March 1997, pursuant to a Series C Preferred Stock Purchase Agreement, the Company issued an aggregate of 1,200,000 shares of Series C Preferred Stock at a price of $5.00 per share to a group of investors (the "Series C Financing"), including an aggregate of 200,000 shares to Hotung Venture Capital Corporation ("Hotung") and its affiliates Daitung Venture Capital Corporation ("Daitung"), Litung Venture Capital Corporation ("Litung") and Futung Venture Capital Corporation ("Futung"); an aggregate of 200,000 shares to Min-Chen Hsieh and Min-Hui Hsieh; and 18,000 shares to the Lian Soung and Grace Soung Community Property Trust dated 9/20/94. Hotung is a beneficial holder of more than 5% of a class of the Company's voting securities, and S.C. Hong, a director of the Company at the time of the Series C Financing, is the President of Hotung, Daitung, Litung and Futung. S.C. Hsieh, a director of the Company at the time of the Series C Financing, is Min-Chen Hsieh and Min-Hui Hsieh's father. Grace Soung, a director of the Company at the time of the Series C Financing, is a co-trustee of the Lian Soung and Grace Soung Community Property Trust dated 9/20/94. Since January 1995, Morris Young, the Company's Chairman of the Board of Directors, President and Chief Executive Officer, and/or Theodore Young, the Company's Senior Vice President, Marketing and a director of the Company, entered into certain agreements to guarantee, in part or in full, the indebtedness incurred by the Company pursuant to the following loan transactions: (i) In September 1995, Morris Young and Theodore Young each entered into a guaranty agreement with the Commercial Bank of Fremont ("CBF"), which was subsequently acquired by U.S. Bank, in connection with a real estate "bridge" loan from CBF to the Company in the principal amount of $4.5 million (the "Bridge Loan"); (ii) The Company entered into a loan agreement with CBF in July 1996 and Bay Area Employment Development Company ("Bay Area") in August 1996 to refinance the Bridge Loan. Morris Young and Theodore Young each entered into a guaranty agreement with CBF and Bay Area in connection with such refinancing; (iii) In May 1997, Morris Young and Theodore Young each entered into guaranty agreements with U.S. Bank in connection with a construction loan and a line of credit from U.S. Bank to the Company in the aggregate principal amount of $3.8 million; and (iv) From December 1995 to July 1997, Morris Young or Theodore Young entered into guaranty agreements with Belvedere Equipment Finance Corporation, as agent on behalf of various lenders, in connection with certain equipment financing loans to the Company in the aggregate principal amount of $2.4 million. Both Morris Young and Theodore Young have since been released from their guaranty agreements with CBF and U.S. Bank. Since January 1995, Equipment & Materials Inc. ("EMI"), a California corporation engaged in international trading with the People's Republic of China ("China") and quartz fabrication, has supplied the Company with various raw materials from China and also has manufactured quartz for the Company. Christina X. Li, the sole shareholder and President of EMI, is the wife of Davis Zhang, the Company's Senior Vice President, Production. The aggregate revenue received by EMI from the Company for such supply and production up through December 1997 is $2.6 million, with $380,000, $760,000, and $1.5 million in revenue received by EMI from the Company in 1995, 1996 and 1997, respectively. 45 47 In January 1996, Davis Zhang, and in February 1996, George Liu, Morris Young's father-in-law, each loaned the Company the principal amount of $50,000 and $224,000, respectively. The foregoing loans, plus interest, have since been paid by the Company. For a description of the compensation of officers and directors of the Company and the eligibility of officers and directors of the Company to participate in the Company's employee benefit plans, see "Management -- Director Compensation," "-- Executive Compensation" and "-- Benefit Plans." The Company believes that all transactions between the Company and its officers, directors, principal stockholders and other affiliates have been and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. To date, the Company has made no loans to officers, directors, principal stockholders or other affiliates other than advances of reimbursement expenses. The Company intends to enter into indemnification agreements with each of its executive officers and directors. See "Management -- Limitation on Liability and Indemnification Matters." 46 48 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of December 31, 1997, and as adjusted to reflect the sale of the shares offered hereby, assuming no exercise of the Underwriters' over-allotment option, (i) by each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) by each of the Named Executive Officers and by each of the Company's directors and (iii) by all executive officers and directors as a group. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder.
PERCENTAGE OWNED(2) -------------------- SHARES BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING --------------------------------------- ------------------ -------- -------- Morris S. Young(3)........................................ 1,956,800 14.9% 12.5% Entities Affiliated with Hotung Venture Capital Corporation(4)................... 1,076,470 8.2 6.9 10-F, 261 Sung Ching Road Taipei, Taiwan, ROC Gary S. Young(5).......................................... 669,500 5.1 4.3 Theodore S. Young......................................... 599,465 4.6 3.8 Davis Zhang(6)............................................ 254,750 1.9 1.6 Guy D. Atwood............................................. -- -- -- Jesse Chen................................................ -- -- -- B.J. Moore................................................ -- -- -- Donald L. Tatzin.......................................... -- -- -- All directors and executive officers as a group (9 persons)(7)............................................. 3,491,181 26.5 22.2
- --------------- (1) Unless otherwise indicated, the address of each of the named individuals is: c/o American Xtal Technology, Inc. 4311 Solar Way, Fremont, California 94538. (2) The amounts reported in this table include shares of Common Stock issuable upon the automatic conversion of all Preferred Stock, which conversion will occur upon the closing of the Offering. The calculations in the table are based on 13,170,268 shares of Common Stock outstanding on an as-converted basis as of December 31, 1997. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options. Calculations of percentages of beneficial ownership assume the exercise by only the respective named stockholders of all options for the purchase of Common Stock held by such stockholders which are exercisable within 60 days of December 31, 1997. (3) Includes 784,600 shares held by the Morris & Vicke Young Trust, 1,132,200 shares held by Morris S. Young Family Ltd. Partnership, and 20,000 shares held by the minor children of Morris Young. Also includes 20,000 shares held jointly by George Liu (Morris Young's father-in-law) and Vicke Young (Morris Young's spouse), of which Morris Young disclaims beneficial ownership. (4) Includes 916,470 shares held by Hotung, 60,000 shares held by Futung, 60,000 shares held by Litung and 40,000 shares held by Daitung. (5) Includes 23,750 shares directly held by Gary Young, 446,087 shares held by Gary Young Trust A, 190,163 shares held by Gary Young Trust B, 2,000 shares held by Joanna Young (Gary Young's daughter), and 7,500 shares of Common Stock subject to options exercisable within 60 days of December 31, 1997. (6) Includes 187,500 shares directly held by Davis Zhang, 45,000 shares held by Christina X. Li (Davis Zhang's spouse), 16,000 shares held by Mr. Zhang's minor children and 6,250 shares of Common Stock subject to options exercisable within 60 days of December 31, 1997. (7) Includes 13,750 shares of Common Stock subject to options exercisable within 60 days of December 31, 1997. 47 49 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the closing of the Offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock. The following summary of certain provisions of the Common Stock and the Preferred Stock of the Company does not purport to be complete and is subject to, and qualified in its entirety by, the Certificate of Incorporation and Bylaws of the Company that are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. COMMON STOCK As of December 31, 1997, there were 13,170,268 shares of Common Stock outstanding held of record by 175 stockholders, as adjusted to reflect the conversion of the outstanding shares of Preferred Stock upon the closing of the Offering. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of Common Stock. Subject to preferences applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any Preferred Stock. Holders of Common Stock have no preemptive or subscription rights, and there are no redemption or conversion rights with respect to such shares. All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock to be issued upon the closing of the Offering will be fully paid and non-assessable. PREFERRED STOCK Upon the closing of the Offering, the Board of Directors will have the authority to issue up to 2,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders. Although it presently has no intention to do so, the Board of Directors, without stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company. See "Risk Factors -- Concentration of Share Ownership and Voting Power; Anti-Takeover Provisions." DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS Certain provisions of Delaware law and the Company's Certificate of Incorporation and Bylaws could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to first negotiate with the Company. The Company believes that the benefits of increased protection of the Company's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging such proposals, including proposals that are priced above the then current market value of the Common Stock, because, among other things, negotiation of such proposals could result in an improvement of their terms. The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date such stockholder became an interested stockholder, unless: (i) prior to such date the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an 48 50 interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85.0% 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 (x) by persons who are directors and also officers and (y) by 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 (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66.7% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10.0% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) 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 (v) 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 15.0% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. The Company's Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of the stockholders of the Company may be called only by the Board of Directors or holders of not less than 10.0% of all of the shares entitled to cast votes at such meetings. The Certificate of Incorporation also provides that, beginning upon the closing of the Offering, the Board of Directors will be divided into three classes, with each class serving staggered three-year terms and that certain amendments of the Company's Certificate of Incorporation, and all amendments by the stockholders of the Company's Bylaws, require the approval of holders of at least 66.7% of the voting power of all outstanding stock. These provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Securities Transfer & Trust, Inc. 49 51 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of the Offering, the Company will have outstanding an aggregate of 15,670,268 shares of Common Stock (16,045,268 if the Underwriters' over-allotment option is exercised in full). Of these shares, the 2,500,000 shares sold in the Offering (2,875,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (whose sales would be subject to certain limitations and restrictions described below). The remaining 13,170,268 shares of Common Stock held by existing stockholders (the "Restricted Shares") were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner except an affiliate) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) 1.0% of the number of shares of Common Stock then outstanding (approximately 156,703 shares immediately after this Offering) or (ii) generally, the average weekly trading volume in the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company 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, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisors prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission had indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. The Company, its officers and directors, and certain beneficial owners of the Company's Common Stock, owning upon the closing of the Offering, in the aggregate, 12,466,028 shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any other securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other capital stock of the Company, for a period of 180 days from the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be salable until the agreements expire. Upon the expiration of these lock-up agreements, all of the Restricted Shares will become eligible for sale, subject in some cases to the limitations of Rule 144. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements. The Company intends to file a registration statement on Form S-8 under the Securities Act covering the 3,483,919 shares subject to outstanding options or reserved for issuance under the Company's 1993 Stock Option Plan, 1997 Stock Option Plan and the 1998 Employee Stock Purchase Plan. Accordingly, shares 50 52 registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, except to the extent that such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. All of the shares issuable upon exercise of outstanding options are subject to 180-day lock-up agreements with the Company and/or representatives of the Underwriters. Following the date 180 days after the date of this Prospectus, an aggregate of 408,711 shares will be issuable upon the exercise of currently outstanding options. Such shares will be freely tradable in the public market upon exercise, pursuant to such registration statement on Form S-8. See "Management -- Benefit Plans." Prior to the Offering, there has been no public market for the Company's Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock. 51 53 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Prudential Securities Incorporated and Cowen & Company are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names:
NUMBER UNDERWRITER OF SHARES ----------- --------- Prudential Securities Incorporated.......................... Cowen & Company............................................. --------- Total....................................................... 2,500,000 =========
The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby, if any are purchased. The Underwriters, through their Representatives, have advised the Company that they propose to offer the shares of Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share; and that such dealers may reallow a concession of $ per share to certain other dealers. After the initial public offering, the initial public offering price and the concessions may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the initial public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to 2,500,000. The Company has agreed to indemnify the several Underwriters and contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company, its officers and directors, and certain beneficial owners of the Company's Common Stock and holders of options to purchase Common Stock have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for any shares of Common Stock or other capital stock of the Company, for a period of 180 days after the date of this Prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements. Prior to the Offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in making such determination will be the prevailing market conditions, the Company's financial and operating history and condition, its prospects and the prospects for its industry in general, the management of the Company and the market prices of securities for companies in businesses similar to that of the Company. 52 54 In connection with the Offering, certain Underwriters (and selling group members, if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following the closing of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 375,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, Prudential Securities Incorporated, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Gray Cary Ware & Freidenrich, LLP, Palo Alto, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The Consolidated Financial Statements of the Company as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedule filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington, D.C., and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Commission maintains a World Wide Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commissions. The address of the website is http://www.sec.gov. 53 55 AMERICAN XTAL TECHNOLOGY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 and Pro Forma as of December 31, 1997......................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997.......................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997.............. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996, and 1997......................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 56 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of American Xtal Technology, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of American Xtal Technology, Inc., and its subsidiary at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California February 6, 1998 F-2 57 AMERICAN XTAL TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS
DECEMBER 31, PRO FORMA ------------------ DECEMBER 31, 1997 1996 1997 (NOTE 1) ------- ------- ----------------- (UNAUDITED) Current Assets: Cash and cash equivalents............................. $ 756 $ 3,054 $ 3,054 Accounts receivable, less allowance for doubtful accounts of $100 and $100.......................... 2,992 6,005 6,005 Inventories........................................... 3,955 8,361 8,361 Prepaid expenses and other assets..................... 153 858 858 Deferred income taxes................................. 489 225 225 ------- ------- ------- Total current assets.......................... 8,345 18,503 18,503 Property, plant and equipment, net...................... 8,409 12,101 12,101 Other assets............................................ 630 9 9 ------- ------- ------- Total assets.................................. $17,384 $30,613 $30,613 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable...................................... $ 828 $ 1,722 $ 1,722 Short-term bank borrowing............................. 300 -- -- Notes payable to related parties...................... 276 -- -- Accrued liabilities................................... 1,162 1,827 1,827 Current portion of long-term debt..................... 237 745 745 ------- ------- ------- Total current liabilities..................... 2,803 4,294 4,294 Long-term debt, net of current portion.................. 5,582 7,728 7,728 ------- ------- ------- Total liabilities............................. 8,385 12,022 12,022 ------- ------- ------- Commitments and Contingencies Stockholders' Equity: Convertible Preferred Stock, no par value, 25,000,000 shares authorized, 8,928,737 and 10,128,737 shares issued and outstanding, actual; $0.001 par value, 2,000,000 shares authorized, none issued and outstanding pro forma.............................. 2,618 8,553 -- Common Stock, no par value, 100,000,000 shares authorized, 2,897,706 and 3,041,531 shares issued and outstanding, actual; $0.001 par value, 40,000,000 shares authorized, 13,170,268 issued and outstanding pro forma.............................. 159 867 13 Additional paid in capital............................ -- -- 9,407 Deferred compensation................................. -- (220) (220) Retained earnings..................................... 6,326 9,584 9,584 Cumulative translation adjustments.................... (104) (193) (193) ------- ------- ------- Total stockholders' equity.................... 8,999 18,591 18,591 ------- ------- ------- Total liabilities and stockholders' equity.... $17,384 $30,613 $30,613 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-3 58 AMERICAN XTAL TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- Revenues: Product revenues.......................................... $11,520 $14,222 $23,014 Contract revenues......................................... 2,958 2,005 2,321 ------- ------- ------- Total revenues.................................... 14,478 16,227 25,335 Cost of revenues: Cost of product revenues.................................. 6,030 9,270 13,674 Cost of contract revenues................................. 2,234 795 1,553 ------- ------- ------- Total cost of revenues............................ 8,264 10,065 15,227 ------- ------- ------- Gross profit................................................ 6,214 6,162 10,108 Operating expenses: Selling, general and administrative....................... 1,716 2,033 2,959 Research and development.................................. 448 592 1,289 ------- ------- ------- Total operating expenses.......................... 2,164 2,625 4,248 ------- ------- ------- Income from operations...................................... 4,050 3,537 5,860 Interest expense............................................ (12) (170) (570) Other income (expense)...................................... 282 (72) (34) ------- ------- ------- Income before provision for income taxes.................... 4,320 3,295 5,256 Provision for income taxes.................................. 1,581 1,249 1,998 ------- ------- ------- Net income.................................................. $ 2,739 $ 2,046 $ 3,258 ======= ======= ======= Net income per share: Basic..................................................... $ 0.97 $ 0.71 $ 1.11 ======= ======= ======= Diluted................................................... $ 0.23 $ 0.17 $ 0.25 ======= ======= ======= Shares used in net income per share calculations (Notes 1 and 9): Basic..................................................... 2,821 2,882 2,938 ======= ======= ======= Diluted................................................... 11,813 11,811 12,839 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-4 59 AMERICAN XTAL TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE PREFERRED STOCK COMMON STOCK CUMULATIVE ------------------- ------------------ DEFERRED RETAINED TRANSLATION SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS ADJUSTMENTS TOTAL ---------- ------ --------- ------ ------------ --------- ----------- ------- Balance at December 31, 1994..... 8,928,737 $2,618 2,707,956 $ 54 $ -- $1,541 $ -- $ 4,213 Common Stock options exercised... -- -- 149,000 55 -- -- -- 55 Common Stock repurchased......... -- -- (8,000) (2) -- -- -- (2) Net income....................... -- -- -- -- -- 2,739 -- 2,739 ---------- ------ --------- ---- ----- ------ ----- ------- Balance at December 31, 1995..... 8,928,737 2,618 2,848,956 107 -- 4,280 -- 7,005 Common Stock options exercised... -- -- 40,750 52 -- -- -- 52 Currency translation adjustment..................... -- -- -- -- -- -- (104) (104) Net income....................... -- -- -- -- -- 2,046 -- 2,046 ---------- ------ --------- ---- ----- ------ ----- ------- Balance at December 31, 1996..... 8,928,737 2,618 2,889,706 159 -- 6,326 (104) 8,999 Issuance of Series C Convertible Preferred Stock in March 1997 at $5.00 per share, net of issuance costs................. 1,200,000 5,935 -- -- -- -- -- 5,935 Common Stock options exercised... -- -- 151,825 386 -- -- -- 386 Deferred compensation............ -- -- -- 322 (322) -- -- -- Amortization of deferred compensation................... -- -- -- -- 102 -- -- 102 Currency translation adjustment..................... -- -- -- -- -- -- (89) (89) Net income....................... -- -- -- -- -- 3,258 -- 3,258 ---------- ------ --------- ---- ----- ------ ----- ------- Balance at December 31, 1997..... 10,128,737 $8,553 3,041,531 $867 $(220) $9,584 $(193) $18,591 ========== ====== ========= ==== ===== ====== ===== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 60 AMERICAN XTAL TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 2,739 $ 2,046 $ 3,258 Adjustments to reconcile net income to cash provided by (used in) operations: Depreciation and amortization........................ 513 867 1,164 Deferred income taxes................................ (358) (43) 264 Stock compensation................................... -- -- 102 Changes in assets and liabilities: Accounts receivable............................... (914) (578) (3,013) Inventory......................................... (626) (2,298) (4,406) Other assets...................................... (427) (149) (84) Accounts payable.................................. 215 247 894 Accrued liabilities............................... (398) 382 665 ------- ------- ------- Net cash provided by (used in) operating activities................................. 744 474 (1,156) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (4,597) (3,946) (4,856) Proceeds from the sale of property, plant and equipment... 239 -- -- Proceeds from the sale of short-term investments.......... 411 -- -- ------- ------- ------- Net cash used in investing activities........ (3,947) (3,946) (4,856) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of Common Stock................ 53 52 386 Proceeds from the issuance of Convertible Preferred Stock.................................................. -- -- 5,935 Proceeds from (payments of) short-term bank borrowings.... 600 (300) (300) Proceeds from long-term debt borrowings................... 2,350 3,469 2,654 Proceeds from (payments of) notes payable to related parties................................................ -- 276 (276) ------- ------- ------- Net cash provided by financing activities.... 3,003 3,497 8,399 ------- ------- ------- Effect of exchange rate changes............................. -- (104) (89) ------- ------- ------- Net (decrease) increase in cash and cash equivalents........ (200) (79) 2,298 Cash and cash equivalents at beginning of year.............. 1,035 835 756 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 835 $ 756 $ 3,054 ======= ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid............................................. $ 12 $ 203 $ 579 ======= ======= ======= Income taxes paid......................................... $ 2,651 $ 794 $ 1,814 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 61 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES American Xtal Technology, Inc. (the "Company") was incorporated in California in December 1986. Upon completion of its initial public offering, the Company will be reincorporated in Delaware. The Company uses a proprietary vertical gradient freeze ("VGF") technique to produce high-performance compound semiconductor base materials, or substrates, for use in a variety of electronic and opto-electronic applications. The Company manufactures and sells Gallium Arsenide ("GaAs"), Indium Phosphide ("InP") and Germanium ("Ge") substrates. The Company also has research and development contracts with the U.S. Department of Defense ("DOD") and other third parties for developing GaAs and other substrates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned Japanese subsidiary. All material intercompany accounts and transactions have been eliminated. Use of Estimates 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Foreign Currency Translation The functional currency of the Company's Japanese subsidiary is the local currency. Accordingly, the assets and liabilities of the subsidiary are translated at the rates of exchange on the balance sheet date. Income and expenses items are translated at an average rate of exchange. The Company does not undertake any foreign currency hedging activities. The cumulative translation adjustment in the years ended December 31, 1996 and 1997, resulted from fluctuations in yen exchange rates and its effects on the translation of balance sheet accounts. Gains and loss from foreign currency translation are included as a separate component of stockholders' equity. Revenue Recognition Product revenues are generally recognized upon shipment. The Company provides an allowance for estimated returns at the time revenue is recognized. Contract revenues are recognized under the percentage of completion method based on costs incurred relative to total contract costs. Costs associated with contract revenues are included in cost of contract revenues. Concentration of Credit Risk The Company manufactures and distributes GaAs, InP and Ge substrates and performs services under research and development contracts. Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable. The Company invests primarily in money market accounts and commercial paper instruments. Cash equivalents are maintained with high quality institutions and their composition and maturities are regularly monitored by management. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral. No customer represented greater than 10.0% of product revenues in fiscal years 1995, 1996 and 1997. For fiscal years 1995 and 1996, one government entity represented 98.6% and 91.3%, respectively, of contract revenues. For fiscal F-7 62 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) year 1997, one government entity and a third party represented 47.4% and 52.6%, respectively, of contract revenues. Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1996 and 1997, approximately $22,000 and $2,029,000, respectively, of money market funds are included in cash and cash equivalents. Inventory Inventory is stated at the lower of cost, using the weighted average method, or market. Property, Plant and Equipment Acquisitions of property, plant and equipment are stated at cost less accumulated depreciation computed using the straight-line method over the estimated economic lives of the assets, generally five years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease. Impairment of Long-Lived Assets Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), the Company reviews long-lived assets based upon a gross cash flow basis and will reserve for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. Based on its most recent analysis, the Company believes that there was no impairment of its property, plant and equipment as of December 31, 1997. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations thereof. Accordingly, compensation costs for stock options is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the stock option exercise price. In addition, the Company complies with the disclosure provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Income Taxes The Company accounts for deferred income taxes using the liability method, under which the expected future tax consequences of timing differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potential common shares outstanding during the period, except if anti-dilutive. Potential common shares consist of the incremental common shares issuable upon conversion of the Convertible Preferred Stock (using the if-converted method) and shares issuable upon the exercise of stock options (using the treasury stock method). (See Note 9 for a reconciliation of the numerators and denominators used in the calculation). F-8 63 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statements of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The adoption of the both statements is required for fiscal years beginning after December 15, 1997. Under SFAS 130, a company is required to report in the financial statements, in addition to net income, comprehensive income including, as applicable, foreign currency items and unrealized gains and losses on certain investments in debt and equity securities. The adoption of SFAS 130 will require the Company to report comprehensive income including foreign currency items. SFAS 131 requires that companies report separately, in the financial statements, certain financial and descriptive information about operating segments profit or loss, certain specific revenue and expense items, and segment assets. Additionally, companies are required to report information about the revenues derived from their products and service groups, about geographic areas in which the Company earns revenues and holds assets, and about major customers. The adoption of SFAS 131 will not have any impact on the Company's financial statements. Pro Forma Balance Sheet (unaudited) If the Offering is consummated, all shares of Convertible Preferred Stock outstanding will automatically convert into an aggregate of 10,128,737 shares of Common Stock. The pro forma effect of this conversion has been reflected in the accompanying unaudited balance sheet as of December 31, 1997. NOTE 2. BALANCE SHEET DETAIL
DECEMBER 31, ----------------- 1996 1997 ------ ------- (IN THOUSANDS) Inventories: Raw materials........................................... $1,865 $ 2,224 Work in process......................................... 1,968 5,623 Finished goods.......................................... 122 514 ------ ------- $3,955 $ 8,361 ====== ======= Property, plant and equipment: Land.................................................... $1,120 $ 1,120 Building................................................ 4,731 4,731 Machinery and equipment................................. 4,350 8,121 Leasehold improvements.................................. 240 240 Construction in progress................................ 688 1,773 ------ ------- 11,129 15,985 Less: Accumulated depreciation and amortization......... 2,720 3,884 ------ ------- $8,409 $12,101 ====== ======= Accrued liabilities: Accrued compensation.................................... $ 392 $ 690 Accrued income tax...................................... 461 282 Customer advances....................................... 57 260 Allowance for sales returns............................. 145 247 Other................................................... 107 348 ------ ------- $1,162 $ 1,827 ====== =======
F-9 64 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. DEBT On September 11, 1995, the Company obtained a bank loan of up to $4.5 million to finance the construction of a new commercial building in Fremont, California. The loan, which was due on September 11, 1996, was refinanced with two new loans. On October 1, 1996, the Company obtained a loan for $3.5 million from a commercial bank. The loan has an interest rate of 8.3% per annum, matures in 2006 and is secured by the land and building. The loan is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which have all been met as of December 31, 1997. On August 15, 1996, the Company obtained a $1.0 million debenture loan from the Bay Area Employment Development Company guaranteed by the U.S. Small Business Administration. The loan has an interest rate of 7.3% per annum, matures in 2016 and is subordinate to the $3.5 million bank loan. As of December 31, 1996 and 1997, an aggregate of $4.5 million and $4.4 million was outstanding under these loans, respectively. The Company obtained equipment loans totaling $1.4 million and $2.9 million from several different banks through a financing company during 1996 and 1997, respectively. These proceeds were used to purchase new manufacturing equipment for the Company's Fremont, California facility. These loans have a maturity of five years with interest rates ranging from 7.7% to 9.0% per annum. These loans are secured by the machinery and equipment purchased with the loans. As of December 31, 1996 and 1997, $1.3 million and $3.2 million was outstanding under these loans, respectively. In November 1996, the Company obtained a $3.0 million line of credit ("LOC") with a bank which expires in April 1998. In March 1998, the Company obtained a $15.0 million LOC which expires in May 1999 to replace the $3.0 million LOC. The $15.0 LOC is secured by the Company's business assets, excluding equipment. Borrowings under the $15.0 LOC bear interest at the bank's prime interest rate plus one-half percent. The $15.0 LOC is subject to certain financial covenants regarding current financial ratios and cash flow requirements which have all been met as of December 31, 1997. At December 31, 1996 and 1997, $300,000 and no amount was outstanding under the $3.0 million LOC, respectively. In May 1997, the Company obtained a bank loan for $1.4 million to finance construction. The loan consisted of two parts (i) a loan for $750,000 which bears interest at the bank's prime rate plus one percent and is secured by property and (ii) a loan for $690,000 which bears interest at the bank's prime rate plus one-half percent and is secured by the Company's business assets, excluding equipment, which was assumed under the $15.0 million LOC. The $750,000 loan will convert into a new term loan at the time of building completion and will have a maturity of ten years with an interest rate fixed at the nine-year U.S. Treasury Bond yield plus 2.3% and will be secured by the land and building. At December 31, 1997, $106,000 was outstanding at an interest rate of 8.3% per annum. The loan is subject to certain financial covenants regarding current financial ratios and cash flow requirements, which have all been met as of December 31, 1997. The aggregate future repayments of long-term debt outstanding at December 31, 1997 are $1.4 million in 1998, $1.4 million in 1999, $1.4 million in 2000, $1.5 million in 2001, $1.2 million in 2002 and $2.6 million thereafter. NOTE 4. RESEARCH AND DEVELOPMENT CONTRACT In March 1994, the Company was awarded a four-year, $6.1 million contract under the DOD Title III program. The Title III contract is comprised of three different contract components: A Cost-Plus-Fixed-Fee component totaling $1.2 million, a Firm-Fixed-Price ("FFP") component totaling $4.4 million and a $500,000 component consisting of a bonus award. The bonus award may be earned upon reaching specific contract milestones. Under the FFP component, 10.0% of the cost reimbursement is withheld by the DOD until the completion of the project in May 1998. The amounts related to this 10.0% withholding were $265,000, $625,000 and $319,000 for the years ended December 31, 1995, 1996 and 1997, respectively. F-10 65 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the years ended December 31, 1995, 1996 and 1997, the Company has recognized contract revenues of $2.4 million, $1.5 million, and $364,000, respectively, under the Title III contract. For the years ended December 31, 1995, 1996 and 1997, the Company incurred costs of $1.4 million, $468,000 and $211,000, respectively, under the Title III contract. Certain products were manufactured under the Title III contract and the costs were charged to such contracts. As permitted under the contract, the products were sold to third parties, generating product revenues of $790,000 and $95,000 for the years ended December 31, 1995 and 1996, respectively. In January 1997, the Company was awarded a $1.2 million contract from a third party. The contract was an FFP contract under which the Company was to receive $1.2 million for its production of Ge substrates. The contract was completed in July 1997. For the year ended December 31, 1997, the Company has recognized contract revenues of $1.2 million and incurred contract costs of $1.1 million under the contract. In May 1997, the Company was awarded a $4.3 million, 30-month contract under the DOD Title III program. For the year ended December 31, 1997, the Company has recognized contract revenues of $661,000 under this arrangement. NOTE 5. INCOME TAXES The components of the provision for income taxes were as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ (IN THOUSANDS) Current: Federal........................................ $1,558 $1,116 $1,571 State.......................................... 381 178 79 Foreign........................................ -- -- 84 ------ ------ ------ Total current.......................... 1,939 1,294 1,734 ------ ------ ------ Deferred: Federal........................................ (322) (36) 235 State.......................................... (36) (9) 29 ------ ------ ------ Total deferred......................... (358) (45) 264 ------ ------ ------ Total provision................... $1,581 $1,249 $1,998 ====== ====== ======
The following is a reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Statutory federal income tax rate................ 34.0% 34.0% 34.0% State income taxes, net of federal tax benefits....................................... 5.6 4.7 4.1 Foreign sales corporation benefit................ (3.5) (2.4) (1.7) Foreign.......................................... -- -- 1.6 Other............................................ 0.2 1.6 0.0 ------ ------ ------ Effective tax rate............................... 36.3% 37.9% 38.0% ====== ====== ======
F-11 66 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31, ---------------- 1996 1997 ------ ------ (IN THOUSANDS) Deferred tax assets: Bad debt and inventory reserves............................ $ 79 $ 497 Vacation accrual........................................... 45 67 State taxes................................................ 62 13 Depreciation............................................... 303 -- ------ ------ Deferred tax assets...................................... 489 577 Deferred tax liabilities: Depreciation............................................... -- (352) ------ ------ Deferred tax liability................................... -- (352) ------ ------ Net deferred tax asset................................ $ 489 $ 225 ====== ======
NOTE 6. RETIREMENT SAVINGS PLAN The Company has a 401(k) Savings Plan (the "Savings Plan") which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. All full-time U.S. employees are eligible to participate in the Savings Plan after one year from the date of hire. Participants may contribute up to 6.0% of their earnings to the Savings Plan with a discretionary matching amount provided by the Company. The Company's contributions to the Savings Plan for the years ended December 31, 1995, 1996 and 1997 were $40,000, $69,000, and $87,000, respectively. NOTE 7. CONVERTIBLE PREFERRED STOCK As of December 31, 1997, the Company had issued and outstanding a total of 10,128,737 shares of Convertible Preferred Stock, no par value, as follows:
DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ (IN THOUSANDS) Series A, 4,924,817 shares authorized, 4,924,817 issued and outstanding......................... $ 658 $ 658 $ 658 Series B, 4,003,921 shares authorized, 4,003,920 issued and outstanding......................... 1,960 1,960 1,960 Series C, 1,200,000 shares authorized, 1,200,000 issued and outstanding......................... -- -- 5,935 ------ ------ ------ $2,618 $2,618 $8,553 ====== ====== ======
Conversion Each share of Series A, B and C Preferred Stock is convertible into one share of Common Stock, at the option of the holder, subject to certain adjustments, and automatically converts upon the completion of an underwritten public offering of Common Stock with gross proceeds of at least $7.5 million. F-12 67 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Liquidation In the event of a liquidation, the holders of Series C Preferred Stock are entitled to receive, prior to and in preference to any distribution of any assets or surplus funds of the Company to the holders of Series A and B Preferred Stock and the Common Stock, the amount of $5.00 for each share of Series C Preferred Stock then outstanding plus all declared and unpaid dividends thereon. The holders of Series B Preferred Stock are entitled to receive, after Series C preferences have been satisfied, the amount of $0.51 for each share plus all declared and unpaid dividends thereon. The holders of Series A Preferred Stock are entitled to receive, after Series C and B preferences have been satisfied, the amount of $0.30 for each share plus all declared and unpaid dividends thereon. The holders of Series A, B and C Preferred Stock are then entitled to share ratably in the remaining assets in the Company with the common stockholders on an as-if converted basis. Dividend Each holder of Series A, B and C Preferred Stock is entitled to receive, prior to and in preference to any holder of Common Stock, dividends equivalent to any declared for the Company's Common Stock on an as-if converted basis. Such dividends are noncumulative and shall be paid only when and as declared by the Board of Directors. The Company has never declared or paid dividends on its Common Stock. Voting Rights Each share of the Series A, B and C Preferred Stock has voting rights equal to that of Common Stock on an as-if converted basis. NOTE 8. STOCK OPTION PLANS In 1993, the Company adopted the 1993 Stock Option Plan ("1993 Plan") which provides for granting of incentive and non-qualified stock options to employees, consultants, and directors of the Company. Under the 1993 Plan, 880,000 shares of Common Stock have been reserved for issuance as of December 31, 1997. Options granted under the 1993 Plan are generally for periods not to exceed ten years and are granted at the fair market value of the stock at the date of grant as determined by the Board of Directors. Options granted under the 1993 Plan generally vest 25.0% upon grant and 25.0% each year thereafter, with full vesting occurring on the third anniversary of the grant date. In May 1997, the Company adopted the 1997 Stock Option Plan ("1997 Plan") which provides for granting of incentive and non-qualified stock options to employees, consultants and directors of the Company. Under the 1997 Plan, 1,300,000 shares of common stock have been reserved for issuance as of December 31, 1997. Options granted under the 1997 Plan are generally for periods not to exceed ten years (five years if the option is granted to a 10.0% stockholder) and are granted at the fair market value of the stock at the date of grant as determined by the Board of Directors. Options granted under the 1997 Plan generally vest 25.0% at the end of one year and 2.1% each month thereafter, with full vesting after four years. Employee Stock Purchase Plan In May 1997, the Company's Board of Directors approved an Employee Stock Purchase Plan. Under this plan, employees of the Company can purchase Common Stock with cash and are required to be exercised as of December 31, 1997. Under the Employee Stock Purchase Plan, 67,000 shares of Common Stock were reserved for issuance and purchase rights for 67,000 shares had been exercised as of December 31, 1997. The Plan was approved by the Company's stockholders in May 1997. F-13 68 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following summarizes the Company's stock option activity under the 1993 Plan, 1997 Plan and the Employee Stock Purchase Plan and related weighted average exercise price within each category for each of the years ended December 31, 1995, 1996 and 1997:
WEIGHTED SHARES OPTIONS AVERAGE AVAILABLE OUTSTANDING OPTION PRICE ---------- ----------- ------------ Balance at December 31, 1994............ 44,994 163,500 $0.68 Additional shares authorized.......... 500,000 -- -- Granted............................... (231,400) 231,400 1.75 Exercised............................. -- (149,000) 0.38 Canceled.............................. 1,000 (1,000) Repurchased........................... 8,000 -- -- ---------- --------- Balance at December 31, 1995............ 322,594 244,900 1.53 Granted............................... -- -- -- Exercised............................. -- (40,750) 1.26 Canceled.............................. -- -- -- ---------- --------- Balance at December 31, 1996............ 322,594 204,150 1.58 Additional shares authorized.......... 1,367,000 -- -- Granted............................... (1,315,100) 1,315,100 4.95 Exercised............................. -- (151,825) 2.54 Canceled.............................. 24,475 (24,475) 3.38 ---------- --------- Balance at December 31, 1997............ 398,969 1,342,950 $4.77 ========== =========
At December 31, 1995, 1996 and 1997, options for 86,800, 107,450 and 76,725 shares, respectively, were vested. During the year ended December 31, 1997, the Company granted options for the purchase of 1,315,100 shares of Common Stock to employees at a weighted average exercise price of $4.95 per share. Management has calculated deferred compensation of approximately $322,000 related to options granted during the year ended December 31, 1997. Such deferred compensation will be amortized over the vesting period relating to these options of which approximately $102,000 has been amortized during the year ended December 31, 1997. Information relating to stock options outstanding under the 1993 Plan, 1997 Plan and the Employee Stock Purchase Plan at December 31, 1997 is as follows:
OPTIONS OUTSTANDING ------------------------------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ----------- ---------------- -------------- Range of exercise prices: $1.20 - $1.90..................... 107,950 1.5 years $1.60 $5.00 - $5.50..................... 1,235,000 9.6 years 5.05 $1.20 - $5.50..................... 1,342,950 8.9 years 4.77
OPTIONS VESTED ------------------------- WEIGHTED NUMBER AVERAGE VESTED EXERCISE PRICE ------- -------------- Range of exercise prices: $1.20 - $1.90...................................... 76,725 $1.50
F-14 69 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Certain Pro Forma Disclosures In October 1995, SFAS 123, which established a fair value based method of accounting for employee stock options plans. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates, as prescribed in SFAS 123, the Company's net income and pro forma net income per share would have been as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1996 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported.................................... $2,739 $2,046 $3,258 Pro forma net income........................... 2,725 2,032 3,111 Net income per share: As reported: Basic....................................... $ 0.97 $ 0.71 $ 1.11 Diluted..................................... 0.23 0.17 0.25 Pro forma net income: Basic....................................... $ 0.97 $ 0.71 $ 1.06 Diluted..................................... 0.23 0.17 0.24
The minimum 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 during the years ended December 31, 1995 and 1997 (no options were granted during the year ended December 31, 1996); dividend yield of 0.0% for both periods; risk-free interest rates of 5.7% and 6.1% for options granted during the year ended December 31, 1995 and 1997, respectively; and expected lives of 4.0 and 4.5 years for options granted during the years ended December 31, 1995 and 1997, respectively. Because the determination of the fair value of all options granted after the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph and, because additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects on reported net income for future years. NOTE 9. NET INCOME PER SHARE Statement of Financial Accounting Standards No. 128 "Earnings per Share" requires a reconciliation of the numerators and denominators of the basic and diluted net income per share calculations as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1995 1996 1997 --------------------------- --------------------------- -------------------------- PER PER PER SHARE SHARE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------ ------ --------- ------ ------ --------- ------ ------ -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic EPS Net income available to common stockholders................ $2,739 2,821 $0.97 $2,046 2,882 $0.71 $3,258 2,938 $1.11 Effect of dilutive securities Common Stock options.......... -- 63 -- -- -- -- -- 72 -- Convertible Preferred Stock... -- 8,929 -- -- 8,929 -- -- 9,829 -- Diluted EPS Net income available to common stockholders................ $2,739 11,813 $0.23 $2,046 11,811 $0.17 $3,258 12,839 $0.25
F-15 70 AMERICAN XTAL TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the years ended December 31, 1995 and 1997, options to purchase approximately 92,920 and 1,254,800 shares, respectively, at prices ranging from $1.20 to $5.50 were outstanding but not included in the computation because the exercise price was greater than the average market price of common shares issued during the respective period. NOTE 10. GEOGRAPHIC REPORTING AND SIGNIFICANT CUSTOMERS
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- (IN THOUSANDS) Net revenues: United States............................... $ 9,258 $10,028 $15,653 Europe...................................... 1,692 2,216 2,497 Canada...................................... 661 522 1,034 Japan....................................... 2,027 2,653 4,323 Asia Pacific and other...................... 840 808 1,828 ------- ------- ------- Consolidated................................ $14,478 $16,227 $25,335 ======= ======= ======= Identifiable assets: United States............................... $10,927 $16,467 $28,967 Japan....................................... 389 917 1,646 ------- ------- ------- Consolidated................................ $11,316 $17,384 $30,613 ======= ======= =======
NOTE 11. RELATED PARTY TRANSACTIONS In January 1996, the Company obtained a loan for $226,000 from a family member of an officer. At December 31, 1996, $226,000 was outstanding under this loan at an interest rate of 10.0% per annum. All outstanding principal and interest were paid in February 1997. In February 1996, the Company obtained a loan for $50,000 from an officer. At December 31, 1996, $50,000 was outstanding at an interest rate of 10.0% per annum. All outstanding principal and interest were paid in March 1997. During the years ended December 31, 1995, 1996 and 1997, the Company purchased $380,000, $760,000 and $1,540,000, respectively, of raw materials and manufactured quartz from a supplier which is owned by a family member of an officer. NOTE 12. SUBSEQUENT EVENT In February 1998, the Company's Board of Directors approved, subject to stockholder approval, an increase of 1.5 million shares of Common Stock to be reserved for issuance under the 1997 Plan and the adoption of the 1998 Employee Stock Purchase Plan with a reserve of 250,000 shares of Common Stock. F-16 71 COMPANY INTRODUCTION American Xtal Technology, Inc. ("AXT") uses a proprietary vertical gradient freeze ("VGF") technique to produce high-performance compound semiconductor substrates for use in a variety of electronic and opto-electronic applications. The Company manufactures and sells substrates composed of gallium arsenide ("GaAs"), indium phosphide ("InP") and germanium ("Ge") and is currently developing other high-performance compound substrates such as gallium phosphide ("GaP") and gallium nitride ("GaN"). The Company believes that its VGF technique provides certain significant advantages over traditional methods for growing crystals for the production of high-performance semiconductor substrates. OVERVIEW: APPLICATION OF AXT PRODUCTS AND TECHNOLOGY TO EVERYDAY LIFE As a result of the limitations of silicon, semiconductor device manufacturers are increasingly utilizing alternative substrates to improve the performance of semiconductor devices or to enable new applications. These alternative substrates are composed of a single element such as Ge, or multiple elements, which may include, among others, gallium, aluminum, indium, arsenic, phosphorous and nitrogen. Substrates that consist of more than one element are referred to as "compound substrates." In comparison to silicon, compound substrates have electrical properties which allow semiconductor devices to operate at much higher speeds or at the same speed with lower power consumption, or to generate light signals. Compound and Ge substrates are sold to semiconductor device manufacturers for use in applications such as wireless and fiber optic telecommunications, lasers, LEDs, satellite solar cells and consumer electronics. As the products on this page indicate, semiconductor devices that incorporate compound substrates are already deeply embedded in many aspects of our daily lives. The Company believes that it is currently the only high-volume supplier of GaAs substrates manufactured using the VGF technique and is positioned to become a leading manufacturer and supplier of other compound and Ge substrates. WIRELESS TELECOMMUNICATIONS The Company's GaAs substrates are used by semiconductor device manufacturers for use in high-performance telecommunication applications. FIBER OPTIC COMMUNICATIONS The Company's InP substrates are used by semiconductor device manufacturers in fiber optic communications. DISPLAYS Large full-color displays like this one in Tokyo, which have LEDs that incorporate GaAs, GaP and GaN substrates, attract attention with news broadcasts, sports events and commercial advertisements. TRAFFIC SIGNALS Extra bright and highly energy-efficient LEDs, which incorporate GaAs substrates, are being used in traffic lights worldwide. CD-ROM Lasers manufactured from GaAs substrates are incorporated into most CD-ROM and DVD drives for the reading and writing of digital data stored optically on discs. SOLAR CELLS The Company's Ge substrates are incorporated into solar cells, which require Ge substrates manufactured with few defects and minimal breakage, for use in satellite communications. CAPTION 1 AXT's proprietary VGF technique is designed to allow control of the crystal-growth process with minimal temperature variation. As a result, the Company is able to grow crystals that have a relatively low dislocation density and high uniformity. AXT believes that its GaAs substrates manufactured from such crystals are mechanically strong, which may result in substrates with lower breakage rates during a customer's manufacturing process. FREMONT FACILITY CAPTION 2 At its ISO 9002-certified manufacturing facility located in Fremont, California, AXT works closely with its customers to ensure that it manufactures substrates to each customer's particular specifications. To ensure that every substrate meets AXT's high standards of quality, the Company's Fremont facility performs all manufacturing operations, which include crystal growth, slicing, testing, edge rounding, polishing, inspection and packaging the substrates for shipment. 72 =============================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................... 3 Risk Factors................................. 6 Use of Proceeds.............................. 16 Dividend Policy.............................. 16 Capitalization............................... 17 Dilution..................................... 18 Selected Consolidated Financial Data......... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business..................................... 28 Management................................... 38 Certain Transactions......................... 45 Principal Stockholders....................... 47 Description of Capital Stock................. 48 Shares Eligible for Future Sale.............. 50 Underwriting................................. 52 Legal Matters................................ 53 Experts...................................... 53 Additional Information....................... 53 Index to Consolidated Financial Statements... F-1
=============================================================== =============================================================== 2,500,000 Shares [AXT LOGO] Common Stock --------------------- PROSPECTUS --------------------- PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY , 1998 =============================================================== 73 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All amounts shown are estimates except for the registration fee, the NASD filing fee and the Nasdaq National Market fee.
ITEM AMOUNT ---- -------- Securities and Exchange Commission registration fee......... $ 8,482 NASD filing fee............................................. 3,375 Nasdaq National Market application fee...................... 50,000 Blue sky qualification fees and expenses.................... 1,000 Accounting fees and expenses................................ 250,000 Legal fees and expenses..................................... 300,000 Printing and engraving expenses............................. 150,000 Transfer agent and registrar fees........................... 5,000 Director and Officer liability insurance.................... 100,000 Miscellaneous expenses...................................... 32,143 -------- Total.................................................. $900,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("Delaware Law") permits the indemnification of officers, directors, and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate of Incorporation (Exhibit 3.1) and Bylaws (Exhibit 3.3) provide that the Registrant shall indemnify its directors, officers, employees, and agents to the full extent permitted by Delaware Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant intends to enter into separate indemnification agreements (Exhibit 10.1) with its directors and officers which should require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). These indemnification provisions may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). At present, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Registrant in which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in a claim for indemnification by any director, officer, employee or other agent of the Registrant. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1995, Registrant has sold and issued the following unregistered securities: (1) From January 1, 1995, to December 31, 1997, Registrant granted options to purchase 151,400 shares of Common Stock pursuant to its 1993 Stock Option Plan at exercise prices ranging from $1.50 per share to $1.90 per share for a total offering price of $264,260. (2) From January 1, 1995 to December 31, 1997, Registrant issued and sold an aggregate of 274,575 shares of Common Stock to its employees, directors and consultants for an aggregate consideration of $284,050, upon exercise of stock options granted pursuant to Registrant's 1993 Stock Option Plan at exercise prices ranging from $0.30 to $1.90. II-1 74 (3) In June 1997, Registrant granted purchase rights to purchase up to, in the aggregate, 67,000 shares of Common Stock to its employees for the purchase price of $3.75 per share pursuant to its 1997 Employee Stock Purchase Plan, for a total offering price of $251,250. (4) In November 1997, Registrant issued and sold an aggregate 67,000 shares of Common Stock to its employees for an aggregate consideration of $251,250, upon exercise of purchase rights granted pursuant to Registrant's 1997 Employee Stock Purchase Plan (since terminated). (5) In 1997, Registrant granted options to purchase 1,118,100 shares of Common Stock at the exercise price of $5.00 per share and 130,000 shares of Common Stock at $5.50 per share pursuant to its 1997 Stock Option Plan, for a total offering price of $6,305,500. (6) On March 31, 1997, Registrant issued and sold an aggregate of 1,200,000 shares of Series C Preferred Stock to a group of private investors for aggregate cash consideration of $6,000,000. There were no underwriters employed in connection with any of the transactions set forth in Item 15. For additional information concerning these equity investment transactions, reference is made to the information contained under the caption "Certain Transactions" in the form of Prospectus included herein. The issuances of Securities describe in Items 15(a)(1) through 15(a)(5) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation. The issuance of securities describe in item 15(a)(6) was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such 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 the share certificates and other instruments issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Underwriting Agreement. 2.1 Form of Agreement and Plan of Merger between American Xtal Technology, a California corporation, and American Xtal Technology Delaware Corporation, a Delaware corporation. 3.1 Certificate of Incorporation of American Xtal Technology Delaware Corporation, a Delaware corporation. 3.2 Form of Certificate of Amendment of Certificate of Incorporation of American Xtal Technology, Inc., a Delaware corporation. 3.3 Bylaws of American Xtal Technology Delaware Corporation, a Delaware corporation. 5.1* Opinion of Gray Cary Ware & Freidenrich, LLP. 10.1 Form of Indemnification Agreement for directors and officers. 10.2 1993 Stock Option Plan and forms of agreements thereunder. 10.3 1997 Stock Option Plan and forms of agreements thereunder. 10.4 1997 Employee Stock Purchase Plan and forms of agreements thereunder. 10.5 1998 Employee Stock Purchase Plan and forms of agreements thereunder. 10.6 Loan Agreement with U.S. Bank dated March 4, 1998. 21.1 List of subsidiaries.
II-2 75
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 23.1 Consent of Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4 of Registration Statement filed on March 17, 1998.) 27.1 Financial Data Schedule (available in EDGAR format only).
- --------------------------- * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of the Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant 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 hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (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 the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (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 statements relating to the securities offered therein, and this Offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 76 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Fremont, County of Alameda, State of California, on the 17th day of March 1998. AMERICAN XTAL TECHNOLOGY, INC. By: /s/ MORRIS S. YOUNG ------------------------------------ Morris S. Young President and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Morris S. Young and Guy D. Atwood, and each of them acting individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ MORRIS S. YOUNG President, March 17, 1998 - -------------------------------------------------------- Chief Executive Officer, Morris S. Young and Chairman of the Board (Principal Executive Officer) /s/ GUY D. ATWOOD Vice President, Chief March 17, 1998 - -------------------------------------------------------- Financial Officer Guy D. Atwood (Principal Financial and Accounting Officer) /s/ THEODORE S. YOUNG Senior Vice President, March 17, 1998 - -------------------------------------------------------- Marketing, Director Theodore S. Young /s/ DONALD L. TATZIN Director March 17, 1998 - -------------------------------------------------------- Donald L. Tatzin /s/ JESSE CHEN Director March 17, 1998 - -------------------------------------------------------- Jesse Chen /s/ B.J. MOORE Director March 17, 1998 - -------------------------------------------------------- B.J. Moore
II-4 77 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1 Form of Underwriting Agreement. 2.1 Form of Agreement and Plan of Merger between American Xtal Technology, a California corporation, and American Xtal Technology Delaware Corporation, a Delaware corporation. 3.1 Certificate of Incorporation of American Xtal Technology Delaware Corporation, a Delaware corporation. 3.2 Form of Certificate of Amendment of Certificate of Incorporation of American Xtal Technology, Inc., a Delaware corporation. 3.3 Bylaws of American Xtal Technology Delaware Corporation, a Delaware corporation. 5.1* Opinion of Gray Cary Ware & Freidenrich, LLP. 10.1 Form of Indemnification Agreement for directors and officers. 10.2 1993 Stock Option Plan and forms of agreements thereunder. 10.3 1997 Stock Option Plan and forms of agreements thereunder. 10.4 1997 Employee Stock Purchase Plan and forms of agreements thereunder. 10.5 1998 Employee Stock Purchase Plan and forms of agreements thereunder. 10.6 Loan Agreement with U.S. Bank dated March 4, 1998. 21.1 List of subsidiaries. 23.1 Consent of Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4 of Registration Statement filed on March 17, 1998.) 27.1 Financial Data Schedule (available in EDGAR format only).
- --------------------------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 American Xtal Technology, Inc. 2,500,000 Shares(1) Common Stock UNDERWRITING AGREEMENT ---------------------- _____________, 1998 PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY As Representatives of the several Underwriters c/o Prudential Securities Incorporated One New York Plaza New York, New York 10292 Dear Sirs: American Xtal Technology, Inc. a Delaware corporation (the "Company"), hereby confirms its agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. Securities. Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the several Underwriters an aggregate of 2,500,000 shares (the "Firm Securities") of the Company's Common Stock, par value $.001 per share ("Common Stock"). The Company also proposes to issue and sell to the several Underwriters not more than 375,000 additional shares of Common Stock if requested by the Representatives as provided in Section 3 of this Agreement. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such option are referred to herein as the "Option Securities", and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities". 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-____) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as - -------------------- (1) Plus an option to purchase from American Xtal Technology up to 375,000 additional shares to cover over-allotments. 2 hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Securities, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (b) The Commission has not issued any order preventing or suspending use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act -2- 3 and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective, (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (d) The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its subsidiaries, taken as a whole. (e) The Company and each of its subsidiaries have full power (corporate and other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (f) The issued shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. (g) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any -3- 4 right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this agreement. The Company owns all of the capital stock of each of its subsidiaries. (h) The capital stock of the Company conforms to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (i) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities or obligations of the Company or any of its subsidiaries convertible into or exchangeable for any capital stock of the Company or any such subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or any such subsidiary any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or any such subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (j) The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company and its consolidated subsidiaries and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Consolidated Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (k) Price Waterhouse LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. (l) The execution and delivery of this Agreement have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (m) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and no such proceedings have been threatened against the Company or any of its subsidiaries or with respect to any of their respective properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. (n) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except -4- 5 such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of its subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or any of its subsidiaries. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (p) The Company has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (q) The Company has not distributed and, prior to the later of (i) the Closing Date and (ii) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or other materials, if any permitted by the Act. (r) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (s) The Company and each of its subsidiaries have good and marketable title in fee simple to all items of real property and marketable title to all personal property owned by each of them, in each case free and clear Of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the -5- 6 use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (t) No labor dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent that could result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (v) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for, and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (x) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (y) The Company will conduct its operations in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company subject to registration under such act. -6- 7 (z) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the Company and its subsidiaries) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (aa) Neither the Company nor any of its subsidiaries is in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and its subsidiaries have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (bb) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (cc) Except for the shares of capital stock of each of the subsidiaries owned by the Company and such subsidiaries, neither the Company nor any such subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (dd) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (ee) No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound or may be affected in any material adverse respect with regard to property, business or operations of the Company and its subsidiaries. 3. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell the Firm Securities to each of the Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $_________ per share, the number of Firm Securities set forth opposite the name of such Underwriter in Schedule 1 hereto. One or more certificates in definitive form for the Firm Securities that the several -7- 8 Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer in same-day funds (the "Wired Funds") to the account of the Company. Such delivery of and payment for the Firm Securities shall be made at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94061, at 9:30 A.M., New York time, on ______, 1998, or at such other place, time or date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date". The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices in New York, New York of the Company's transfer agent or registrar or of Prudential Securities Incorporated at least 24 hours prior to the Firm Closing Date. (b) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, the Company hereby grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 3. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within thirty days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Securities and Option Closing Date, respectively. (c) The Company hereby acknowledges that the wire transfer by or on behalf of the Underwriters of the purchase price for any Shares does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt for Securities by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company. Furthermore, in the event that the Underwriters wire funds to the Company prior to the completion of the closing of a purchase of Securities, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Securities, by facsimile or otherwise, the Company will not be entitled to the wired funds and shall return the wired funds to the Underwriters as soon as practicable (by wire transfer of same-day funds) -8- 9 upon demand. In the event that the closing of a purchase of Securities is not completed and the wire funds are not returned by the Company to the Underwriters on the same day the wired funds were received by the Company, the Company agrees to pay to the Underwriters in respect of each day the wire funds are not returned by it in same-day funds, interest on the amount of such wire funds in an amount representing the Underwriters' cost of financing as reasonably determined by Prudential Securities Incorporated. (d) It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. 4. Offering by the Underwriters. Upon your authorization of the release of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 5. Covenants of the Company. The Company covenants and agrees with each of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the prospectus, Term Sheet or the amendment referred to in the second sentence of Section 2(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representatives previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (b) The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any Rule 462(b) Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the -9- 10 Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities, provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 5(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e) The Company will, without charge, provide (i) to the Representatives and to counsel for the Underwriters a conformed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) or any Rule 462(b) Registration Statement, certified by the Secretary or an Assistant Secretary of the Company to be true and complete copies thereof as filed with the Commission by electronic transmission, (ii) to each other Underwriter, a conformed copy of such registration statement or any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 6:00 PM. New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. The Company will provide or cause to be provided to each of the Representatives, and to each Underwriter that so requests in writing, a copy of each report on Form SR filed by the Company as required by Rule 463 under the Act. (f) The Company, as soon as practicable, will make generally available to its securityholders and to the Representatives a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares -10- 11 of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except pursuant to this Agreement and except for issuances pursuant to the exercise of employee stock options outstanding on the date hereof or pursuant to the terms of convertible securities of the Company outstanding on the date hereof. (i) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (j) The Company will obtain the agreements described in Section 7(f) hereof prior to the Firm Closing Date. (k) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (m) The Company will cause the Securities to be duly included for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") prior to the Firm Closing Date. The Company will ensure that the Securities remain included for quotation on the Nasdaq National Market following the Firm Closing Date. 6. Expenses. The Company will pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the Securities on the Nasdaq National Market, (viii) any meetings with prospective investors in the Securities (other than as shall have been specifically approved by the Representatives to be paid for by the Underwriters), and (ix) advertising relating to the offering of the Securities (other than as shall have been specifically -11- 12 approved by the Representatives to be paid for by the Underwriters)]. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on their part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Firm Securities shall be subject, in the Representatives' sole discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: (a) If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or with respect to the Original Registration Statement, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representatives shall have received an opinion, dated the Firm Closing Date, of Gray Cary Ware & Freidenrich, counsel for the Company, to the effect that: (i) the Company and each of its subsidiaries listed in Schedule 2 hereto (the "Subsidiaries") have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and the Subsidiaries, taken as a whole; (ii) the Company and each of the Subsidiaries have corporate power to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus, and the Company has -12- 13 corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the issued shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any perfected security interests or, to the best knowledge of such counsel, any other security interests, liens, encumbrances, equities or claims; (iv) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Securities have been duly included for trading on the Nasdaq National Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (v) the statements set forth under the heading "Description of Capital Stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; (vi) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; (vii) (A) no legal or governmental proceedings are pending to which the Company or any of the Subsidiaries is a party or to which the property of the Company or any of the Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties and (B) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (viii) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of their respective properties are bound, or the charter documents or by-laws of the Company or any of the -13- 14 Subsidiaries, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company or Subsidiaries; (ix) the Company and each of its subsidiaries have good and marketable title in fee simple to all items of real property and marketable title to all personal property owned by each of them, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not interfere with the use made or proposed to be made of such property by the Company or such subsidiary, and any real property and buildings held under lease by the Company or any such subsidiary are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or such subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (x) the Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor any such subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (xi) no subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (xii) to the best of such counsel's knowledge, the Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (xiii) the Company is not an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940; -14- 15 (xiv) to the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries is in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company and the Subsidiaries have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health and environmental laws and regulations to conduct their respective businesses, and the Company and each such subsidiary is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (xv) to the best of such counsel's knowledge, no default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or any of the Subsidiaries are a party or by which the Company or any of the Subsidiaries or any of their respective properties is bound or may be affected in any material adverse respect with regard to property, business or operations of the Company and its subsidiaries; (xvi) there are no holders of securities of the Company, who, by reason of the filing of the Registration Statement have the right (and have not waived such right) to request the Company to register under the Act, or to include in the Registration Statement, securities held by them; (xvii) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and within the time period required by Rules 434 and 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best knowledge of such counsel, are contemplated by the Commission; and (xviii) the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder. (xix) if the Company elects to rely on Rule 434, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A). -15- 16 Such counsel shall also state that they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any jurisdiction other than the State of California or the United States or the General Corporation Law of the State of Delaware, to the extent satisfactory in form and scope to counsel for the Underwriters, upon the opinion of [INSERT NAME OF LOCAL COUNSEL]. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion of [INSERT NAME OF LOCAL COUNSEL], and copies of such opinion shall be delivered to the Representatives and counsel for the Underwriters. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) The Representatives shall have received an opinion, dated the Firm Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. In rendering such opinion, such counsel may rely as to all matters of law upon the opinion of [INSERT NAME OF LOCAL COUNSEL] referred to in paragraph (b) above. (d) The Representatives shall have received from Price Waterhouse LLP a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance Satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company and its consolidated subsidiaries within the meaning of the Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited consolidated financial statements and schedules and pro forma financial statements examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) on the basis of a reading of the latest available interim unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries, carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and each of its consolidated subsidiaries, and inquiries of certain officials of the Company and its consolidated subsidiaries who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: -16- 17 (A) the unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus; and (B) at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company and its consolidated subsidiaries or any decreases in not current assets or stockholders' equity of the Company and its consolidated subsidiaries, in each case compared with amounts shown on the March 31, 1998 unaudited consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from April 1, 1998 to such specified date there were any decreases, as compared with the period from March 31, 1997 to ______________, in total revenues, net income or net income per share of the Company and its consolidated subsidiaries, except in all instances for changes, decreases or increases set forth in such letter: and (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and its consolidated subsidiaries and are included in the Registration Statement and the Prospectus and in Exhibit 11 to the Registration Statement, and have compared such amounts, percentages and financial information with such records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation; and (v) any other statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus. In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (e) The Representatives shall have received a certificate, dated the Firm Closing Date, of the principal executive officer and the principal financial or accounting officer of the Company to the effect that: -17- 18 (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission: and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (f) The Representatives shall have received from each person who is a director or officer of the Company or who owns _________ shares of Common Stock an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Agreement. (g) On or before the Firm Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h) Prior to the commencement of the offering of the Securities, the Securities shall have been included for trading on the Nasdaq National Market. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. -18- 19 The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company in Section 2 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials used in connection with the marketing of the Securities, including without limitation, slides, videos, films, tape recordings, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; and provided, further, that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue. statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, -19- 20 unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5(d) and (e) of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director or officer of the Company, or controlling person of the Company may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company, any such director or officer of the Company, or controlling person of the Company in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from -20- 21 the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action affected by such indemnified party without the consent of the indemnifying party. (d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed -21- 22 by the provisions of the Prudential Securities Incorporated Master Agreement Among Underwriters. For purposes of this paragraph (d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. 9. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 10 hereof. In the event of any default by one or more Underwriters as described in this Section 9, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or such Option Closing Date, respectively, -22- 23 (i) the Company or any of its subsidiaries shall have, in the sole judgment of the Representatives, sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on either such exchange; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have, been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof, (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 10 hereof. 12. Information Supplied by Underwriters. The statements set forth in the last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Prudential Securities Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity Transactions Group; if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 4311 Solar Way, Fremont, California 94538. 14. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in -23- 24 Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. 16. Consent to Jurisdiction and Service of Process. All judicial proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, the Company accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The Company designates and appoints ________________, and such other persons as may hereafter be selected by the Company irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Company to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company at its address provided in Section 13 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company refuses to accept service, the Company hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company in the State of New York may be made by registered or certified mail, return receipt requested, to the Company at its address provided in Section 13 hereof, and the Company hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against the Company in the courts of any other jurisdiction. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -24- 25 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company and each of the several Underwriters. Very truly yours, AMERICAN XTAL TECHNOLOGY, INC. By ----------------------------------------- [TITLE] The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY By PRUDENTIAL SECURITIES INCORPORATED By ------------------------------------- Jean-Claude Canfin Managing Director For itself and on behalf of the Representatives. -25- 26 SCHEDULE 1 UNDERWRITERS
Number of Firm Securities to Underwriter be Purchased - ----------- ------------ Prudential Securities Incorporated......................................... Cowen & Company............................................................ ------------ Total....................................................... ============
27 SCHEDULE 2 SUBSIDARIES Name Jurisdiction of Incorporation - ---- ----------------------------- EX-2.1 3 FORM OF AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into as of __________, 1998 by and between American Xtal Technology, a California corporation ("AXT California"), and American Xtal Technology Delaware Corporation, a Delaware corporation ("AXT Delaware"). WITNESSETH: WHEREAS, AXT Delaware is a corporation duly organized and existing under the laws of the State of Delaware; WHEREAS, AXT California is a corporation duly organized and existing under the laws of the State of California; WHEREAS, on the date of this Merger Agreement, AXT Delaware has authority to issue 1,000 shares of Common Stock, par value $0.001 per share (the "AXT Delaware Common Stock"), of which _____ shares are issued and outstanding and owned by AXT California; WHEREAS, on the date of this Merger Agreement, AXT California has authority to issue 100,000,000 shares of Common Stock (the "AXT California Common Stock"), of which ____ shares are issued and outstanding, and 25,000,000 shares of Preferred Stock (the "AXT California Preferred Stock"), of which 4,924,817 shares are designated as Series A Preferred Stock, 4,003,921 shares are designated as Series B Preferred Stock and 1,200,000 shares are designated as Series C Preferred Stock and 4,924,817 shares of Series A Preferred Stock are issued and outstanding, 4,003,920 shares of Series B Preferred Stock are issued and outstanding and 1,200,000 shares of Series C Preferred Stock are issued and outstanding; WHEREAS, the respective Boards of Directors for AXT Delaware and AXT California have determined that, for the purpose of effecting the reincorporation of AXT California in the State of Delaware, it is advisable and to the advantage of said two corporations and their stockholders that AXT California merge with and into AXT Delaware upon the terms and conditions herein provided; and WHEREAS, the respective Boards of Directors of AXT Delaware and AXT California, the stockholders of AXT California, and the sole stockholder of AXT Delaware have adopted and approved this Merger Agreement. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, AXT California and AXT Delaware hereby agree to merge as follows: 1. Merger. AXT California shall be merged with and into AXT Delaware, and AXT Delaware shall survive the merger ("Merger"), effective upon the date when this Merger Agreement is made effective in accordance with applicable law (the "Effective Date"). 1 2 2. Governing Documents. The Certificate of Incorporation of AXT Delaware shall be amended to read in full as follows: FIRST: The name of the Corporation is American Xtal Technology, Inc. (hereinafter sometimes referred to as the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: STOCK This Corporation is authorized to issue two classes of shares, which shall be known as Common Stock and Preferred Stock. The total number of shares of Common Stock which this Corporation is authorized to issue is 100,000,000, $0.001 par value per share, and the total number of shares of Preferred Stock which this Corporation is authorized to issue is 25,000,000, $0.001 par value per share, of which 4,924,817 shares are designated as Series A Preferred Stock (the "Series A Preferred"), 4,003,921 shares are designated as Series B Preferred Stock (the "Series B Preferred"), and 1,200,000 shares are designated as Series C Preferred Stock (the "Series C Preferred"). The remaining Preferred Stock may be issued from time to time in one or more additional series. The Board of Directors is authorized within the limitations and restrictions stated in these Amended and Restated Certificate of Incorporation (i) to determine and alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock other than the Series A Preferred, the Series B Preferred and the Series C Preferred and the number of shares constituting any such series and the designation thereof, or any of them; and (ii) to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. If the number of shares of any such series of Preferred Stock shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. This Corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock in accordance with the applicable conversion provisions. References hereafter to "Preferred Stock" shall mean the Series A Preferred, the Series B Preferred and the Series C Preferred collectively. 2 3 The rights, preferences, privileges and restrictions granted to or imposed upon the respective classes of shares or the holders thereof are as follows: 1. Dividend Preference. The holders of Preferred Stock shall be entitled to receive, out of funds legally available therefor, dividends at the rate of (i) $0.01 per annum for each share of Series A Preferred held by them, (ii) $0.016 per annum for each share of Series B Preferred held by them, and (iii) $0.15 per annum for each share of Series C Preferred held by them, payable, when and as declared by the Board, in preference and priority to the payment of dividends on any shares of Common Stock. The right to such dividends shall not be cumulative, and no right shall accrue to the holders of Preferred Stock by reason of the fact that dividends are not declared or paid in any previous fiscal year were sufficient to pay such dividends in whole or in part. No dividends may be paid on any series of Preferred Stock unless the same percentage of the respective dividend preference is also paid to each other series of Preferred Stock, in preference and priority to any payment of dividends on the Common Stock. No shares of Common Stock shall receive any dividend at a rate which is greater than the rate at which dividends are simultaneously paid in respect of the Preferred Stock. 2. Liquidation Rights. (a) Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or not, the holders of Series C Preferred shall be entitled to receive, before any amount shall be paid to holders of Series A Preferred, Series B Preferred or Common Stock, an amount equal to $5.00 per share for each share of Series C Preferred then held by such holder plus all declared and unpaid dividends, if any. If, upon the occurrence of such event, the assets and funds available to be distributed among the holders of Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of Series C Preferred in proportion to the number of shares of Series C Preferred held by each. After payment has been made to the holders of Series C Preferred of the full preferential amounts to which they are entitled, the holders of Series B Preferred shall be entitled to receive, before any amount shall be paid to holders of Series A Preferred or Common Stock, an amount equal to $0.51 per share for each share of Series B Preferred then held by such holder plus all declared and unpaid dividends, if any. If, upon the occurrence of such event, the assets and funds available to be distributed among the holders of Series B Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of Series B Preferred in proportion to the number of shares of Series B Preferred held by each. After payment has been made to the holders of Series B Preferred of the full preferential amounts to which they are entitled, the holders of Series A Preferred shall be entitled to receive an amount equal to $0.30 per share for each share of Series A Preferred then held plus all declared and unpaid dividends before any amount shall be paid to holders of Common Stock. If the assets and funds available to be distributed among the holders of Series A Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of Series A Preferred in proportion to the number of shares of Series A Preferred held by each. After 3 4 payment has been made to the holders of Preferred Stock of the full amounts to which they shall be entitled as aforesaid, the remaining assets of the Corporation available for distribution to shareholders shall be distributed ratably among the holders of Preferred Stock and the holders of Common Stock based on the number of shares of Common Stock held by each (assuming the conversion into Common Stock of all Preferred Stock). (b) Consolidation or Merger. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, or a series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. (c) Consent to Repurchases. Each holder of shares of Preferred Stock shall be deemed to have consented to any repurchases by the Corporation of shares of Common Stock issued to or held by employees, directors or consultants pursuant to agreements providing for such repurchase upon the termination of such person's service to this Corporation. 3. Nonredeemable. The shares of Common Stock and the shares of Preferred Stock are nonredeemable. 4. Voting Rights. Except as otherwise provided by law, the holders of Preferred Stock and the holders of Common Stock shall be entitled to notice of any shareholders' meeting and to vote upon any matter submitted to the shareholders for a vote, including the election of directors, as follows: (i) the holders of Preferred Stock shall have one vote for each full share of Common Stock into which their respective shares of Preferred Stock are convertible on the record date for the vote, and (ii) the holders of Common Stock shall have one vote per share of Common Stock. 5. Conversion Rights. (a) Right to Convert. Each share of Series A Preferred, Series B Preferred or Series C Preferred shall be convertible, at any time upon surrender of the certificate therefor, into fully-paid and non-assessable shares of Common Stock at the rate of one share of Common Stock for each share of Series A Preferred, Series B Preferred or Series C Preferred, subject to adjustment in accordance with Paragraph 5(b). No adjustment shall be made with respect to any dividends which may be accrued and unpaid at the date of surrender for conversion. The option to convert shall be exercised by surrendering to the Corporation, at the office of the corporation or of any transfer agent for the Common Stock or the Preferred Stock, certificates representing the shares to be converted duly endorsed in blank or accompanied by proper instruments of transfer. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to the holder of Preferred Stock certificates for the number of full shares of Common Stock to which the holder is entitled. The conversion shall be deemed to have been made as of the date of surrender of the certificates for the Preferred Stock, and the person entitled to receive the Common Stock therefor shall be treated for all purposes as the record holder of such Common Stock upon such date. 4 5 (b) Adjustments to Conversion Rate. The number of shares of Common Stock into which the Series A, Series B and Series C Preferred may be converted shall be subject to adjustments as follows: (i) Subdivisions, Combinations, or Consolidations. If the outstanding shares of Common Stock are subdivided, by stock split, stock dividend combination, reclassification or otherwise, into a larger or smaller number of shares, the number of shares of Common Stock into which the Series A, Series B and Series C Preferred may be converted shall be increased or decreased, concurrently with the effectiveness of such subdivision, combination, or consolidation, in the same proportion as the increase or decrease in the outstanding shares of Common Stock. (ii) Merger; Reorganization. In case of any capital reorganization, including any reclassification of the capital stock of the Corporation or any merger of the Corporation with another corporation or the sale or conveyance of all or substantially all of the assets of the Corporation to another corporation, each share of Series A, Series B and Series C Preferred shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock deliverable upon conversion of such share of Series A, Series B and Series C Preferred would have been entitled upon such reorganization. (c) Certificate of Adjustment. Whenever the Amount of Common Stock or other securities deliverable upon the conversion of Series A Preferred, Series B Preferred and Series C Preferred shall be adjusted pursuant to the provisions hereof, the Corporation shall forthwith file, at its principal executive office and with any transfer agent for its Common Stock or Preferred Stock, a statement signed by the President and Treasurer of the Corporation stating the adjusted amount of its Common Stock or other securities deliverable per share of Series A Preferred, Series B Preferred and Series C Preferred calculated to the nearest one-hundredth and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based. Each adjustment shall remain in effect until a subsequent adjustment is required hereunder. (d) Automatic Conversion. The shares of Series A Preferred, Series B Preferred and Series C Preferred shall be automatically converted into Common Stock immediately prior to the closing of an underwritten public offering pursuant to an effective registration statement filed for the corporation with the Securities and Exchange Commission which results in gross proceeds in excess of $7,500,000. (e) Reservation of Common. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock the full number of shares deliverable upon conversion of all of the then outstanding Preferred Stock and shall take all such action and obtain all such permits and orders as may be necessary to enable the Corporation lawfully to issue such Common Stock upon the conversion of the Preferred Stock. (f) No Fractional Shares. No fractions of shares of Common Stock shall be issued upon the conversion of the Preferred Stock. In lieu of any fractional shares, the 5 6 corporation shall pay to the holder an amount of cash equal to the fair market value of such fractional shares as determined by the Board of Directors. 6. No Preemptive Rights. No holder of Preferred Stock shall have any preemptive right to purchase and/or subscribe for any additional shares of any class of stock which may be issued at any time by the Corporation. 7. Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided to the Preferred Stock herein shall be vested in the Common Stock. 8. Status of Converted Stock. In case any shares of Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so converted shall resume the status of authorized but unissued shares of Preferred Stock. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. C. On and after the closing date of the first sale of the Corporation's Common Stock pursuant to a firmly underwritten registered public offering which results in the automatic conversion of the Corporation's Preferred Stock (the "IPO"), any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Prior to such sale, unless otherwise provided by law, any action which may otherwise be taken at any meeting of the stockholders may be taken without a meeting and without prior notice, if a written consent describing such actions is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. D. Special meetings of stockholders of the Corporation may be called only (1) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there 6 7 exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or (2) by the holders of not less than ten percent (10%) of all of the shares entitled to cast votes at the meeting. SIXTH: A. The number of directors shall initially be set at five (5) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Upon the closing of the IPO, the directors shall be divided into three classes with the term of office of the first class (Class I) to expire at the first annual meeting of the stockholders following the IPO; the term of office of the second class (Class II) to expire at the second annual meeting of stockholders held following the IPO; the term of office of the third class (Class III) to expire at the third annual meeting of stockholders; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. Subject to the rights of the holders of any series of Preferred Stock then outstanding, a vacancy resulting from the removal of a director by the stockholders as provided in Article SIXTH, Section C below may be filled at a special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. C. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation 7 8 entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum, or by the stockholders as provided in Article SIXTH, Section A above. Directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. EIGHTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article EIGHTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 8 9 NINTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article NINTH, Article FIFTH, Article SIXTH, Article SEVENTH or Article EIGHTH. The Certificate of Incorporation of AXT Delaware, as amended herein, shall continue to be the Certificate of Incorporation of AXT Delaware as the surviving Corporation without change or amendment until further amended in accordance with the provisions thereof and applicable laws. The Bylaws of AXT Delaware, in effect on the Effective Date, shall continue to be the Bylaws of AXT Delaware as the surviving Corporation without change or amendment until further amended in accordance with the provisions thereof and applicable laws. 3. Directors and Officers. The directors and officers of AXT California shall become the directors and officers of AXT Delaware upon the Effective Date and any committee of the Board of Directors of AXT California shall become the members of such committees for AXT Delaware. 4. Succession. On the Effective Date, AXT Delaware shall succeed to AXT California in the manner of and as more fully set forth in Section 259 of the General Corporation Law of the State of Delaware. 5. Further Assurances. From time to time, as and when required by AXT Delaware or by its successors and assigns, there shall be executed and delivered on behalf of AXT California such deeds and other instruments, and there shall be taken or caused to be taken by it such further and other action, as shall be appropriate or necessary in order to vest, perfect or confirm, of record or otherwise, in AXT Delaware the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of AXT California, and otherwise to carry out the purposes of this Merger Agreement and the officers and directors of AXT Delaware are fully authorized in the name and on behalf of AXT California or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 6. Stock of AXT California. a. Common Stock. Upon the Effective Date, by virtue of the Merger and without any action on the part of the holder thereof, each share of AXT California Common 9 10 Stock outstanding immediately prior thereto shall be changed and converted into one fully paid and nonassessable share of AXT Delaware Common Stock. b. Preferred Stock. Upon the Effective Date, by virtue of the Merger and without any action on the part of the holder thereof, each share of each series of AXT California Preferred Stock outstanding immediately prior thereto shall be changed and converted into one fully paid and nonassessable share of AXT Delaware Preferred Stock of an equivalent series. 7. Stock Certificates. On and after the Effective Date, all of the outstanding certificates which prior to that time represented shares of AXT California stock shall be deemed for all purposes to evidence ownership of and to represent the shares of AXT Delaware stock into which the shares of AXT California stock represented by such certificates have been converted as herein provided. The registered owner on the books and records of AXT Delaware or its transfer agent of any such outstanding stock certificate shall, until such certificate shall have been surrendered for transfer or otherwise accounted for to AXT Delaware or its transfer agent, have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon the shares of AXT Delaware stock evidenced by such outstanding certificate as above provided. 8. Options. Upon the Effective Date, each outstanding option or other right to purchase shares of AXT California stock, including those options granted under the 1993 Stock Option Plan and the 1997 Stock Option Plan (collectively, the "Option Plans") of AXT California, shall be converted into and become an option or right to purchase the identical number of shares of AXT Delaware stock at a price per share equal to the exercise price of the option or right to purchase AXT California stock, and upon the same terms and subject to the same conditions as set forth in the Option Plans and other agreements entered into by AXT California pertaining to such options, warrants, or rights. A number of shares of AXT Delaware stock shall be reserved for purposes of such options and rights equal to the number of shares of AXT California stock so reserved as of the Effective Date. As of the Effective Date, AXT Delaware shall assume all obligations of AXT California under agreements pertaining to such options and rights, including the Option Plans, and the outstanding options or other rights, or portions thereof, granted pursuant thereto. 9. Other Employee Benefit Plans. As of the Effective Date, AXT Delaware hereby assumes all obligations of AXT California under any and all employee benefit plans in effect as of said date or with respect to which employee rights or accrued benefits are outstanding as of said date, including but not limited to the 1997 Employee Stock Purchase Plan and the 1998 Employee Stock Purchase Plan. A number of shares of AXT Delaware stock shall be reserved for purposes of such plans equal to the number of shares of AXT California stock so reserved as of the Effective Date. As of the Effective Date, AXT Delaware shall assume all obligations of AXT California under agreements pertaining to such plans, and the outstanding rights granted pursuant thereto. 10. Outstanding Common Stock of AXT Delaware. Forthwith upon the Effective Date, the one thousand (1,000) shares of AXT Delaware Common Stock presently issued and outstanding in the name of AXT California shall be canceled and retired and resume the status of 10 11 authorized and unissued shares of AXT Delaware Common Stock, and no shares of AXT Delaware Common Stock or other securities of AXT Delaware shall be issued in respect thereof. 11. Covenants of AXT Delaware. AXT Delaware covenants and agrees that it will, on or before the Effective Date: a. Qualify to do business as a foreign corporation in the State of California, and in all other states in which AXT California is so qualified and in which the failure so to qualify would have a material adverse impact on the business or financial condition of AXT Delaware. In connection therewith, AXT Delaware shall irrevocably appoint an agent for service of process as required under the provisions of Section 2105 of the California Corporations Code and under applicable provisions of state law in other states in which qualification is required hereunder. b. File any and all documents with the California Franchise Tax Board necessary to the assumption by AXT Delaware of all of the franchise tax liabilities of AXT California. 12. Amendment. At any time before or after approval and adoption by the stockholders of AXT California, this Merger Agreement may be amended in any manner as may be determined in the judgment of the respective Boards of Directors of AXT Delaware and AXT California to be necessary, desirable or expedient in order to clarify the intention of the parties hereto or to effect or facilitate the purposes and intent of this Merger Agreement. 13. Abandonment. At any time before the Effective Date, this Merger Agreement may be terminated and the Merger may be abandoned by the Board of Directors of either AXT California or AXT Delaware or both, notwithstanding approval of this Merger Agreement by the sole stockholder of AXT Delaware and the stockholders of AXT California. 14. Counterparts. In order to facilitate the filing and recording of this Merger Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original. 11 12 IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved by resolution of the Board of Directors of AXT California and AXT Delaware, is hereby executed on behalf of each of said two corporations by their respective officers thereunto duly authorized. AMERICAN XTAL TECHNOLOGY DELAWARE CORPORATION, a Delaware corporation By: ---------------------------------------- Morris S. Young, President and Chief Executive Officer AMERICAN XTAL TECHNOLOGY, a California corporation By: ---------------------------------------- Morris S. Young, President and Chief Executive Officer 12 13 CERTIFICATE OF SECRETARY OF AMERICAN XTAL TECHNOLOGY DELAWARE CORPORATION (a Delaware corporation) I, ____________, the Secretary of American Xtal Technology Delaware Corporation, a Delaware corporation (the "Corporation"), hereby certify that the Agreement and Plan of Merger to which this Certificate is attached was duly signed on behalf of the Corporation by its President under the corporate seal of the Corporation and was duly approved and adopted by a unanimous vote of the outstanding stock entitled to vote thereon by written consent of the sole stockholder of the Corporation dated ________________, 1998. Executed effective on the ___ day of _________, 1998. -------------------------------- (Name) 13 14 CERTIFICATE OF APPROVAL OF AGREEMENT AND PLAN OF MERGER OF AMERICAN XTAL TECHNOLOGY. (a California corporation) Morris S. Young and __________ certify that: 1. They are the duly elected and acting President and Secretary, respectively, of American Xtal Technology, a California corporation (the "Corporation"). 2. This Certificate is attached to the Agreement and Plan of Merger dated as of _______________, 1998, providing for the merger of the Corporation with and into American Xtal Technology Delaware Corporation, a Delaware corporation. 3. The Agreement and Plan of Merger in the form attached hereto (the "Merger Agreement") was approved by the Board of Directors of the Corporation at a meeting duly noticed and held on _____________, 1998. 4. The total number of outstanding shares of the Corporation entitled to vote on the merger was __________ shares of Common Stock, 4,924,817 shares of Series A Preferred Stock, 4,003,921 shares of Series B Preferred Stock and 1,200,000 shares of Series C Preferred Stock. 5. The principal terms of the Merger Agreement were approved by an affirmative vote which exceeded the vote required, such vote being a majority of the total number of outstanding shares of Common Stock and a majority of the outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting separately as a class. Dated: ____________________, 1998. ------------------------------------ Morris S. Young, President ------------------------------------ _____________, Secretary 14 15 The undersigned, Morris S. Young and ___________, President and Secretary, respectively, of American Xtal Technology, a California corporation, declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of their own knowledge. Executed at Fremont, California, on ______________, 1998. ------------------------------------ Morris S. Young, President ------------------------------------ _____________, Secretary 15 EX-3.1 4 CERTIFICATE OF INCORPORATION OF AMERICAN XTAL 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF AMERICAN XTAL TECHNOLOGY DELAWARE CORPORATION FIRST: The name of this corporation is American Xtal Technology Delaware Corporation (hereinafter sometimes referred to as the "Corporation"). SECOND:The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH:The total number of shares of stock which the Corporation shall have authority to issue is One Thousand (1,000) shares of Common Stock, par value $0.001 per share (the "Common Stock"). FIFTH: The name and mailing address of the incorporator is: Charlotte Fu c/o Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, CA 94301 SIXTH: The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by Statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot unless the Bylaws so provide. 1 2 SEVENTH: The Board of Directors is authorized to make, adopt, amend, alter or repeal the Bylaws of the Corporation. The stockholders shall also have power to make, adopt, amend, alter or repeal the Bylaws of the Corporation. EIGHTH: This Corporation reserves the right to amend or repeal any of the provisions contained in this Certificate of Incorporation in any manner now or hereafter permitted by law, and the rights of the stockholders of this Corporation are granted subject to this reservation. NINTH: To the fullest extent permitted by the Delaware General Corporation Law, a director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article NINTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and accordingly, have hereto set my hand this 11th day of November, 1997. ----------------------------- Charlotte Fu 2 EX-3.2 5 AMENDMENT OF CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AMERICAN XTAL TECHNOLOGY, INC. We, Morris S. Young, President and Chief Executive Officer, and Guy Atwood, Secretary of American Xtal Technology, Inc. (the "Corporation"), a corporation duly organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Sections 228 and 242 thereof, DO HEREBY CERTIFY: FIRST: That the amendment to the Corporation's Certificate of Incorporation set forth in the following resolution has been approved in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware. "RESOLVED, that Paragraph ONE of Article FOURTH of the Corporation's Certificate of Incorporation is hereby amended to read in its entirety as follows: FOURTH: STOCK The Corporation is authorized to issue two classes of stock to be designated, respectively, "Preferred Stock" and "Common Stock." The total number of shares of Preferred Stock the Corporation shall have authority to issue is 12,128,738, $0.001 par value per share, and the total number of shares of Common Stock the Corporation shall have authority to issue is ________, $0.001 par value per share. Of the authorized shares of Preferred Stock, 4,924,817 shares shall be designated as "Series A Preferred Stock," 4,003,921 shares shall be designated as "Series B Preferred Stock,"and 1,200,000 shall be designated as "Series C Preferred Stock." The remaining unauthorized shares of Preferred Stock shall initially be undesignated. 2 IN WITNESS WHEREOF, this Certificate of Amendment of Certificate of Incorporation has been executed on behalf of the Corporation by its President and Chief Executive Officer and attested by Guy Atwood, its Secretary, this ____ day of __________, 1998. AMERICAN XTAL TECHNOLOGY, INC. By: -------------------------------- Morris S. Young, President and Chief Executive Officer Attest: By: --------------------------------- Guy Atwood, Secretary -2- EX-3.3 6 BYLAWS OF AMERICAN XTAL TECHNOLOGY 1 EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF AMERICAN XTAL TECHNOLOGY DELAWARE CORPORATION 2
TABLE OF CONTENTS Page ---- ARTICLE I STOCKHOLDERS..........................................................1 Section 1.1 Annual Meeting...............................................................1 Section 1.2 Special Meetings.............................................................1 Section 1.3 Notice of Meetings...........................................................1 Section 1.4 Quorum.......................................................................1 Section 1.5 Conduct of the Stockholders' Meeting.........................................2 Section 1.6 Conduct of Business..........................................................2 Section 1.7 Notice of Stockholder Business...............................................2 Section 1.8 Proxies and Voting...........................................................3 Section 1.9 Stock List...................................................................3 ARTICLE II BOARD OF DIRECTORS....................................................4 Section 2.1 Number and Term of Office....................................................4 Section 2.2 Vacancies and Newly Created Directorships....................................4 Section 2.3 Removal......................................................................4 Section 2.4 Regular Meetings.............................................................5 Section 2.5 Special Meetings.............................................................5 Section 2.6 Quorum.......................................................................5 Section 2.7 Participation in Meetings by Conference Telephone............................5 Section 2.8 Conduct of Business..........................................................5 Section 2.9 Powers.......................................................................5 Section 2.10 Compensation of Directors....................................................6 Section 2.11 Nomination of Director Candidates............................................6 ARTICLE III COMMITTEES............................................................7 Section 3.1 Committees of the Board of Directors.........................................7 Section 3.2 Conduct of Business..........................................................8 ARTICLE IV OFFICERS..............................................................8 Section 4.1 Generally....................................................................8 Section 4.2 Chairman of the Board........................................................8 Section 4.3 President....................................................................8 Section 4.4 Vice President...............................................................8 Section 4.5 Treasurer....................................................................8 Section 4.6 Secretary....................................................................9 Section 4.7 Delegation of Authority......................................................9 Section 4.8 Removal......................................................................9 Section 4.9 Action With Respect to Securities of Other Corporations......................9 ARTICLE V STOCK.................................................................9 Section 5.1 Certificates of Stock........................................................9 Section 5.2 Transfers of Stock...........................................................9 Section 5.3 Record Date..................................................................9 Section 5.4 Lost, Stolen or Destroyed Certificates......................................10
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TABLE OF CONTENTS Page ---- Section 5.5 Regulations.................................................................10 ARTICLE VI NOTICES..............................................................10 Section 6.1 Notices.....................................................................10 Section 6.2 Waivers.....................................................................10 ARTICLE VII MISCELLANEOUS........................................................10 Section 7.1 Facsimile Signatures........................................................10 Section 7.2 Corporate Seal..............................................................11 Section 7.3 Reliance Upon Books, Reports and Records....................................11 Section 7.4 Fiscal Year.................................................................11 Section 7.5 Time Periods................................................................11 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS............................11 Section 8.1 Right to Indemnification....................................................11 Section 8.2 Right of Claimant to Bring Suit.............................................12 Section 8.3 Non-Exclusivity of Rights...................................................12 Section 8.4 Indemnification Contracts...................................................12 Section 8.5 Insurance...................................................................13 Section 8.6 Effect of Amendment.........................................................13 ARTICLE IX AMENDMENTS...........................................................13 Section 9.1 Amendment of Bylaws.........................................................13
ii 4 AMERICAN XTAL TECHNOLOGY DELAWARE CORPORATION A DELAWARE CORPORATION AMENDED AND RESTATED BYLAWS ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 1.2 Special Meetings. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exists any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (ii) by the holders of not less than 10% of all shares entitled to cast votes at the meeting, voting together as a single class and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3 Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4 Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. 1 5 If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of the stockholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence the Vice President designated by the President, or in the absence of such designation any Vice President, or in the absence of the President or any Vice President, a chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 8 of these Bylaws to act by proxy, and officers of the Corporation. Section 1.6 Conduct of Business. The Chairman shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 1.6 and Section 1.7, below. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6 and Section 1.7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.7 Notice of Stockholder Business. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a stockholder, or (d) properly brought before a 2 6 special meeting by a stockholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by stockholders. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Section 1.8 Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. No stockholder may authorize more than one proxy for his shares. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast. Section 1.9 Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within 3 7 the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office. The number of directors shall be Five (5) and, the number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Upon the closing of the first sale of the Corporation's common stock pursuant to a firmly underwritten registered public offering (the "IPO"), the directors shall be divided into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders held after the IPO, the term of office of the second class to expire at the second annual meeting of stockholders held after the IPO, the term of office of the third class to expire at the third annual meeting of stockholders held after the IPO and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. A vacancy resulting from the removal of a director by the stockholders as provided in Article II, Section 2.3 below may be filled at special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of the death, resignation or removal of any director. Section 2.2 Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3 Removal. Subject to the rights of holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of 4 8 the directors then in office, though less than a quorum, or by the stockholders as provided in Article II, Section 2.1 above. Directors so chosen shall hold office until the new annual meeting of stockholders. Section 2.4 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not fewer than five (5) days before the meeting or by telegraphing or personally delivering the same not fewer than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6 Quorum. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 2.7 Participation in Meetings by Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8 Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (a) To declare dividends from time to time in accordance with law; (b) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; 5 9 (c) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (d) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (e) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (f) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (g) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (h) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the Corporation's business and affairs. Section 2.10 Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.11 Nomination of Director Candidates. Subject to the rights of holders of any class or series of Preferred Stock then outstanding, nominations for the election of Directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally. However, any stockholder entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a stockholder nomination for a director to be elected at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's Predecessor's) Proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a nomination for director to be elected at a special meeting, notice by the stockholders to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the 6 10 nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of Directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. In the event that a person is validly designated as a nominee in accordance with this Section 2.11 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee upon delivery, not fewer than five days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Section 2.11 had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. If the chairman of the meeting for the election of Directors determines that a nomination of any candidate for election as a Director at such meeting was not made in accordance with the applicable provisions of this Section 2.11, such nomination shall be void; provided, however, that nothing in this Section 2.11 shall be deemed to limit any voting rights upon the occurrence of dividend arrearages provided to holders of Preferred Stock pursuant to the Preferred Stock designation for any series of Preferred Stock. ARTICLE III COMMITTEES Section 3.1 Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. 7 11 In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2 Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS Section 4.1 Generally. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chairman of the Board, if there shall be such an officer, and the President shall each be members of the Board of Directors. Any number of offices may he held by the same person. Section 4.2 Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. Section 4.3 President. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation. 8 12 Section 4.4 Vice President. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. Section 4.5 Treasurer. Unless otherwise designated by the Board of Directors, the Chief Financial Officer of the Corporation shall be the Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation and shall have custody of all monies and securities of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Section 4.6 Secretary. The Secretary shall issue all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders, the Board of Directors, and all committees of the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. Section 4.7 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.8 Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 4.9 Action With Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK Section 5.1 Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. 9 13 Section 5.2 Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3 Record Date. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.5 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 6.1 Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or be telegram or mailgram. Section 6.2 Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. 10 14 ARTICLE VII MISCELLANEOUS Section 7.1 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2 Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 7.3 Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 7.5 Time Periods. In applying any provision of these bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a Partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the 11 15 Corporation to the fullest extent authorized by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2 of this Article VIII, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, unless the Delaware General Corporation Law then so prohibits, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation, employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 8.2 Right of Claimant to Bring Suit. If a claim under Section 8.1 of this Article VIII is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The burden of proving such claim shall be on the claimant. It shall be a defense to any such action (other then an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its 12 16 Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 8.3 Non-Exclusivity of Rights. The rights conferred on any person in Sections 8.1 and 8.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.4 Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. Section 8.5 Insurance. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 8.6 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VIII by the stockholders and the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENTS Section 9.1 Amendment of Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by the Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 13 17 CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected and acting Secretary of American Xtal Technology Delaware Corporation, a Delaware corporation (the "Corporation"), and that the foregoing Bylaws, comprising thirteen (13) pages, constitute the Bylaws of the Corporation as duly adopted by the unanimous written consent at of the Board of Directors of the Corporation on ___________ __, 1998. IN WITNESS WHEREOF, I have hereunto subscribed my name on_____________ , 1998. ________________________________________ Gary S. Young, Secretary 14 EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNITY AGREEMENT This Indemnity Agreement, dated as of __________, 1998, is made by and between American Xtal Technology, Inc., a Delaware corporation (the "Company"), and ___________________________ (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company 1 2 and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Agent. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) Expenses. For purposes of this Agreement, "expenses" include all out of pocket expenses costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, 2 3 however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, or investigative. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing; provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 3. Liability Insurance. (a) Maintenance of D&O Insurance. The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) Rights and Benefits. In all policies of D&O Insurance, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. (c) Limitation on Required Maintenance of D&O Insurance. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. Mandatory Indemnification. Subject to Section 9 below, the Company shall indemnify the Indemnitee as follows: 3 4 (a) Successful Defense. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (c) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under this subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. (d) Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) 4 5 for which payment is actually made to Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 5. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense; or (C) the 5 6 Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. (b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 9. Non-exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 10. Enforcement. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that 6 7 such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 11. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 12. Survival of Rights. (a) All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 13. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 13 hereof. 15. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage 7 8 prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 18. Consent to Jurisdiction. The Company and the Indemnitee each hereby consent to the jurisdiction of the courts of the State of Delaware with respect to any action or proceeding which arises out of or relates to this Agreement. 8 9 The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. THE COMPANY: AMERICAN XTAL TECHNOLOGY By ---------------------------------- Morris Young Its: President & CEO Address: 4311 Solar Way Fremont, CA 94538 INDEMNITEE: ------------------------------------ [NAME] Address: ------------------------------------ ------------------------------------ 9 EX-10.2 8 1993 STOCK OPTION PLAN AND FORMS OF AGREEMENTS 1 EXHIBIT 10.2 1993 STOCK OPTION PLAN OF BESTAL CORPORATION 2 TABLE OF CONTENTS
Page ---- 1. PURPOSES OF THE PLAN....................................................1 2. ELIGIBLE PERSONS........................................................1 3. STOCK SUBJECT TO THIS PLAN..............................................1 4. ADMINISTRATION..........................................................2 5. GRANTING OF OPTIONS; OPTION AGREEMENT...................................2 6. TERMS AND CONDITIONS OF OPTIONS.........................................3 6.1 Terms and Conditions to Which All Options Are Subject............3 6.1.1 Changes in Capital Structure..............................3 6.1.2 Corporate Transactions....................................3 6.1.3 Time of Option Exercise...................................4 6.1.4 Option Grant Date.........................................4 6.1.5 Nonassignability of Option Rights.........................4 6.1.6 Payment...................................................4 6.1.7 Termination of Employment.................................5 6.1.8 Repurchase of Stock.......................................6 6.1.9 Withholding and Employment Taxes..........................6 6.1.10 Other Provisions..........................................6 6.1.11 Determination of Value....................................7 6.1.12 Option Term...............................................7 6.2 Terms and Conditions to Which Only NQOs Are Subject..............8 6.2.1 Exercise Price............................................8 6.3 Terms and Conditions to Which Only ISOs Are Subject..............8 6.3.1 Exercise Price............................................8 6.3.2 Disqualifying Dispositions................................8 7. MANNER OF EXERCISE......................................................8 8. EMPLOYMENT OR CONSULTING RELATIONSHIP...................................9 9. FINANCIAL INFORMATION...................................................9 10. AMENDMENTS TO PLAN......................................................9 11. SHAREHOLDER APPROVAL; TERM..............................................9
i 3 1993 STOCK OPTION PLAN OF BESTAL CORPORATION 1. PURPOSES OF THE PLAN The purposes of the Stock Option Plan (the "Plan") of Bestal Corporation, a California corporation (the "Company") are to: (a) Encourage selected employees, directors and consultants to improve operations and increase profits of the company; (b) Encourage selected employees, directors and consultants to accept or continue employment or association with the Company or its Affiliates; and (c) Increase the interest of selected employees, directors and consultants in the Company's welfare through participation in the growth in value of the common stock of the Company (the "Common Stock"). Options granted under this Plan ("Options") may be "incentive stock options" ("ISOs") intended to satisfy the Requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified options" ("NQOs"). 2. ELIGIBLE PERSONS Every person who at the date of grant of an option is a full-time employee of the Company or of any Affiliate (as defined below) of the Company is eligible to receive NQOs or ISOs under this Plan. Every person who at the date of grant is a consultant or non-employee director to the Company or to any Affiliate (as defined below) of the Company is eligible to receive NQOs under this Plan. The term "Affiliate" as used in the Plan means a parent or subsidiary corporation as defined in the applicable provisions (currently Sections 424(e) and (f), respectively) of the Code. The term "employee" includes an officer or director who is an employee, of the Company. The term "consultant" includes persons employed by, or otherwise affiliated with, a consultant. 3. STOCK SUBJECT TO THIS PLAN Subject to the provisions of Section 6.1.1 of the Plan, the maximum aggregate number of shares of stock which may be granted pursuant to this Plan is 300,000 shares of Common Stock. The shares covered by the portion of any grant under the Plan which expires unexercised shall become available again for grants under the Plan. Shares issued pursuant to an option granted under the Plan which are repurchased by the Company in accordance with the terms of the Plan shall become available again for grants as NQOs under the Plan. 1 4 4. ADMINISTRATION (a) This Plan shall be administered by the Board of Directors of the Company (the "Board") or by a committee (the "Committee") of at least two Board members to which administration of the Plan is delegated (in either case, the "Administrator"). (b) From and after such time as the Company registers a class of equity securities under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Plan shall be administered in accordance with the disinterested administration requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission ("Rule 16b-3"), or any successor rule thereto. (c) Subject to the other provisions of this Plan, the Administrator shall have the authority, in its discretion: (i) to grant Options; (ii) to determine the fair market value of the Common Stock subject to Options; (iii) to determine the exercise price of Options granted; (iv) to determine the persons to whom, and the time or times at which, Options shall be granted, and the number of shares subject to each Option; (v) to interpret this Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to this Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical), including but not limited to, the time or times at which Options shall be exercisable; (viii) with the consent of the optionee, to modify or amend any Option; (ix) to defer (with the consent of the optionee) or accelerate the exercise date of any Option; (x) to authorize any person to execute on behalf of the Company any instrument evidencing the grant of an Option; and (xi) to make all other determinations deemed necessary or advisable for the administration of this Plan. The Administrator may delegate nondiscretionary administrative duties to such employees of the Company as it deems proper. (d) All questions of interpretation, implementation, and application of this Plan shall be determined by the Administrator. Such determinations shall be final and binding on all persons. 5. GRANTING OF OPTIONS; OPTION AGREEMENT (a) No Options shall be granted under this Plan after ten years from the date of adoption of this Plan by the Board, or the date the Plan is approved by the shareholders of the Company, whichever is earlier. (b) Each option shall be evidenced by a written stock option agreement, in form satisfactory to the Company, executed by the Company and the person to whom such Option is granted; provided, however, that the failure by the Company, the Optionee, or both to execute such an agreement shall not invalidate the granting of an Option, although the exercise of each option shall be subject to Section 6.1.4. (c) The agreement shall specify whether each Option it evidences is a NQO or an ISO. (d) The Administrator may approve the grant of Options under this Plan to persons who are expected to become employees, directors or consultants of the Company, but are 2 5 not employees, directors or consultants at the date of approval. In such cases, the Option shall be deemed granted, without further approval, on the date the grantee assumes the employment or consulting relationship forming the basis for such grant, and, in addition, satisfies all requirements of this Plan for Options granted on that date. 6. TERMS AND CONDITIONS OF OPTIONS Each Option granted under this Plan shall be designated is an NQO or an ISO. Each Option shall be subject to the terms and conditions set forth in Section 6.1. NQOs shall be also subject to the terms and conditions set forth in Section 6.2, but not those set forth in Section 6.3. ISOs shall also be subject to the terms and conditions set forth in Section 6.3, but not those set forth in Section 6.2. 6.1 Terms and Conditions to Which All Options Are Subject. All Options granted under this Plan shall be subject to the following terms and conditions: 6.1.1 Changes in Capital Structure. Subject to Section 6.1.2, if the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, combination or reclassification, or converted into or exchanged for other securities as a result of a merger, consolidation or reorganization, appropriate adjustments shall be made by the Board in (a) the number and class of shares of stock Subject to this Plan and each Option outstanding under this Plan, and (b) the exercise price of each outstanding Option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustments. Each such adjustment shall be subject to approval by the Board in its sole Discretion. 6.1.2 Corporate Transactions. New option rights may be substituted for the option rights granted under this Plan, or the Company's obligations as to options outstanding under this Plan may be assumed, by an employer corporation other than the Company, or by a parent or subsidiary of such employer corporation, in connection with (i) any merger, consolidation, acquisition, separation, or reorganization under which more than 50 percent of the shares of the Company outstanding immediately before such event are converted into cash or into another security, (ii) the dissolution or liquidation of the Company, or (iii) any like occurrence in which the Company is involved, in such manner that the then outstanding Options which are ISOs will continue to be "incentive stock options" within the meaning of Section 422 of the Code to the full extent permitted thereby. Notwithstanding the foregoing or the provisions of Section 6.1.1, if such employer corporation, or parent or subsidiary of such employer corporation, does not substitute new and substantially equivalent option rights for the option rights granted hereunder, or assume the option rights granted hereunder, the Administrator may, in its absolute discretion, do one or more of the following: (i) accelerate any vesting schedule to which an Option is subject; (ii) cancel Options upon payment to each optionee in cash, with respect to each Option to the extent then exercisable, of any amount which, in the absolute discretion of the Administrator, is determined to be equivalent to any excess of the market value (at the effective time of such event) of the consideration that such optionee would have received if the option had been exercised before the effective time over the exercise price of the Option; or (iii) except in case of a dissolution, liquidation, or sale of all or substantially all of the Company's assets, terminate the 3 6 period during which such options are exercisable provided, however, that each optionee shall be mailed notice at least thirty-five (35) days prior to such merger, consolidation, acquisition, separation, reorganization, or similar occurrence, and shall have at least thirty (30) days after the mailing of such notice to exercise any unexpired option rights granted hereunder. 6.1.3 Time of Option Exercise. Except as necessary to satisfy the requirements of Section 422 of the Code and subject to Section 5, Options granted under this Plan shall be exercisable (a) immediately as of the effective date of the stock option agreement granting the Option, or (b) in accordance with a schedule related to the date of the grant of the Option, the date of first employment, or such other dates as may be set by the Administrator (in any case, the "Vesting Base Date") and specified in the written stock option agreement relating to such Option; provided, however, that (i) the right to exercise an Option must vest at the rate of at least 20% per year over five years from the date such option was granted and (ii) if the optionee is a director or officer, as those terms are used in Section 16 of the Exchange Act, such Option may not be exercisable, in whole or in part, at any time prior to the six-month anniversary of the date of Option grant, unless the Administrator determines that the foregoing provision is not necessary to comply with the provisions of Rule 16b-3 or that Rule 16b-3 is not applicable to the Plan. No Option shall be exercisable, however, until a written stock option agreement in form satisfactory to the Company is executed by the Company and the optionee. 6.1.4 Option Grant Date. Except in the case of advance approvals described in Section 5(d), the date of grant of an option under this Plan shall be the date as of which the Administrator approves the grant. 6.1.5 Nonassignability of Option Rights. No Option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution. During the life of the optionee, an Option shall be exercisable only by the optionee. 6.1.6 Payment. Except as provided below, payment in full, in cash, shall be made for all stock purchased at the time written notice of exercise of an Option is given to the Company, and proceeds of any payment shall constitute general funds of the Company. At the time an Option is granted or exercised, the Administrator, in the exercise of its absolute discretion, may authorize any one or more of the following additional methods of payment: (a) Acceptance of the optionee's full recourse promissory note for all or part of the Option price, payable on such terms and bearing such interest rate as determined by the Administrator (but in no event less than the minimum interest rate specified under the Code at which no additional interest on debt instruments of such type would be imputed), which promissory note may be either secured or unsecured in such manner as the Administrator shall approve (including, without limitation, by a security interest in the shares of the Company). In making its determination to accept a promissory note from an employee of the Company, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company; and 4 7 (b) Delivery by the optionee of Common Stock already owned by the optionee for all or part of the Option price, provided the value (determined as set forth in Section 6.1.11) of such Common Stock is equal on the date of exercise to the Option price, or such portion thereof as the optionee is authorized to pay by delivery of such stock; provided, however, that if an optionee has exercised any portion of any Option granted by the Company by delivery of Common Stock, the optionee may not, within six months following such exercise, exercise any Option granted under this Plan by delivery of Common Stock; and (c) Any other consideration and method of payment to the extent permitted under Sections 408 and 409 of the California General Corporation Law. 6.1.7 Termination of Employment. Unless determined otherwise by the Administrator in its absolute discretion, to the extent not already expired or exercised, an Option shall terminate: (i) for optionees who are employees not subject to Section 16(b) of the Exchange Act, at the earlier of (a) the Expiration Date (as defined in Section 6.1.12) or (b) three months after termination of employment with the Company or any Affiliate; (ii) for optionees who are consultants or non-employee directors, at the earlier of (a) the Expiration Date or (b) seven months after the last day served as a consultant to or director of the Company or any Affiliate; and (iii) for optionees who are employees and either directors or otherwise subject to Section 16(b) of the Exchange Act, at the earlier of (a) the Expiration Date, (b) three months after termination of employment with the Company or any Affiliate in the case of ISOs, and (c) in the case of NQOs, seven months after the later of termination of employment with the Company or any Affiliate or the last day served as a director or consultant of the Company or any Affiliate; provided, that an Option shall be exercisable after the date of termination of employment or service as a director or consultant only to the extent exercisable on the date of termination. Notwithstanding the foregoing, if termination of employment or service as a director or consultant is due to the optionee's death or "disability" (as determined in accordance with Section 22(e)(3) of the Code), the optionee, or the optionee's personal representative (or any other person who acquires the Option from the optionee by will or the applicable laws of descent and distribution), may at any time within 12 months after the termination of employment or service as a director or consultant (or such lesser period as is specified in the stock option agreement but in no event after the Expiration date of the Option), exercise the rights to the extent they were exercisable on the date of the termination. A transfer of an Optionee from the Company to an Affiliate or vice versa, or from one Affiliate to another, or a leave of absence due to sickness, military service, or other cause duly approved by the Company, shall not be deemed a termination of employment or the consulting relationship for purposes of this Plan. For the purpose of this Section 6.1.7, "employment" means engagement with the company or any subsidiary of the Company either (i) as an employee, (ii) as a director, or (iii) as a consultant on a basis determined by the President of the Company in his or her sole discretion to be substantially equivalent to employment. 6.1.8 Repurchase of Stock. At the option of the Administrator, the stock to be delivered pursuant to the exercise of any Option granted to an employee, director or consultant under this Plan may be subject to a right of repurchase in favor of the Company with respect to any employee, or director or consultant whose employment, or director or Consulting relationship with the Company is terminated. Such right of repurchase shall be at the Option 5 8 exercise price and shall expire at the faster of (i) the rate of 20% per year over five years from the date the Option is granted (without respect to the date the Option was exercised or became exercisable) or (ii) in accordance with a schedule related to the Vesting Base Date with respect to each Option grant, as determined by the Administrator. Determination of the number of shares subject to such right of repurchase shall be made as of the date the employee's employment by, director's director relationship with, or consultant's consulting relationship with, the Company terminates, not as of the date that any Option granted to such employee, director or consultant is thereafter exercised. Such right of repurchase must be exercised for cash or cancellation of purchase money indebtedness within 90 days of termination of the employment, director or consulting relationship with the Company. 6.1.9 Withholding and Employment Taxes. At the time of exercise of an Option (or at such later time(s) as the Company may prescribe), the optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. The Administrator may, in the exercise of its sole discretion, permit an optionee to pay some or all of such taxes by means of a promissory note on such terms as the Administrator deems appropriate. If authorized by the Administrator in its sole discretion, an optionee may elect to have shares of Common Stock which are acquired upon exercise of the Option withheld by the Company or to tender to the Company other shares of Common Stock or other securities of the Company owned by the optionee on the date of determination of the amount of tax to be withheld as a result of the exercise of such Option (the "Tax Date") to pay the amount of tax that is required by law to be withheld by the Company as a result of the exercise of such Option, provided that such election satisfies the following requirements: (a) such election shall be irrevocable; and (b) such election shall be subject to the disapproval of the Administrator at any time. Any securities so withheld or tendered shall be valued by the Company as of the Tax Date. 6.1.10 Other Provisions. Each Option granted under this Plan may contain such other terms, provisions, and conditions not inconsistent with this Plan as may be determined by the Administrator, and each ISO granted under this Plan shall include such provisions and conditions as are necessary to qualify the Option as an "incentive stock option" within the meaning of Section 422 of the Code. If Options provide for a right of first refusal in favor of the Company with respect to stock acquired by employees, directors or consultants, such Options shall provide (a) that the right of first refusal applies only where there is a bona fide third-party offerer and the employee, director or consultant desires to sell the stock; (b) such right of first refusal requires the Company to make its election to purchase the stock subject to such right of first refusal, if at all, by giving notice of such election no more than 30 days after receipt of notice of such right of first refusal; and (c) upon the exercise of a right of first refusal, the Company must purchase all (but not less than all, unless the selling employee, director or consultant consents) of the offered stock on the same terms offered by the bona-fide third party offerer, within sixty days after receipt of the notice of such right of first refusal, unless a longer period is offered by the bona fide third-party offerer. Such Options shall further provide that the right of first refusal shall 6 9 terminate upon the earlier of (i) the closing of the Company's initial registered public offering to the public generally, or (ii) the date ten (10) years after the grant date as set forth in Section 6.1.4. 6.1.11 Determination of Value. For purposes of the Plan, the value of Common Stock or other securities of the Company shall be determined as follows: (a) If the stock of the Company is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers Automated Quotation System, its fair market value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the largest such exchange) for the date the value is to be determined (or if there are no sales for such date, then for the last preceding business day on which there were sales), as reported in the Wall Street Journal or similar publication. (b) If the stock of the Company is regularly quoted by a recognized securities dealer but selling prices are not reported, its fair market value shall be the mean between the high bid and low asked prices for the stock on the date the value is to be determined (or if there are no quoted prices for the date of grant, then for the last preceding business day on which there were quoted prices). (c) In the absence of an established market for the stock, the fair market value thereof shall be determined by the Administrator, with reference to the Company's net worth, prospective earning power, dividend-paying capacity, and other relevant factors, including the goodwill of the Company, the economic outlook in the Company's industry, the Company's position in the industry and its management, and the values of stock of other corporations in the same or a similar line of business. 6.1.12 Option Term. No option shall be exercisable more than 120 months after the date of grant, or such lesser period of time as is set forth in the stock option agreement (the end of the maximum exercise period stated in the stock option agreement is referred to in this Plan as the "Expiration Date"). No ISO granted to a Ten Percent Shareholder (as defined in Section 6.2.1) shall be exercisable more than five ears after the date of grant. 6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted under this Plan which are designated as NQOs shall be subject to the following terms and conditions: 6.2.1 Exercise Price. The exercise price of a NQO shall be not less than 85 percent of the fair market value (determined in accordance with Section 6.1.11) of the stock subject to the option on the date of grant, except that the exercise price of a NQO granted to any person who owns, directly or by attribution, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Affiliate (a "Ten Percent Shareholder"), shall in no event be less than 110 percent of such fair market value. 7 10 6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted under this Plan which are designated as ISOs shall be subject to the following terms and conditions: 6.3.1 Exercise Price. Except as set forth in Section 6.2.1, the exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value (determined in accordance with Section 6.1.11) of the stock covered by the Option at the time the Option is granted, except that the exercise price of an ISO granted to any Ten Percent Shareholder shall in no event be less than 110 percent of such fair market value. 6.3.2 Disqualifying Dispositions. If stock acquired upon exercise of an ISO is disposed of in a "disqualifying disposition" within the meaning of Section 422 of the Code, the holder of the stock immediately before the disposition shall notify the Company in writing of the date and terms of the disposition and comply with any other requirements imposed by the Company in order to enable the Company to secure any related income tax deduction to which it is entitled. 7. MANNER OF EXERCISE An optionee wishing to exercise an Option shall give written notice to the Company at its principal executive office, to the attention of the officer of the Company designated by the Administrator, accompanied by payment of the exercise price as provided in Section 6.1.6. The date the Company receives written notice of an exercise hereunder accompanied by payment of the exercise price and, if required, by payment of any federal or state withholding or employment taxes required to be withheld by virtue of exercise of the Option will be considered as the date such Option was exercised. Promptly after receipt of written notice of exercise of an Option, the Company shall, without stock issue or transfer taxes to the optionee or other person entitled to exercise the Option, deliver to the optionee or such other person a certificate or certificates for the requisite number of shares of stock. An optionee or transferee of an optionee shall not have any privileges as a shareholder with respect to any stock covered by the Option until the date of issuance of a stock certificate. 8. EMPLOYMENT OR CONSULTING RELATIONSHIP Nothing in this Plan or any Option granted thereunder shall interfere with or limit in any way the right of the Company or of any of its Affiliates to terminate any optionee's employment or consulting at any time, nor confer upon any optionee any right to continue in the employ of, or consult with, the Company or any of its Affiliates. 9. FINANCIAL INFORMATION The Company shall provide to each optionee during the period such optionee holds an outstanding Option a copy of the financial statements of the Company as prepared either by the Company or independent certified public accountants of the Company. Such financial statements 8 11 shall be delivered as soon as practicable following the end of the Company's fiscal year during the period Options are outstanding. 10. AMENDMENTS TO PLAN The Board may amend this Plan at any time. Without the consent of an optionee, no amendment may adversely affect Outstanding Options except to conform this Plan and ISOs granted under this Plan to federal or other tax laws relating to incentive stock options. No amendment shall require shareholder approval unless (a) shareholder approval is required to preserve incentive stock option treatment for federal income tax purposes, (b) from and after such time as the Company registers a class of equity securities under Section 12 of the Exchange Act, shareholder approval shall be required to meet the exemptions provided by Rule 16b-3, or any successor rule thereto, or (c) the Board otherwise concludes that shareholder approval is advisable. 11. SHAREHOLDER APPROVAL; TERM This Plan shall become effective upon adoption by the Board of Directors, provided, however, that no Option shall be Exercisable unless and until unanimous written consent of the shareholders of the Company, or approval by a majority of shareholders of the Company present, or represented, and entitled to vote at a validly called shareholders' meeting at which a Quorum is present (or such greater number as may be required by law or applicable governmental regulations or orders) is obtained within 12 months before or after adoption by the Board. This Plan shall terminate ten years after adoption by the Board unless terminated earlier by the Board. The Board may terminate this Plan at any time without shareholder approval. No Options shall be granted after termination of this Plan, but termination shall not affect rights and obligations under then outstanding Options. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 12 Options may be granted and exercised under this Plan only after there has been compliance with all applicable federal and state securities laws. Plan adopted by the Board of Directors as of March 12, 1993. Plan approved by Shareholders on April 20, 1993 10 13 BESTAL CORPORATION 1993 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT (A) Name of Optionee:___________________ (B) Grant Date:_________________________ (C) Number of Shares:___________________ (D) Exercise Price:_____________________ (E) Vesting Base Date:__________________ (F) Effective Date:_____________________ THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), is made and entered into as of the date set forth in Item F above between Bestal Corporation, a California corporation (the "Company") and the person named in Item A above ("Optionee") . THE PARTIES AGREE AS FOLLOWS: 1. Grant of Option; Effective Date; Vesting Base Date. 1.1 Grant. The Company hereby grants to optionee pursuant to the Company's 1993 Stock Option Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit 1, an incentive stock option (the "ISO") to purchase all or any part of an aggregate of the number of shares (the "ISO Shares") of the Company's Common Stock (the "Common Stock") listed in Item C above on the terms and conditions set forth herein and in the Plan, the terms and conditions of the Plan being hereby incorporated into this Agreement by reference. 1.2 Vesting Base Date. The parties hereby establish the date set forth in Item E above as the Vesting Base Date (as defined in Section 6.1.3 of the Plan). 2. Exercise Price. The exercise price for purchase of each share of Common Stock covered by this ISO shall be the price set forth in Item D above. 3. Term. Unless otherwise specified on Exhibit 3 attached hereto, if any (the absence of such Exhibit indicating that no such Exhibit was intended), this ISO shall expire as provided in Section 6.1.12 of the Plan. 4. Adjustment of ISOs. The Company shall adjust the number and kind of shares and the exercise price thereof in certain circumstances in accordance with the provisions of Section 6.1.1 of the Plan. 5. Exercise of Options. 5.1 Vesting; Time of Exercise. This ISO shall be exercisable according to the schedule set forth on Exhibit 5.1 attached hereto. 14 5.2 Exercise After Termination of Status as an Employee, Director or Consultant. In the event of termination of Optionee's continuous status as an employee, director or consultant, this ISO may be exercised only in accordance with the provisions of Section 6.1.7 of the Plan. 5.3 Manner of Exercise. Optionee may exercise this ISO, or any portion of this ISO, by giving written notice to the Company at its principal executive office, to the attention of the officer of the Company designated by the Plan Administrator, accompanied by a copy of the 1993 Stock Option Plan Stock Purchase Agreement in substantially the form attached hereto as Exhibit 5.3 executed by Optionee (or at the option of the Company such other form of stock purchase agreement as shall then be acceptable to the Company), payment of the exercise price and payment of any applicable withholding or employment taxes. The date the Company receives written notice of an exercise hereunder accompanied by payment will be considered as the date this ISO was exercised. Promptly after receipt of written notice of exercise of the ISO, the Company shall, without stock issue or transfer taxes to the Optionee or other person entitled to exercise, deliver to the Optionee or other person a certificate or certificates for the requisite number of ISO Shares. An Optionee or transferee of an Optionee shall not have any privileges as a shareholder with respect to any ISO Shares covered by the option until the date of issuance of a stock certificate. 5.4 Payment. Except as provided in Exhibit 5.4 attached hereto, if any (the absence of such Exhibit indicating that no Exhibit was intended), payment in full, in cash, shall be made for all ISO Shares purchased at the time written notice of exercise of the ISO is given to the Company, and proceeds of any payment shall constitute general funds of the Company. 6. Nonassignability of ISO. This ISO is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. During the life of Optionee, the ISO is exercisable only by the Optionee. Any attempt to assign, pledge, transfer, hypothecate or otherwise dispose of, this ISO in a manner not herein permitted, and any levy of execution, attachment, or similar process on this ISO, shall be null and void. 7. Company's Right of First Refusal. 7.1 Right of First Refusal. In the event that the Optionee proposes to sell, pledge, or otherwise transfer any ISO Shares or any interest in such shares to any person or entity, the Company shall have a right of first refusal (the "Right of First Refusal") with respect to such ISO Shares. If Optionee desires to transfer ISO Shares, Optionee shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of ISO Shares proposed to be transferred, the proposed transfer price, and the name and address of the proposed transferee. The Transfer Notice shall be signed both by Optionee and by the proposed transferee and must constitute a binding commitment of both such parties for the transfer of such ISO Shares. The Company may elect to purchase all, but not less than all, of the ISO Shares subject to the Transfer Notice by delivery of a notice of exercise of the Company's Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the -2- 15 Company. The purchase price paid by the Company shall be the price per share equal to the proposed per share transfer price, and shall be paid to the Optionee within 60 days after the date the Transfer Notice is received by the Company, unless a longer period for payment was offered by the proposed transferee, in which case the Company shall pay the purchase price within such longer period. The Company's rights under this Section 7.1 shall be freely assignable, in whole or in part. 7.2 Transfer of ISO Shares. If the Company fails to exercise the Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company, the optionee may, not later than 75 days following delivery to the Company of the Transfer Notice, conclude a transfer of the ISO Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in Section 7.1 of this Agreement. If the Company exercises the Right of First Refusal, the parties shall consummate the sale of ISO Shares on the terms, other than price, as applicable under Section 7.1, set forth in the Transfer Notice; provided, however, in the event the Transfer Notice provides for payment for the ISO Shares other than in cash, the Company shall have the option of paying for the ISO Shares by the discounted cash equivalent of the consideration described in the Transfer Notice. 7.3 Binding Effect. The Right of First Refusal shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any transferee of ISO Shares other than a transferee acquiring ISO Shares in a transaction where the Company failed to exercise the Right of First Refusal (a "Free Transferee") or a transferee of a Free Transferee. 7.4 Termination of Company's Right of First Refusal. Notwithstanding anything in this Section 7, the Company shall have no Right of First Refusal, and Optionee shall have no obligation to comply with the procedures in Sections 7.1 through 7.3 after the earlier of (i) the closing of the Company's initial registered public offering of Common Stock to the public generally, or (ii) the date ten (10) years after the Effective Date. 8. Market Standoff. Optionee hereby agrees that if so requested by the Company or any representative of the Underwriters in connection with any registration of the offering of the securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), Optionee shall not sell or otherwise transfer the ISO Shares for a period of 180 days following the effective date of a Registration Statement filed under the Securities Act; provided, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Securities Act which include securities to be sold on behalf of the Company in an underwritten offering under the Securities Act. The Company may impose stop-transfer instructions with respect to the ISO Shares subject to the foregoing restrictions until the end of each such 180-day period. -3- 16 9. Restriction on Issuance of Shares. 9.1 Legality of Issuance. The Company shall not be obligated to sell or issue any ISO Shares pursuant to this agreement if such sale or issuance, in the opinion of the Company and the Company's counsel, might constitute a violation by the Company of any provision of law, including without limitation the Provisions of the Securities Act. 9.2 Registration or Qualification of Securities. The Company may, but shall not be required to, register or qualify the sale of this ISO or any ISO Shares under the Securities Act or any other applicable law. The Company shall lot be obligated to take any affirmative action in order to cause the grant or exercise of this option or the issuance or sale of any ISO Shares pursuant thereto to comply with any law. 10. Restriction on Transfer. Regardless whether the sale of the ISO Shares has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of ISO Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and the Company's counsel, such restrictions are necessary or desirable in order to achieve compliance with the Provisions of the Securities Act, the securities laws of any state, or any other law. 11. Stock Certificate Restrictive Legends. Stock certificates evidencing ISO Shares may bear such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following legends: "The offering and sale of the securities represented hereby have not been registered under the Securities Act of 1933, as amended (the "Act"). Any transfer of such securities will be invalid unless a registration statement under the Act is in effect as to such transfer or in the opinion of counsel for the Company such registration is unnecessary in order for such transfer to comply with the Act." "The securities represented hereby are subject to a right of first refusal by the Company pursuant to the provisions of the Company's 1993 Stock Option Plan and a purchase agreement relating to such securities, and may not be sold or otherwise transferred except in compliance with the terms of such right of first refusal." "The securities represented hereby are subject to restrictions on transfer for a period of 180 days following the effective date of a registration statement under the Securities Act of 1933, as amended, for an offering of the Company's securities as more fully provided in an agreement between the Company and the original purchaser relating to the option to purchase such securities." 12. Disqualifying Dispositions. If stock acquired by exercise of this ISO is disposed of within two years after the Effective Date or within one year after date of such exercise (as determined under Section 5.3 of this Agreement), the Optionee immediately prior to the -4- 17 disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. 13. Representations, Warranties, Covenants, and Acknowledgments of Optionee Upon Exercise of ISO. Optionee hereby agrees that in the event that the Company and the Company's counsel deem it necessary or advisable in the exercise of their discretion, the issuance of ISO Shares may be conditioned upon certain representations, warranties, and acknowledgments by the person exercising the ISO (the "Purchaser"), including, without limitation, those set forth in Sections 13.1 through 13.8 inclusive: 13.1 Investment. Purchaser is acquiring the ISO Shares for Purchaser's own account, and not for the account of any other person. Purchaser is acquiring the ISO Shares for investment and not with a view to distribution or resale thereof except in compliance with applicable laws regulating securities. 13.2 Business Experience. Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company evidenced by purchase of the ISO Shares. 13.3 Relation to Company. Purchaser is presently an officer, director, or other employee of, or consultant to the Company, and in such capacity has become personally familiar with the business, affairs, financial condition, and results of operations of the Company. 13.4 Access to Information. Purchaser has had the opportunity to ask questions of, and to receive answers from, appropriate executive officers of the Company with respect to the terms and conditions of the transaction contemplated hereby and with respect to the business, affairs, financial condition, and results of operations of the Company. Purchaser has had access to such financial and other information as is necessary in order for Purchaser to make a fully-informed decision as to investment in the Company by way of purchase of the ISO Shares, and has had the opportunity to obtain any additional information necessary to verify any of such information to which Purchaser has had access. 13.5 Speculative Investment. Purchaser's investment in the Company represented by the ISO Shares is highly speculative in nature and is subject to a high degree of risk of loss in whole or in part. The amount of such investment is within Purchaser's risk capital means and is not so great in relation to Purchaser's total financial resources as would jeopardize the personal financial needs of Purchaser or Purchaser's family in the event such investment were lost in whole or in part. 13.6 Registration. Purchaser must bear the economic risk of investment for an indefinite period of time because the sale to Purchaser of the ISO Shares has not been registered under the Securities Act and the ISO Shares cannot be transferred by Purchaser unless such transfer is registered under the Securities Act or an exemption from such registration is available. The Company has made no agreements, covenants, or undertakings whatsoever to register the transfer of any of the ISO Shares under the Securities Act. The Company has made no Representations, warranties, or covenants whatsoever as to whether any exemption from the -5- 18 Securities Act, including without limitation any exemption for limited sales in routine brokers' transactions pursuant to Rule 144, will be available; if the exemption under Rule 144 is available at all, it may not be available until at least two years after payment of cash for the ISO Shares and not then unless: (i) a public trading market then exists in the Company's common stock; (ii) adequate information as to the Company's financial and other affairs and operations is then available to the public; and (iii) all other terms and conditions of Rule 144 have been satisfied. Purchaser understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to the reporting obligations of the Securities Exchange Act of 1934 (typically 90 lays after the effective date of an initial public offering). 13.7 Public Trading. None of the Company's securities is presently publicly traded, and the Company has made no representation, covenant, or agreement as to whether there will be a public market for any of its securities. 13.8 Tax Advice. The Company has made no warranties or representations to Purchaser with respect to the income tax consequences of the transactions contemplated by the agreement pursuant to which the ISO Shares will be purchased and Purchaser is in no manner relying on the Company or its representatives for an assessment of such tax consequences. 14. Assignment; Binding Effect. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, legal representatives, and successors of the parties hereto; provided, however, that Optionee may not assign any of Optionee's rights under this Agreement. 15. Damages. Optionee shall be liable to the Company for all costs and damages, including incidental and consequential damages, resulting from a disposition of ISO Shares which is not in conformity with the provisions of this Agreement. 16. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California excluding those laws that direct the application of the laws of another jurisdiction. 17. Notices. All notices and other communications under this Agreement shall be in writing. Unless and until the Optionee is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: Bestal Corporation 6780 Sierra Court, Suite I Dublin, California 94568 Attention: President Unless and until the Company is notified in writing to the contrary, all notices, communications, and documents intended for the Optionee and related to this Agreement, if not delivered by hand, shall be mailed to Optionee's last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; documents shall be mailed by 6 19 registered mail, return receipt requested, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and two business days after mailing, if by mail. 7 20 IN WITNESS WHEREOF, the parties have executed this Incentive Stock Option Agreement as of the Effective Date. BESTAL CORPORATION By ---------------------------------- Title ---------------------------------- The Optionee hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. ------------------------------------- Optionee Dated: -------------------------------- Optionee's spouse indicates by the execution of this Incentive Stock Option Agreement his or her consent to be bound by the terms thereof as to his or her interests, whether as community property or otherwise, if any, in the option granted hereunder, and in any ISO Shares purchased pursuant to this Agreement. ------------------------------------ Optionee's Spouse 8 21 BESTAL CORPORATION 1993 STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT (A) Name of Optionee:_____________________ (B) Grant Date:___________________________ (C) Number of Shares:_____________________ (D) Exercise Price:_______________________ (E) Vesting Base Date:____________________ (F) Effective Date:_______________________ THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement"), is made and entered into as of the date set forth in Item F above between Bestal Corporation, a California corporation (the "Company"), and the person named in Item A above ("Optionee"). THE PARTIES AGREE AS FOLLOWS: 1. Grant of Option; Effective Date; Vesting Base Date. 1.1 Grant. The Company hereby grants to Optionee pursuant to the Company's 1993 Stock Option Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit 1, a nonqualified stock option (the "NQO") to purchase all or any part of an aggregate of the number of shares (the "NQO Shares") of the Company's Common Stock (the "Common Stock") listed in Item C above on the terms and conditions set forth herein and in the Plan, the terms and conditions of the Plan being hereby incorporated into this Agreement by reference. 1.2 Vesting Base Date. The parties hereby establish the date set forth in Item E above as the Vesting Base Date (as defined in Section 6.1.3 of the Plan). 2. Exercise Price. The exercise price for purchase of each share of Common Stock covered by this NQO shall be the price set forth in Item D above. 3. Term. Unless otherwise specified on Exhibit 3 attached hereto, if any (the absence of such exhibit indicating that no such exhibit was intended), this NQO shall expire as provided in Section 6.1.12 of the Plan. 4. Adjustment of NQOs. The Company shall adjust the number and kind of shares and the exercise price thereof in certain circumstances in accordance with the provisions of Section 6.1.1 of the Plan. 5. Exercise of Options. 5.1 Vesting; Time of Exercise. This NQO shall be exercisable according to the Schedule set forth on Exhibit 5.1 attached hereto. 22 5.2 Exercise After Termination of Status as an Employee, Director or Consultant. In the event of termination of Optionee's continuous status as an employee, director or consultant, this NQO may be exercised only in accordance with the provisions of Section 6.1.7 of the Plan. 5.3 Manner of Exercise. Optionee may exercise this NQO, or any portion of this NQO, by giving written notice to the Company at its principal executive office, to the attention of the officer of the Company designated by the Plan Administrator, accompanied by a copy of the 1993 Stock Option Plan Stock Purchase Agreement in substantially the form attached hereto as Exhibit 5.3 executed by Optionee (or at the option of the Company such other form of stock purchase agreement as shall then be acceptable to the Company), payment of the exercise price and payment of any applicable withholding or employment taxes. The date the Company receives written notice of an exercise hereunder accompanied by payment will be considered as the date this NQO was exercised. Promptly after receipt of written notice of exercise of the NQO, the Company shall, without stock issue or transfer taxes to the Optionee or other person entitled to exercise, deliver to the Optionee or other person a certificate or certificates for the requisite number of NQO Shares. An Optionee or transferee of an Optionee shall not have any privileges as a shareholder with respect to any NQO Shares covered by the option until the date of issuance of a stock certificate. 5.4 Payment. Except as provided in Exhibit 5.4 attached hereto, if any (the absence of such exhibit indicating that no exhibit was intended), payment in full, in cash, shall be made for all NQO Shares purchased at the time written notice of exercise of the NQO is given to the Company, and proceeds of any payment shall constitute general funds of the Company. 6. Nonassignability of NQO. This NQO is not assignable or transferable by Optionee except by will or by the laws of descent and distribution. During the life of Optionee, the NQO is exercisable only by the Optionee. Any attempt to assign, pledge, transfer, hypothecate or otherwise dispose of this NQO in a manner not herein permitted, and any levy of execution, attachment, or similar process on this NQO, shall be null and void. 7. Company's Right of First Refusal. 7.1 Right of First Refusal. In the event that the Optionee proposes to sell, pledge, or otherwise transfer any NQO Shares or any interest in such shares to a bona-fide third party offeror, the Company shall have a right of first refusal (the "Right of First Refusal") with respect to such NQO Shares. If Optionee desires to transfer NQO Shares, Optionee shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of NQO Shares proposed to be transferred, the proposed transfer price, and the name and address of the bona-fide third party offeror. The Transfer Notice shall be signed both by Optionee and by the bona-fide third party offeror and must constitute a binding commitment of both such parties for the transfer of such NQO Shares. The Company may elect to purchase all, but not less than all, of the NQO Shares subject to the Transfer Notice by delivery of a notice of exercise of the Company's Right of First Refusal within 30 days after the -2- 23 date the Transfer Notice is delivered to the Company. The purchase price paid by the Company shall be the price per share equal to the proposed per share transfer price, and shall be paid to the Optionee within 60 days after the date the Transfer Notice is received by the Company, unless a longer period for payment was offered by the bona-fide third party offeror, in which case the Company shall pay the purchase price within such longer period. The Company's rights under this Section 7.1 shall be freely assignable, in whole or in part. 7.2 Transfer of NQO Shares. If the Company fails to exercise the Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company, the Optionee may, not later than 75 days following delivery to the Company of the Transfer Notice, conclude a transfer of the NQO Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in Section 7.1 of this Agreement. If the Company exercises the Right of First Refusal, the parties shall consummate the sale of NQO Shares on the terms, other than price, as applicable under Section 7.1, set forth in the Transfer Notice; provided, however, in the event the Transfer Notice provides for payment for the NQO Shares other than in cash, the Company shall have the option of paying for the NQO Shares by the discounted cash equivalent of the consideration described in the Transfer Notice. 7.3 Binding Effect. The Right of First Refusal shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any transferee of NQO Shares other than a transferee acquiring NQO Shares in a transaction where the Company failed to exercise the Right of First Refusal (a "Free Transferee") or a transferee of a Free Transferee. 7.4 Termination of Company's Right of First Refusal. Notwithstanding anything in this Section 7, the Company shall have no Right of First Refusal, and Optionee shall have no obligation to comply with the procedures in Sections 7.1 through 7.3 after the earlier of (i) the closing of the Company's initial registered public offering of Common Stock to the public generally, or (ii) the date ten years after the Effective Date. 8. Market Standoff. Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of the securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), Optionee shall not sell or otherwise transfer the NQO Shares for a period of 180 days following the effective date of a Registration Statement filed under the Securities Act; provided, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Securities Act which include securities to be sold on behalf of the Company in an underwritten offering under the Securities Act. The Company may impose stop-transfer instructions with respect to the NQO Shares subject to the foregoing restrictions until the end of each such 180-day period. -3- 24 9. Restriction on Issuance of Shares. 9.1 Legality of Issuance. The Company shall not be obligated to sell or issue any NQO Shares pursuant to this Agreement if such sale or issuance, in the opinion of the Company and the Company's counsel, might constitute a violation by the Company of any provision of law, including without limitation the provisions of the Securities Act. 9.2 Registration or Qualification of Securities. The Company may, but shall not be required to, register or qualify the sale of this NQO or any NQO Shares under the Securities Act or any other applicable law. The Company shall not be obligated to take any affirmative action in order to cause the grant or exercise of this option or the issuance or sale of any NQO Shares pursuant thereto to comply with any law. 10. Restriction on Transfer. Regardless whether the sale of the NQO Shares has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of NQO Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and the Company's counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law. 11. Stock Certificate Restrictive Legends. Stock certificates evidencing NQO Shares may bear such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following legends: "The offering and sale of the securities represented hereby have not been registered under the Securities Act of 1933, as amended (the "Act"). Any transfer of such securities will be invalid unless a registration statement under the Act is in effect as to such transfer or in the opinion of counsel for the Company such registration is unnecessary in order for such transfer to comply with the Act." "The securities represented hereby are subject to a right of first refusal by the Company pursuant to the provisions of the Company's 1993 Stock Option Plan and a purchase agreement relating to such securities, and may not be sold or otherwise transferred except in compliance with the terms of such right of first refusal." "The securities represented hereby are subject to restrictions on transfer for a period of 180 days following the effective date of a registration statement under the Securities Act of 1933, as amended, for an offering of the Company's securities as more fully provided in an agreement between the Company and the original purchaser relating to the option to purchase such securities." 12. Disqualifying Dispositions. If stock acquired by exercise of this ISO is disposed of within two years after the Effective Date or within one year after date of such exercise (as determined under Section 5.3 of this Agreement), the Optionee immediately prior to the -4- 25 disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. 13. Representations, Warranties, Covenants, and Acknowledgments of Optionee Upon Exercise of NQO. Optionee hereby agrees that in the event that the Company and the Company's counsel deem it necessary or advisable in the exercise of their discretion, the issuance of NQO Shares may be conditioned upon certain representations, warranties, and acknowledgments by the person exercising the NQO (the "Purchaser"), including, without limitation, those set forth in Sections 13.1 through 13.8 inclusive. 13.1 Investment. Purchaser is acquiring the NQO Shares for Purchaser's own account, and not for the account of any other person. Purchaser is acquiring the NQO Shares for investment and not with a view to distribution or resale thereof except in compliance with applicable laws regulating securities. 13.2 Business Experience. Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company evidenced by purchase of the NQO Shares. 13.3 Relation to Company. Purchaser is presently an officer, director, or other employee of, or consultant to the Company, and in such capacity has become personally familiar with the business, affairs, financial condition and results of operations of the Company. 13.4 Access to Information. Purchaser has had the opportunity to ask questions of, and to receive answers from, appropriate executive officers of the Company with respect to the terms and conditions of the transaction contemplated hereby, and with respect to the business, affairs, financial condition, and results of operations of the Company. Purchaser has had access to such financial and other information as is necessary in order for Purchaser to make a fully-informed decision as to investment in the Company by way of purchase of the NQO Shares, and has had the opportunity to obtain any additional information necessary to verify any of such information to which Purchaser has had access. 13.5 Speculative Investment. Purchaser's investment in the Company represented by the NQO Shares is highly speculative in nature and is subject to a high degree of risk of loss in whole or in part. The amount of such investment is within Purchaser's risk capital means and is not so great in relation to Purchaser's total financial resources as would jeopardize the personal financial needs of Purchaser or Purchaser's family in the event such investment were lost in whole or in part. 13.6 Registration. Purchaser must bear the economic risk of investment for an indefinite period of time because the sale to Purchaser of the NQO Shares has not been registered under the Securities Act and the NQO Shares cannot be transferred by Purchaser unless such transfer is registered under the Securities Act or an exemption from such registration is available. The Company has made no agreements, covenants, or undertakings whatsoever to register the transfer of any of the NQO Shares under the Securities Act. The Company has made no representations, warranties, or covenants whatsoever as to whether any exemption from the -5- 26 Securities Act, including without limitation any exemption for limited sales in routine brokers' transactions pursuant to Rule 144, will be available; if the exemption under Rule 144 is available at all, it may not be available until at least two years after payment of cash for the NQO Shares and not then unless: (i) a public trading market then exists in the Company's common stock; (ii) adequate information as to the Company's financial and other affairs and operations is then available to the public; and (iii) all other terms and conditions of Rule 144 have been satisfied. Purchaser understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to the reporting obligations of the Securities Exchange Act of 1934 (typically 90 days after the effective date of an initial public offering). 13.7 Public Trading. None of the Company's securities is presently publicly traded, and the Company has made no representation, covenant or agreement as to whether there will be a public market for any of its securities. 13.8 Tax Advice. The Company has made no warranties or representations to Purchaser with respect to the income tax consequences of the transactions contemplated by the agreement pursuant to which the NQO Shares will be purchased and Purchaser is in no manner relying on the Company or its representatives for an assessment of such tax consequences. 14. Assignment; Binding Effect. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, legal representatives, and successors of the parties hereto; provided, however, that Optionee may not assign any of Optionee's rights under this Agreement. 15. Damages. Optionee shall be liable to the Company for all costs and damages, including incidental and consequential damages, resulting from a disposition of NQO Shares which is not in conformity with the provisions of this Agreement. 16. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California excluding those laws that direct the application of the laws of another jurisdiction. 17. Notices. All notices and other communications under this Agreement shall be in writing. Unless and until the Optionee is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: Bestal Corporation 6780 Sierra Court, Suite I Dublin, California 94568 Attention: President Unless and until the Company is notified in writing to the contrary, all notices, communications and documents intended for the Optionee and related to this Agreement, if not delivered by hand, shall be mailed to Optionee's last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; -6- 27 documents shall be mailed by registered mail, return receipt requested, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and two business days after mailing, if by mail. IN WITNESS WHEREOF, the parties have executed this Nonqualified Stock Option Agreement as of the Effective Date. BESTAL CORPORATION By ------------------------------- Title --------------------------- The Optionee hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. ---------------------------------- Optionee Dated: --------------------------- Optionee's spouse indicates by the execution of this Nonqualified Stock Option Agreement his or her consent to be bound by the terms thereof as to his or her interests, whether as community property or otherwise, if any, in the option granted hereunder, and in any NQO Shares purchased pursuant to this Agreement. ---------------------------------- Optionee's Spouse -7- 28 AMERICAN XTAL TECHNOLOGY 1993 STOCK OPTION PLAN STOCK PURCHASE AGREEMENT (A) Name of Purchaser:________________________ (B) Number of Plan Shares:____________________ (C) Exercise Price:___________________________ (D) Purchase Price:___________________________ (E) Date of Option Agreement:_________________ (F) Effective Date:___________________________ THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the date set forth in Item F above (the "Effective Date") between AMERICAN XTAL TECHNOLOGY, a California corporation (the "Company"), and the person named in Item A above (the "Purchaser"). THE PARTIES AGREE AS FOLLOWS: 1. Purchase of Shares. Pursuant to the Company's 1993 Employee Stock Option Plan (the "Plan") and to a stock option agreement ("Option Agreement") between the parties dated the date set forth in Item E above, the Company hereby sells to Purchaser, and Purchaser hereby buys from the Company, that number of shares (the "Plan Shares") of the Company's Common Stock ("Common Stock") set forth in Item B above on the terms and conditions set forth herein and in the Plan and the Option Agreement, the terms and conditions of the Plan and the Option Agreement being hereby incorporated into this Agreement by reference. 2. Purchase Price. Purchaser shall purchase the Plan Shares from the Company, and the Company shall sell the Plan Shares to Purchaser, at a price per share as set forth in Item C above (the "Exercise Price"), for a total purchase price as set forth in Item D above (the "Purchase Price"). 3. Manner of Payment. Purchaser shall pay the Purchase Price of the Plan Shares in cash (or in the manner set forth in Exhibit 5.4 to the Option Agreement evidencing the option, the absence of any Exhibit 5.4 indicating that no such exhibit was intended). 4. Company's Right of First Refusal Respecting Plan Shares. 4.1 Right of First Refusal. In the event that Purchaser proposes to sell, pledge, or otherwise transfer any Plan Shares or any interest in such shares to a bona-fide third party offeror, the Company shall have a right of first refusal (the "Right of First Refusal") with respect to such Plan Shares. If Purchaser desires to transfer Plan Shares, Purchaser shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of Plan Shares proposed to be transferred, the proposed transfer price, and the name and address of the bona-fide third party offeror. The Transfer Notice shall be signed both by Purchaser and by the bona-fide third party offeror and must constitute a binding commitment of both such parties for the transfer of such Plan Shares. The Company may elect to purchase the Plan Shares subject to the Transfer Notice by delivery of a notice of exercise of the -1- 29 Company's Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company. The purchase price paid by the Company shall be the price per share equal to the proposed per share transfer price, and shall be paid to the Purchaser within 60 days after the date the Transfer Notice is received by the Company, unless a longer period for payment was offered by the bona-fide third party offeror, in which case the Company shall pay the purchase price within such longer period. The Company's rights under this Section 4.1 shall be freely assignable, in whole or in part. 4.2 Transfer of Plan Shares. If the Company fails to exercise the Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company, Purchaser may, not later than 75 days following delivery to the Company of the Transfer Notice, conclude a transfer of the Plan Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by Purchaser, shall again be subject to the Company's Right of First Refusal and shall require compliance by Purchaser with the procedure described in Section 4.1 of this Agreement. If the Company exercises the Right of First Refusal, the parties shall consummate the sale of Plan Shares on the terms, other than price, as applicable under Section 4.1, set forth in the Transfer Notice, subject; provided, however, in the event the Transfer Notice provides for payment for the Plan Shares other than in cash, the Company shall have the option of paying for the Plan Shares by the discounted cash equivalent of the consideration described in the Transfer Notice. If, at the time of exercise of the right of first refusal, any notes are outstanding which represent any portion of the Purchase Price of the Plan Shares, the repurchase price shall be paid first by cancellation of any obligation for accrued but unpaid interest under such notes, next by cancellation of principal under such notes, and finally by payment of cash. 4.3 Binding Effect of Right of First Refusal. The Company's Right of First Refusal shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any transferee of Plan Shares other than a transferee acquiring Plan Shares in a transaction where the Company failed to exercise the Right of First Refusal (a "Free Transferee") or a transferee of a Free Transferee. 4.4 Termination of Company's Right of First Refusal. Notwithstanding anything in this Section 4, the Company shall have no Right of First Refusal, and Purchaser shall have no obligation to comply with the procedures in Sections 4.1 through 4.3, after the earlier of (a) the closing of the Company's initial registered public offering to the public generally, or (b) the date ten (10) years after the Effective Date (as defined in the Option Agreement). 5. Stock Certificate Restrictive Legends. Stock certificates evidencing Plan Shares may bear such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including without limitation, the following legends: "The offering and sale of the securities represented hereby have not been registered under the Securities Act of 1933 (the "Act"). Any transfer of such securities will be invalid unless a registration statement under the Act is in effect as to such transfer or in the opinion of counsel for the Company such registration is unnecessary in order for such transfer to comply with the Act." -2- 30 "The securities represented hereby are subject to a right for first refusal by the Company pursuant to the provisions of the Company's 1993 Stock Option Plan and a purchaser agreement relating to such securities, and may not be sold or otherwise transferred except in compliance with the terms of such right of first refusal." "The securities represented hereby are subject to restrictions on transfer for a period of 180 days following the effective date of a registration statement under the Securities Act of 1933, as amended, for an offering of the Company's securities as more fully provided in an agreement between the Company and the original purchaser relating to the option to purchase such securities." 6. Representations, Warranties, Covenants, and Acknowledgments of Purchaser. Purchaser hereby represents, warrants, covenants, acknowledges, and agrees that: 6.1 Investment. Purchaser is acquiring the Plan Shares for Purchaser's own account, and not for the account of any other person. Purchaser is acquiring the Plan Shares for investment and not with a view to distribution or resale thereof except in compliance with applicable laws regulating securities. 6.2 Business Experience. Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company evidenced by the purchase of the Plan Shares. 6.3 Relation of Company. Purchaser is presently an officer, director, or employee of, or consultant to, the Company and in such capacity has become personally familiar with the business, affairs, financial condition, and results of operations of the Company. 6.4 Access to Information. Purchaser has had the opportunity to ask questions of, and to receive answers from, appropriate executive officers of the Company with respect to the terms and conditions of the transactions contemplated hereby and with respect to the business, affairs, financial condition, and results of operations of the Company. Purchaser has had access to such financial and other information as is necessary in order for Purchaser to make a fully-informed decision as to investment in the Company by way of purchase of the Plan Shares, and has had the opportunity to obtain any additional information necessary to verify any of such information to which Purchaser has had access. 6.5 Speculative Investment. Purchaser's investment in the Company represented by the Plan Shares is highly speculative in nature and is subject to a high degree of risk of loss in whole or in part. The amount of such investment is within Purchaser's risk capital means and is not so great in relation to Purchaser's total financial resources as would jeopardize the personal financial needs of Purchaser or Purchaser's family in the event such investment were lost in whole or in part. 6.6 Registration. Purchaser must bear the economic risk of investment for an indefinite period of time because the sale to Purchaser of the Plan Shares has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and the Plan Shares cannot be transferred by Purchaser unless such transfer is registered under the Securities Act or an exemption from such registration is available. The Company has made no agreements, -3- 31 covenants or undertakings whatsoever to register the transfer of any of the Shares under the Securities Act. The Company has made no representations, warranties, or covenants whatsoever as to whether any exemption from the Securities Act, including without limitation any exemption for limited sales in routine brokers' transactions pursuant to Rule 144, will be available; if the exemption under Rule 144 is available at all, it will not be available until at least two years after payment of cash for the Plan Shares and not then unless: (a) a public trading market then exists in the Company's Common Stock; (b) adequate information as to the Company's financial and other affairs and operations is then available to the public; and (c) all other terms and conditions of Rule 144 have been satisfied. Purchaser understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to the reporting obligations of the Securities Exchange Act of 1934 (typically 90 days after the effective date of an initial public offering). 6.7 Public Trading. None of the Company's securities is presently publicly traded, and the Company has made no representation, covenant, or agreement as to whether there will be a public market for any of its securities. 6.8 Tax Advice. The Company has made no warranties or representations to Purchaser with respect to the income tax consequences of the transactions contemplated by this Agreement and Purchaser is in no manner relying on the Company or its representatives for an assessment of such tax consequences. 7. Binding Effect. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto. 8. Taxes. Purchaser shall execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Election Pursuant to Section 83(b) of the Internal Revenue Code (the "Acknowledgment") attached hereto as Exhibit 8A. Purchaser shall execute and submit with the Acknowledgment a copy of the Election Pursuant to Section 83(b) of the Code, attached hereto as Exhibit 8B, if Purchaser has indicated in the Acknowledgment his decision to make such an election. Purchaser should consult his tax advisor to determine if there is a comparable election to file in the state of his residence and whether such filing is desirable under the circumstances. The Company may withhold from Purchaser's wages, or require Purchaser to pay to the Company, any applicable withholding or employment taxes resulting from the purchase of Plan Shares hereunder or from the lapse of any restrictions imposed on the Plan Shares. . 9. Disqualifying Dispositions of ISO Stock. If stock acquired by exercise of an ISO (as defined in Section 1 of the Plan) is disposed of within two years after the Effective Date (as defined in the Option Agreement) or within one year after such exercise, Purchaser immediately prior to the disposition shall promptly notify the Company in writing of the date and terms of the disposition and shall provide such other information regarding the disposition as the Company may reasonably require. 10. Damages. Purchaser shall be liable to the Company for all costs and damages, including incidental and consequential damages, resulting from a disposition of Plan Shares which is not in conformity with the provisions of this Agreement. -4- 32 11. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California excluding those laws that direct the application of the laws of another jurisdiction. 12. Notices. All notices and other communications under this Agreement shall be in writing. Unless and until Purchaser is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: American Xtal Technology 4311 Solar Way Fremont, CA 94538 Unless and until the Company is notified in writing to the contrary, all notices, communications, and documents intended for Purchaser and related to this Agreement, if not delivered by hand, shall be mailed to Purchaser's last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; documents shall be mailed by registered mail, return receipt requested, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and two business days after mailing, if by mail. IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. AMERICAN XTAL TECHNOLOGY By ---------------------------------- Title --------------------------------- Purchaser hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. Purchaser ---------------------------- Purchaser's spouse indicates by the execution of this Agreement his or her consent to be bound by the terms herein as to his or her interests, whether as community property or otherwise, if any, in the Plan Shares hereby purchased. Purchaser's Spouse -------------------------- -5- 33 Exhibits - -------- Exhibit 1A Employee Stock Option Plan Exhibit 1B Option Agreement Exhibit 8A Acknowledgment Regarding Election Pursuant to Section 83(b) Exhibit 8B Section 83(b) Election 34 ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE The undersigned (which term includes the undersigned's spouse), a purchaser of ________ shares of Common Stock of AMERICAN XTAL TECHNOLOGY (the "Company"), pursuant to an option granted under the Company's 1993 Stock Option Plan (the "Plan"), hereby states as follows: 1. The undersigned acknowledges receipt of a copy of a Stock Purchase Agreement by and between the undersigned and the Company (the "Agreement") effecting the purchase of shares, which the undersigned has carefully reviewed. 2. The undersigned either [check as applicable]: _____ (a) has consulted, and has been fully advised by, the undersigned's own tax advisor, _______________________________, whose business address is _________________ ____________________________, regarding the income tax consequences of purchasing shares under the Agreement, and particularly regarding the advisability of making an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and pursuant to the corresponding provisions, if any, of applicable state laws (including without limitation Section 17122.7(b) of the California Revenue and Taxation Code, as amended (the "Rev. & Tax. Code") if applicable); or _____ (b) has knowingly chosen not to consult a tax advisor. 3. The undersigned hereby avers that, with respect to the purchase of shares, the undersigned [check as applicable]: _____ (a) will make an election under Section 83(b) solely for purposes of Section 56(b)(3) of the Code (and analogous state law, if any) relating to the Alternative Minimum Tax, and a "protective" election under Section 83(b) (and analogous state law, if any) for all other income tax purposes; _____ (b) will not make an election under Section 83(b) of the Code (and analogous state law, if any) for any purpose. 4. With respect to any election under Section 83(b) of the Code, "protective" or otherwise, indicated in paragraph (3), above, the undersigned herewith submits an executed copy of the appropriate form of election and acknowledges that copies thereof have been duly and timely filed with the appropriate offices of the Internal Revenue Service and applicable state taxing authorities and that the undersigned will attach a copy of the form of election to the Exhibit 8A 35 undersigned's federal income tax return for the year of the purchase and, if required, to the undersigned's state income tax return(s) for the same period. 5. Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's purchase of shares under the Agreement or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. Date: ----------------- ----------------------------- (Purchaser) Date: ----------------- ----------------------------- (Spouse) -2- 36 ELECTION PURSUANT TO SECTION 83(B) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY TRANSFERRED IN CONNECTION WITH THE PERFORMANCE OF SERVICES -------------------------------------- The undersigned hereby makes the election, modified to the extent described in Paragraph 9 below, authorized by Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, with respect to shares of Common Stock of AMERICAN XTAL TECHNOLOGY (the "Company") described below acquired by the undersigned on the date shown below. To the extent permitted, this election shall also serve as an election under analogous state law. As required by the Treasury Regulations under Section 83(b), the undersigned supplies herewith the following information: 1. The undersigned's name and address are: Name: -------------------------------------- Address: ----------------------------------- ----------------------------------- 2. The undersigned has taxpayer identification number ______- _____- _____ 3. The property with respect to which this protective election is made consists of _________ shares of Common Stock, no par value, of the Company. 4. The date on which the above-described property was transferred to the undersigned was ______________, 19____. 5. As of the date of transfer, the property was subject to the following substantial risk of forfeiture: ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 6. The fair market value of the property at the time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) was $______ per share. 7. The amount paid for the property by the undersigned was $______ per share. Exhibit 8B 37 8. A copy of this election has been furnished to the Company, and a copy of this election will be attached to the undersigned's federal income tax return for the year to which this election relates. 9. If the property was acquired by the exercise of an Incentive Stock Option within the meaning of Section 422 of the Code then, except in the event of a "disqualifying disposition" of the property, this election is protective only and does not constitute an agreement to report or include as income subject to federal income tax amounts which, but for this election, are not so reportable or includible. Date: --------------- ----------------------------- (Purchaser) -2- EX-10.3 9 1997 STOCK OPTION PLAN AND FORMS OF AGREEMENTS 1 EXHIBIT 10.3 AMERICAN XTAL TECHNOLOGY 1997 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The American Xtal Technology 1997 Stock Option Plan (the "PLAN") is hereby established effective as of July 26, 1997 (the "EFFECTIVE DATE"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of the Participating Company Group and its shareholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from the Effective Date. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means American Xtal Technology, a California corporation, or any successor corporation thereto. (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. 1 2 (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (g) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company group because of the sickness or injury of the Optionee. (h) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (k) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (l) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. 2 3 (n) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (o) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. (p) "OPTIONEE" means a person who has been granted one or more Options. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (u) "SECTION 162(M)" means Section 162(m) of the Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66). (v) "SECURITIES ACT" means the Securities Act of 1933, as amended. (w) "SERVICE" means an Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, an Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Optionee's Option Agreement. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. 3 4 (x) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. (z) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company within the meaning of Section 422(b)(6) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.3 POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, 4 5 including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of Service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel, renew, reprice or otherwise adjust the exercise price of, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of Service with the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 3.4 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be __________________________ (__________) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof. If an outstanding Option for any reason expires or is terminated or canceled or shares of Stock 5 6 acquired, subject to repurchase, upon the exercise of an Option are repurchased by the Company, the shares of Stock allocable to the unexercised portion of such Option, or such repurchased shares of Stock, shall again be available for issuance under the Plan. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "employees," "consultants" and "directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of an employment or other service relationship with the Participating Company Group. Eligible persons may be granted more than one (1) Option. 5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences service with a Participating Company, with an exercise price determined as of such date in accordance with Section 6.1. 5.3 FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is 6 7 granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1 EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2 EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Incentive Stock Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option and, (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences Service with a Participating Company. Subject to the foregoing, unless otherwise specified by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the Effective Date of grant of the Option. 7 8 6.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved by the Company, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company. Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4 TAX WITHHOLDING. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to 8 9 accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating Company Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, the Company shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating Company Group arising in connection with the Option or the shares acquired upon the exercise thereof. The Company shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating Company Group's tax withholding obligations have been satisfied by the Optionee. 6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a right of first refusal, one or more repurchase options, or other conditions and restrictions as determined by the Board in its sole discretion at the time the Option is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Optionee shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions. 6.6 EFFECT OF TERMINATION OF SERVICE. (a) OPTION EXERCISABILITY. Subject to earlier termination of the Option as otherwise provided herein, an Option shall be exercisable after an Optionee's termination of Service as follows: (i) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the date of expiration of the Option's term as set forth in the Option Agreement evidencing such Option (the "option expiration date"). (ii) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of six (6) months (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option 9 10 Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of Service. (iii) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within one (1) month (or such longer or shorter period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of an Option within the applicable time periods set forth in Section 6.6(a) is prevented by the provisions of Section 11 below, the Option shall remain exercisable until one (1) month after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a) of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as an "incentive stock option" shall comply with and be subject to the terms and conditions set forth in the form of Incentive Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board at the time the Option is granted, an Option designated as a "nonstatutory stock option" shall comply with and be subject to the terms and conditions set forth in the form of Nonstatutory Stock Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.3 AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of any of the standard forms of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement shall be in accordance with the terms of the Plan. 10 11 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), may either assume the Company's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired 11 12 upon exercise of an Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 9. PROVISION OF INFORMATION. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company's common shareholders. 10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 11. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 12 13 12. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company's shareholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company's shareholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 14. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum number of shares of Stock issuable thereunder as provided in Section 4.1 (the "Maximum Shares") shall be approved by the shareholders of the Company within twelve (12) months of the date of adoption thereof by the Board. Options granted prior to shareholder approval of the Plan or in excess of the Maximum Shares previously approved by the shareholders shall become exercisable no earlier than the date of shareholder approval of the Plan or such increase in the Maximum Shares, as the case may be. 13 14 IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing is the American Xtal Technology 1997 Stock Option Plan as duly adopted by the Board on July 26, 1997 and amended by the Board through ______________, 199__. ---------------------------------------- Secretary 14 15 PLAN HISTORY July 26, 1997 Board adopts Plan, with an initial reserve of 1,300,000 shares. July 26, 1997 Shareholders approve Plan, with an initial reserve of 1,300,000 shares. ___________, 1997 Board amends Plan, effective as of the Effective Date of the Company's initial registration under Section 12 of the Exchange Act, with a share reserve of ____________ shares. ___________, 1997 Shareholders approve amendment of Plan, with a share reserve of _____________ shares. 16 AMERICAN XTAL TECHNOLOGY INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ______________, 199_, by and between American Xtal Technology and _________________________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the American Xtal Technology 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means ____________________________ __, 199_. (b) "NUMBER OF OPTION SHARES" means ________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $______ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): [ ] the Date of Option Grant. [ ] __________________ __, 199_, the date the Optionee's Service commenced. 1 17 (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the 1/4 Optionee's Service has not terminated prior to such date Plus ---- For each full month of the Optionee's continuous 1/48 Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional
(f) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (g) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s). (h) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (i) "COMPANY" means American Xtal Technology, a California corporation, or any successor corporation thereto. (j) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (k) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company group because of the sickness or injury of the Optionee. (m) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating 2 18 Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Option Agreement. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (p) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (q) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (r) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (s) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (t) "SECURITIES ACT" means the Securities Act of 1933, as amended. (u) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the 3 19 Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee ceased to be an Employee (other than by reason of death or a permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) (v) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be an incentive stock option within the meaning of Section 422(b) of the Code (an "Incentive Stock Option"), but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than One Hundred Thousand Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 4 20 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price. 4.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company 5 21 of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "Cashless Exercise" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares. 4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE 6 22 OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee's Service as an Employee terminated as a result of a Disability other than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will be treated as a nonstatutory stock option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the 7 23 Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within one (1) month (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until one (1) month after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences of any such delayed exercise. 7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences of any such delayed exercise. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or 8 24 (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock 9 25 subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date of the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 10 26 12. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. 13. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 14. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 16. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 11 27 17. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 18. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. AMERICAN XTAL TECHNOLOGY By: ------------------------------------ Title: --------------------------------- Address: 4311 Solar Way Fremont, CA 94538 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. OPTIONEE Date: -------------------------------- ---------------------------------------- Optionee Address: ---------------------------------------- ---------------------------------------- 12 28 Optionee: ------------------------------ Date: ---------------------------------- INCENTIVE STOCK OPTION EXERCISE NOTICE (Registered Shares) American Xtal Technology 4311 Solar Way Fremont, CA 94538 Attention: Chief Financial Officer Ladies and Gentlemen: 1. Exercise of Option. I was granted an incentive stock option (the "Option") to purchase shares of the common stock of American Xtal Technology (the "COMPANY") on ___________________, 19___, pursuant to the Company's 1997 Stock Option Plan and pursuant to the Incentive Stock Option Agreement dated __________________, 19___ (the "OPTION Agreement"). The Grant Number of the Option is _____________. I hereby elect to exercise the Option as to a total of __________________ shares of the common stock of the Company (the "SHARES"), all of which have vested in accordance with the Option Agreement. 2. Payments. Enclosed herewith or arrangements have been made for full payment in the aggregate amount of $_____________ (representing $_______ per share) for the Shares in the manner set forth in the Option Agreement. I authorize payroll withholding and otherwise will make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any. 3. Binding Effect. I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of the Option Agreement, of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon the my heirs, executors, administrators, successors and assigns. I agree that I will promptly notify the Chief Financial Officer of the Company if I transfer any of the Shares acquired pursuant to the Option within one (1) year from the date I exercise all or part of the Option or within two (2) years of the date of grant of the Option. 1 29 My address of record is: ----------------------------------------------- ----------------------------------------------- My Social Security Number is: ------------------------ I understand that I am purchasing the Shares pursuant to the terms of my Option Agreement, which I have received and carefully read and understand. Very truly yours, ---------------------------------------- (Signature) ---------------------------------------- (Optionee's Name Printed) Receipt of the above is hereby acknowledged. AMERICAN XTAL TECHNOLOGY By: ------------------------------------ Title: --------------------------------- Dated: --------------------------------- 2 30 AMERICAN XTAL TECHNOLOGY NONSTATUTORY STOCK OPTION AGREEMENT THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of _____________ __, 199_ , by and between American Xtal Technology and (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the American Xtal Technology 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means _________________ __, 199_ . (b) "NUMBER OF OPTION SHARES" means ________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $_________ per share of Stock, as adjusted from time to ____________ time pursuant to Section 9. (d) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): [ ] the Date of Option Grant. [ ] __________________ __, 199_, the date the Optionee's Service commenced. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows: 1 31 (f) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (g) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "BOARD" also means such Committee(s).
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the 1/4 Optionee's Service has not terminated prior to such date Plus ---- For each full month of the Optionee's continuous 1/48 Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional
(h) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (i) "COMPANY" means American Xtal Technology., a California corporation, or any successor corporation thereto. (j) "CONSULTANT" means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director. (k) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating Company. (l) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company group because of the sickness or injury of the Optionee. (m) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Option Agreement. 2 32 (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (p) "INSIDER" means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (q) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (r) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (s) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation. (t) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (u) "SECURITIES ACT" means the Securities Act of 1933, as amended. (v) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the 3 33 Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. (w) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 9. (x) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 1.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the 4 34 Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares. 4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price. 4.3 PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. 4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to 5 35 make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares. 4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7 FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 6 36 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1 OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative) at any time prior to the expiration of six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of six (6) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within one (1) month after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within one (1) month (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until one (1) 7 37 month after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 8. CHANGE IN CONTROL. 8.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "Transaction") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), may either assume the Company's 8 38 rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Change in Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Change in Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Change in Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Change in Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Change in Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and 9 39 acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. LEGENDS. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. 12. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 13. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing. 10 40 15. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 16. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 17. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. AMERICAN XTAL TECHNOLOGY By: ------------------------------------ Title: --------------------------------- Address: 4311 Solar Way Fremont, California 94538 11 41 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. OPTIONEE Date: -------------------------------- ---------------------------------------- Optionee Address: ---------------------------------------- ---------------------------------------- 12 42 Optionee: ------------------------------ Date: ------------------------------ NONSTATUTORY STOCK OPTION EXERCISE NOTICE (Registered Shares) American Xtal Technology 4311 Solar Way Fremont, California 94538 Attention: Chief Financial Officer Ladies and Gentlemen: 1. Exercise of Option. I was granted a nonstatutory stock option (the "Option") to purchase shares of the common stock of American Xtal Technology (the "Company") on ___________________, 19___, pursuant to the Company's 1997 Stock Option Plan ("Plan") and pursuant to the Nonstatutory Stock Option Agreement dated __________________, 19___ (the "Option Agreement"). The Grant Number of the Option is _____________. I hereby elect to exercise the Option as to a total of __________________ shares of the common stock of the Company (the "SHARES"), all of which have vested in accordance with the Option Agreement. 2. Payments. Enclosed herewith or arrangements have been made for is full payment in the aggregate amount of $_____________ (representing $_______ per share) for the Shares in the manner set forth in the Option Agreement. I authorize payroll withholding and otherwise will make adequate provision for foreign, federal and state tax withholding obligations of the Company, if any. 3. Binding Effect. I agree that the Shares are being acquired in accordance with and subject to the terms, provisions and conditions of the Option Agreement, of which I hereby expressly assent. This Agreement shall inure to the benefit of and be binding upon the my heirs, executors, administrators, successors and assigns. My address of record is: ----------------------------------------------------- ----------------------------------------------------- My Social Security Number is: ------------------------------ 1 43 I understand that I am purchasing the Shares pursuant to the terms of my Option Agreement, which I have received and carefully read and understand. Very truly yours, ---------------------------------------- (Signature) ---------------------------------------- (Optionee's Name Printed) Receipt of the above is hereby acknowledged. AMERICAN XTAL TECHNOLOGY By: ------------------------------------ Title: --------------------------------- Dated: --------------------------------- 2 EX-10.4 10 1997 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 1997 EMPLOYEE STOCK PURCHASE PLAN OF AMERICAN XTAL TECHNOLOGY 1. PURPOSES OF THE PLAN The purposes of the 1997 Employee Stock Purchase Plan (the "Plan") of AMERICAN XTAL TECHNOLOGY, a California corporation (the "Company"), are to encourage selected employees to continue employment with the Company, to improve operations, and increase profits of the Company and to increase the interest in the Company's welfare through participation in the growth in value of the common stock of the Company (the "Common Stock"). 2. ELIGIBLE PERSONS Every person who at the date of grant of a stock purchase right ("Stock Purchase Right") is a full time employee of the Company or of any affiliate (as defined below) of the Company is eligible to receive a Stock Purchase Right under this plan. The term "Affiliate" as used in the Plan means a parent or subsidiary corporation as defined in the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The term "employee" includes an officer or director who is an employee, of the Company. 3. STOCK SUBJECT TO THIS PLAN Subject to the provisions of Section 6.1 of the Plan, the total number of shares of stock which may be issued under Stock Purchase Rights granted pursuant to this Plan shall not exceed 67,000 shares of Common Stock. The shares covered by the portion of any grant under the Plan which expires unexercised shall become available again for grants under the Plan. 4. ADMINISTRATION 4.1 General. This Plan shall be administered by the Board of Directors of the Company (the "Board") or, by a committee (the "Committee") of at least two Board members to which Administration of the Plan, or of part of the Plan, is delegated (in either case, the "Administrator"). 4.2 Public Company. From and after such time as the Company registers a class of equity securities under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Committee shall consist of Board members who are "Non-Employee Directors" as defined under Rule 16b-3 promulgated by the Securities and Exchange Commission ("Rule 16b-3"), or any successor rule thereto. 4.3 Authority of Administrator. Subject to the other provisions of this Plan, the Administrator shall have the authority, in its discretion: (i) to grant Stock Purchase Rights; (ii) to determine the fair market value of the Common Stock subject to Stock Purchase Rights; (iii) to determine the exercise price of Stock Purchase Rights granted; (iv) to determine the person to whom, and the time or times at which, Stock Purchase Rights shall be granted, and the number of shares subject to each Stock Purchase Right (v) to interpret this Plan; (vi) to prescribe, amend and 2 rescind rules and regulations relating to this plan; (vii) to determine the terms and provisions of each Stock Purchase Right granted; (viii) with the consent of the holder, to modify or amend any Stock Purchase Right; (ix) to authorize any person to execute on behalf of the Company any instrument evidencing the grant of a Stock Purchase Right; (x) to make all other determinations deemed necessary or advisable for the administration of this Plan. The administrator (A) may delegate to one or more officers of this Company the authority to grant Stock Purchase Rights in an amount not exceed 10,000 shares of Common Stock to persons other than "executive officers" as defined in the Exchange Act and the rules and regulations thereunder, to determine the fair market value of Common Stock subject to such Stock Purchase Rights, and to determine the exercise price of such Stock Purchase Rights granted and (B) may delegate nondiscretionary administrative duties to such employees of the Company as it deems proper. 4.4 Interpretation by Administrator. All questions of interpretation, implementation, and application of this Plan shall be determined by the Administrator. Such determinations shall be final and binding on all persons. 4.5 Rule 16b-3. With respect to persons subject to Section 16 of the Exchange Act, if any, transactions under this plan are intended to comply with the applicable conditions of Rule 16b-3, or any successor rule thereto. To the extent a transaction under this Plan or action by the Administrator fails to so comply, it shall, to the extent deemed advisable by the Administrator be modified to comply with Rule 16b-3. Notwithstanding the above, it shall be the responsibility of such persons, not of the Company or the Administrator, to comply with the requirements of Section 16 of the Exchange Act; and neither the Company nor the Administrator shall be liable if this Plan or any transaction under this Plan fails to comply with the applicable conditions of Rule 16b-3 or any successor rule thereto, or if any such person incurs any liability under Section 16 of the Exchange Act. 5. GRANTING OF STOCK PURCHASE RIGHTS; STOCK PURCHASE AGREEMENT 5.1 No Stock Purchase Right shall be granted under this Plan after one year from the date of adoption of this Plan by the Board. 5.2 Each Stock Purchase Right shall be evidenced by a written Stock Purchase Agreement in a form satisfactory to the Company, setting forth the terms, conditions and restrictions relating to the offer, including the number of shares of Common Stock which such person shall be entitled to purchase. Such Stock Purchase Agreement shall be delivered to the holder at the time of the grant of the Stock Purchase Right. 5.3 The offeree shall have six months, or such other period as determined by the Administrator, from the date upon which the grant was approved to accept the offer to purchase the shares of Common Stock subject to the Stock Purchase Right. Acceptance of the offer shall be evidenced by execution of the Stock Purchase Agreement by the holder and the Company and payment of the purchase price pursuant to Section 6.5 below. -2- 3 6. TERMS AND CONDITIONS OF OPTIONS Each Stock Purchase Right granted under this Plan shall be subject to the terms and conditions set forth in this Section 6. 6.1 Changes in Capital. If the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, combination or reclassification, appropriate adjustments shall be made by the Board in (a) the number and class of shares of stock subject to this Plan and each Stock Purchase Right outstanding under this Plan and (b) the exercise price of each outstanding Stock Purchase Right; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustments. Each such adjustment shall be subject to approval by the Board in its sole discretion. 6.2 Corporate Transactions. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each holder at least 30 days prior to such proposed action. To the extent not previously exercised, all Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action. In the event of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive, or in the event of a sale of all or substantially all of the assets of the Company in which the stockholders of the Company receive securities of the acquiring entity or an affiliate thereof, all Stock Purchase Rights shall be assumed or equivalent rights shall be substituted by the successor corporation (or other entity) or a parent or subsidiary of such successor corporation (or other entity). If such successor does not agree to assume the Stock Purchase Rights or to substitute equivalent options therefor, unless the Administrator shall determine otherwise, the Stock Purchase Rights shall be fully exercisable for a period of thirty (30) days from the date notice is given under this Section 6.2 and shall terminate upon expiration of such 30-day period. 6.3 Stock Purchase Rights Grant Date. The date of grant of a Stock Purchase Right under this Plan shall be the date as of which the Administrator approves the grant. 6.4 Nonassignability of Stock Purchase Rights. No Stock Purchase Right granted under this Plan shall be assignable or otherwise transferable by the holder except by will or by the laws of descent and distribution. During the life of the holder, a Stock Purchase Right shall be exercisable only by the holder thereof. 6.5 Payment. Except as provided below, payment in full, in cash, shall be made for all stock purchased at the time of the Stock Purchase Agreement is executed by the holder and proceeds of any payment shall constitute general funds of the Company. 6.6 Termination of Employment. If for any reason other than death or disability, an optionee ceases to be employed by the Company or any of its Affiliates (such event being called a "Termination"), Stock Purchase Rights held at the date of Termination may be exercised in whole or in part at any time within one (1) month of the date of such Termination, or such other period of not less than thirty (30) days after the date of such Termination as is specified by the Administrator, but in no event after the Stock Purchase Rights expire pursuant to -3- 4 Section 5.3. If an optionee dies or becomes disabled (within the meaning of Section 22(c)(3) of the Code) while employed by the Company or an Affiliate or with the period that the Stock Purchase Rights remain exercisable after Termination, Stock Purchase Rights then held may be exercised, in whole or in part, by the holder, by the holder's personal representative or by the person to whom the Stock Purchase Right is transferred by devise or the laws of descent and distribution, at any time before the Stock Purchase Right expires pursuant to Section 5.3. For purposes of this Section 6.6, a holder's employment shall not be deemed to terminate by reason of sick leave, military leave or other leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the holder's rights to reemployment by the Company or any Affiliate is granted either contractually or by statute. 6.7 Repurchase of Stock. At the option of the Administrator, the stock to be delivered pursuant to the exercise of any Stock Purchase Rights granted to an employee under this Plan may be subject to a right of repurchase in favor of the Company with respect to any employee whose employment relationship with the Company is terminated. Such right of repurchase either: (a) shall be at the Stock Purchase Right exercise price and (i) shall lapse at the rate of at least 20% per year over five years from the date the Stock Purchase Right is granted (without regard to the date it is exercised), and must be exercised for cash or cancellation of purchase money indebtedness within 90 days after such termination of employment (or in the case of securities issued upon exercise of Stock Purchase Rights after the date of termination, within 90 days after the date of exercise); or (b) shall be at the higher of the Stock Purchase Right exercise price of the fair market value (determined as set forth in Section 6.9) of the stock being purchased on the date of termination, and must be exercised for cash or cancellation of repurchase money indebtedness within 90 days after such termination of employment (or in the case of securities issued upon exercise of Stock Purchase Rights after the date of termination, within 90 days after the date of exercise) and such right shall terminate when the Company's securities become publicly traded. Determination of the number of shares subject to any such right of repurchase shall be made as of the date the employee's employment by the Company terminates, not as of the date that any Stock Purchase Right granted to such employee is thereafter exercised. 6.8 Withholding and Employment Taxes. At the time of exercise of a Stock Purchase Right or at such other time as the amount of such obligations becomes determinable (the "Tax Date"), the holder shall remit to the Company in cash any applicable federal and state withholding and employment taxes. If authorized by the Administrator in its sole discretion after considering any tax or accounting consequences, a holder may elect to (i) tender to the Company previously owned shares of Common Stock which are acquired upon exercise of the Stock Purchase Right withheld by the Company as a result of the exercise of such Stock Purchase Right. -4- 5 Any election pursuant to clause (i) above, where the holder is tendering Common Stock issued pursuant to the exercise of a Stock Purchase Right, shall require that such shares be held at least six months prior to the Tax Date. Any securities tendered or withheld in accordance with this Section 6.8 shall be valued by the Company as of the Tax Date. 6.9 Determination of Value. For purposes of the Plan, the value of Common Stock or other securities of the Company shall be determined as follows: (a) If the stock of the Company is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System, its fair market value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the largest such exchange) for the date the values it to be determined (or if there are no sales for such date, the for the last preceding business day on which there were sales), as reported in the Wall Street Journal or similar publication. (b) If the stock of the Company is regularly quoted by a recognized securities dealer but selling prices are not reported, its fair market value shall be the mean between the high bid and low asked prices for the stock on the date the value is to be determined (or if there are no quoted prices for the date of grant, then for the last preceding business day on which there were quoted prices). (c) In the absence of an established market for the stock, the fair market value thereof shall be determined in good faith by the Administrator, with reference to the Company's net worth, prospective earning power, dividend paying capacity, and other relevant facts, including the goodwill of the Company, the economic outlook in the Company's industry and its management, and the values of stock of other corporations in the same or a similar line of business. 6.10 Exercise Price. The exercise price of a Stock Purchase Right shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than 85% of the fair market value (determined in accordance with Section 6.9) of the stock covered by the Stock Purchase Right at the time the Stock Purchase is granted except that the exercise price of any Stock Purchase Right granted to a person who owns, directly or by attribution, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Affiliate, shall in no event be less than 110% of such fair market value. 7. MANNER OF EXERCISE 7.1 A holder wishing to exercise a Stock Purchase Right shall deliver the executed Stock Purchase Agreement to the Company at is principal executive office, to the attention of the officer of the Company designated by the Administrator, accompanied by payment of the exercise price as provided in Section 6.6. The date the Company receives the executed -5- 6 Stock Purchase Agreement for exercise hereunder accompanied by payment of the exercise price will be considered as the date such Stock Purchase Right was exercised. 7.2 Promptly after receipt of a Stock Purchase Agreement accompanied by payment, the Company shall, without stock issue or transfer taxes to the holder or other person entitled to exercise the Stock Purchase Right, deliver to the holder or such other person a certificate or certificates for the requisite number of shares of stock. A holder or permitted transferee of a holder shall not have any privileges as a stockholder with respect to any shares of stock covered by the Stock Purchase Right until the date of issuance (as evidenced by the appropriate entry on the books of the Company or a duly authorized transfer agent) of such shares. 8. EMPLOYMENT OR CONSULTING RELATIONSHIP Nothing in this Plan or any Stock Purchase Right granted thereunder shall interfere with or limit in any way the right of the Company or any of its Affiliates to terminate any holder's employment at any time, nor confer upon any holder any right to continue in the employ of the Company of any of its Affiliates. 9. FINANCIAL INFORMATION The Company shall provide to each holder of Common Stock acquired upon exercise of Stock Purchase Rights granted under the Plan for so long as such person is a holder of such Common Stock, annual financial statements of the Company as prepared either by the Company or independent certified public accountants of the Company. Such financial statements shall include, at a minimum, a balance sheet and an income statement, and shall be delivered as soon as practicable following the end of the Company's fiscal year. 10. CONDITIONS UPON ISSUANCE OF SHARES Shares of Common Stock shall not be issued pursuant to the exercise of a Stock Purchase Right unless the exercise of such Stock Purchase Right and the issuance and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended (the "Securities Act"). 11. NONEXCLUSIVITY OF THE PLAN The adoption of the Plan shall not be construed as creating any limitations on the power of the Company to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options or rights other than under the Plan. 12. MARKET STANDOFF Each holder, if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the company under the Securities Act shall not sell or otherwise transfer any shares of Common Stock acquired upon exercise of Stock Purchase Rights during the 120-day period following the effective date of -6- 7 a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall apply only to the first two registration statements of the Company to become effective under the Securities Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restriction until the end of such 120-day period. In addition, any certificate representing shares of Common Stock acquired upon exercise of a Stock Purchase Right shall bear the following legend: "The securities represented hereby are subject to restrictions or transfer for a period of 120 days following the effective date of a registration statement under the Securities Act of 1933 for an offering of the Company's securities as more fully provided in an agreement between the Company and the original purchaser of such securities." 13. AMENDMENTS TO PLAN The Board may at any time amend, alter, suspend or discontinue the Plan. Without the consent of a holder, no amendment, alteration, suspension or discontinuance may adversely affect outstanding Stock Purchase Rights. No amendment, alteration, suspension or discontinuance shall require stockholder approval unless the Board concludes that stockholder approval is advisable. 14. EFFECTIVE DATE OF PLAN This Plan shall become effective upon adoption by the Board provided, however, that any shares purchased upon exercise of Stock Purchase Rights shall be rescinded if written consent of the shareholders of the Company, or approval of shareholders of the Company, is not obtained within 12 months after adoption by the Board. Approved by the Board of Directors on February 2, 1997. Approved by the Shareholders on May 30, 1997. -7- 8 AMERICAN XTAL TECHNOLOGY 1997 EMPLOYEE STOCK PURCHASE PLAN STOCK PURCHASE AGREEMENT (A) Name of Purchaser: ------------------------------- (B) Number of Shares: ------------------------------- (C) Exercise Price: ---------------------------------- (D) Purchase Price: ---------------------------------- (E) Date of Grant: ----------------------------------- (F) Expiration of Grant: ----------------------------- THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the date set forth in Item G above (the "Effective Date") between AMERICAN XTAL TECHNOLOGY, a California corporation (the "Company"), and the person named in Item A above (the "Purchaser"). THE PARTIES AGREE AS FOLLOWS: 1. Purchase of Shares. Pursuant to the Company's 1997 Employee Stock Purchase Plan (the "Plan") under which the Purchaser was granted a Stock Purchase Right on the date set forth in Item E above, the Company hereby sells to Purchaser, and Purchaser hereby buys from the Company, that number of shares (the "Plan Shares") of the Company's Common Stock (as defined in the Plan) set forth in Item B above on the terms and conditions set forth herein and in the Plan, the terms and conditions of the Plan being hereby incorporated into this agreement by reference. 2. Purchase Price. Purchaser shall purchase the Plan Shares from the Company, and the Company shall sell the Plan Shares to Purchaser, at a price per share as set forth in Item C above (the "Exercise Price"), for a total purchase price as set forth in Item D above (the "Purchase Price"). 3. Payment. Purchaser shall pay the Purchase Price of the Plan Shares by delivery of cash or check for the full amount of the Purchase Price. 4. Company's Repurchase Rights. The Plan Shares purchased hereunder shall be subject to a right of repurchase in favor of the Company (the "Right of Repurchase"). In the event the Purchaser's employment with the Company terminates, the Company may exercise such Right of Repurchase by giving notice within 90 days after such termination of employment. Pursuant to the Right of Repurchase, the Company may purchase the Plan Shares (either by payment of cash) for an amount equal to the higher of the price the Purchaser paid for such Plan Shares (exclusive of any taxes paid upon acquisition of the stock) or the value of Plan Shares on date of termination (determined as set forth in Section 6.9 of the Plan). The Company shall include with such notice payment in full in cash or by evidence of cancellation of purchase money indebtedness. The Purchaser may not dispose of or transfer the Plan Shares while such shares are 1 9 subject to the Right of Repurchase and any such attempted transfer shall be null and void. This Right of Repurchase shall terminate upon the closing of a registered public offering of the Company's securities. 5. Company's Right of First Refusal Respecting Plan Shares. 5.1. Right of First Refusal. In the event that Purchaser proposes to sell, pledge, or otherwise transfer any Plan Shares or any interest in such shares to a bona-fide third party offeror, the Company shall have a right of first refusal (the "Right of First Refusal") with respect to such Plan Shares. If Purchaser desires to transfer Plan Shares, Purchaser shall give a written notice (the "Transfer Notice") to the Company describing fully the proposed transfer, including the number of Plan Shares proposed to be transferred, the proposed transfer price, and name and address of the bona-fide third party offeror. The Transfer Notice shall be signed both by Purchaser and by the bona-fide third party offeror and must constitute a binding commitment of both such parties for the transfer of such Plan Shares. The Company may elect to purchase the Plan Shares subject to the Transfer Notice by delivery of a notice of exercise of the Company's Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company. The purchase price paid by the Company shall be the price per share equal to the proposed per share transfer price, and shall be paid to the Purchaser within 60 days after the date the Transfer Notice is received by the Company, unless a longer period for payment was offered by the bona-fide third party offeror, in which case the Company shall pay the purchase price within such longer period. The Company's rights under this Section 5.1 shall be freely assignable, in whole or in part. Notwithstanding the foregoing, the Right of First Refusal does not apply to a transfer of Plan Shares by gift or devise to the Purchaser's immediate family (i.e., parents, spouse or children or to a trust for the benefit of the Purchaser or any of the Purchaser's immediate family members), but does apply to any subsequent transfer of such Plan Shares by such immediate family members. 5.2. Transfer of Plan Shares. If the Company fails to exercise the Right of First Refusal within 30 days after the date the Transfer Notice is delivered to the Company, Purchaser may, not later than 75 days following delivery to the Company of the Transfer Notice, conclude a transfer of the Plan Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by Purchaser, shall again be subject to the Company's Right of First Refusal and shall require compliance by Purchaser with the procedure described in Section 5.1 of this Agreement. If the Company exercises the Right of First Refusal, the parties shall consummate the sale of Plan Shares on the terms, other than price, as applicable under Section 5. 1, set forth the Transfer Notice; provided, however, in the event the Transfer Notice provides for payment for the Plan Shares other than in cash, the Company shall have the option of paying for the Plan shares by paying in cash the present value of the consideration described in the Transfer Notice; and further provided that if the value of noncash consideration is to be paid, and the Purchaser disagrees with the value determined by the Company, the Purchaser may request an independent appraisal by an appraiser acceptable to the Purchaser and the Company, the costs of such appraisal to be borne equally by the Purchaser and the Company. If, at the time of exercise of the right of first refusal, any notes are outstanding which represent any portion of the Purchase Price of the Plan Shares, the 2 10 repurchase price shall be paid first by cancellation of any obligation for accrued but unpaid interest under such notes, next by cancellation of principal under such notes, and finally by payment of cash. 5.3. Binding Effect of Right of First Refusal. The Company's Right of First Refusal shall inure to the benefit of the successors and assigns of the Company and shall be binding upon any transferee of Plan Shares other than a transferee acquiring Plan Shares in a transaction where the Company failed to exercise the Right of First Refusal (a "Free Transferee") or a transferee of a Free Transferee. 5.4. Termination of Company's Right of First Refusal. Notwithstanding anything in this Section 5, the Company shall have no Right of First Refusal, and Purchaser shall have no obligation to comply with the procedures in Sections 5.1 through 5.3, after the earlier of (a) the closing of the Company's initial registered public offering to the public generally, or (b) the date ten years after the Date of the Grant specified in Item E above. 6. Stock Certificate Restrictive Legends. Stock certificates evidencing Plan Shares may bear such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement. 7. Representations, Warranties, Covenants, and Acknowledgments of Purchaser. Purchaser hereby represents, warrants, covenants, acknowledges, and agrees that: 7.1. Investment. Purchaser is acquiring the Plan Shares for Purchaser's own account, and not for the account of any other person. Purchaser is acquiring the Plan Shares for investment and not with a view to distribution or resale thereof except in compliance with applicable laws regulating securities. 7.2. Business Experience. Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the Company evidenced by the purchase of the Plan Shares. 7.3. Relation of Company. Purchaser is presently an employee of the Company and in such capacity has become personally familiar with the business, affairs, financial condition, and results of operations of the Company. 7.4. Access to Information. Purchaser has had the opportunity to ask questions of, and to receive answers from, appropriate executive officers of the Company with respect to the terms and conditions of the transactions contemplated hereby and with respect to business, affairs, financial condition, and results of operations of the Company. Purchaser has had access to such financial and other information as is necessary in order for Purchaser to make a fully-informed decision as to investment in the Company by way of purchase of the Plan Shares, and has had the opportunity to obtain any additional information necessary to verify any of such information to which Purchaser has had access. 7.5. Speculative Investment. Purchaser's investment in the Company represented by the Plan Shares is highly speculative in nature and is subject to a high degree of risk of loss in whole or in part. The amount of such investment is within Purchaser's risk capital 3 11 means and is not so great in relation to Purchaser's total financial resources as would jeopardize the personal financial needs of Purchaser or Purchaser's family in the event such investment were lost in whole or in part. 7.6. Registration. Purchaser must bear the economic risk of investment for an indefinite period of time because the sale to Purchaser of the Plan Shares has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and the Plan Shares cannot be transferred by Purchaser unless such transfer is registered under the Securities Act or an exemption from such registration is available. The Company has made no agreements, covenants or undertakings whatsoever to register the transfer of any of the Plan Shares under the Securities Act. The Company has made no representations, warranties, or covenants whatsoever as to whether any exemption from the Securities Act, including without limitation any exemption for limited sales in routine brokers' transactions pursuant to Rule 144, will be available; if the exemption under Rule 144 is available at all, it will not be available until at least one year after payment of cash for the Plan Shares and not then unless: (a) a public trading market then exists in the Company's Common Stock; (b) adequate information as to the Company's financial and other affairs and operations is then available to the public; and (c) all other terms and conditions of Rule 144 have been satisfied. Purchaser understands that the resale provisions of Rule 701 will not apply until 90 days after the Company becomes subject to reporting obligations of the Securities Exchange Act of 1934 (typically upon the effective date of an initial public offering). 7.7. Public Trading. None of the Company's securities is presently publicly traded, and the Company has made no representation, covenant, or agreement as to whether there will be a public market for any of its securities. 7.8. Tax Advice. The Company has made no warranties or representations to Purchaser with respect to the income tax consequences of the transactions contemplated by this Agreement and Purchaser is in no manner relying on the Company or its representatives for an assessment of such tax consequences. 8. Binding Effect. Subject to the limitations set forth in this Agreement, this Agreement shall be binding upon, and inure to the benefit of, the executors, administrators, heirs, legal representatives, successors, and assigns of the parties hereto. 9. Damages. Purchaser shall be liable to the Company for all costs and damages, including incidental and consequential damages, resulting from a disposition of Plan Shares which is not in conformity with the provisions of this Agreement. 10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California excluding those laws that direct the application of the laws of another jurisdiction. 11. Notices. All notices and other communications under this Agreement shall be in writing. Unless and until Purchaser is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement, if not delivered by hand, shall be mailed, addressed as follows: 4 12 American Xtal Technology 4311 Solar Way Fremont, CA 94538 Attention: Controller Unless and until the Company is notified in writing to the contrary, all notices, communications, and documents intended for Purchaser and related to this Agreement, if not delivered by hand, shall be mailed to Purchaser's last known address as shown on the Company's books. Notices and communications shall be mailed by first class mail, postage prepaid; documents shall be mailed by registered mail, return receipt requested, postage prepaid. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, and two business days after mailing, if by mail. IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. AMERICAN XTAL TECHNOLOGY By ------------------------------------- Title ---------------------------------- Purchaser hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. Purchaser ------------------------------ Purchaser's spouse indicates by the execution of this Agreement his or her consent to be bound by the terms herein as to his or her interests, whether as community property or otherwise, if any, in the Plan Shares hereby purchased. Purchaser's Spouse --------------------- 5 13 Attachments 1997 Employee Stock Purchase Plan Acknowledgment Regarding Election Pursuant to Section 83(b) Section 83(b) Election 6 14 ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE The undersigned (which term includes the undersigned's spouse), a purchaser of Shares of Common Stock of AMERICAN XTAL TECHNOLOGY (the "Company"), pursuant to stock purchase right granted under the Company's 1997 Employee Stock Purchase Plan (the "Plan"), hereby states as follows: 1. The undersigned acknowledges receipt of a copy of a Stock Purchase Agreement by and between the undersigned and the Company (the "Agreement") effecting the purchase of shares, which the undersigned has carefully reviewed. 2. The undersigned either [check as applicable]: ____(a) has consulted, and has been fully advised by, the undersigned's own tax advisor, _________________________ whose business address is _____________________________, regarding the income tax consequences of purchasing shares under the Agreement, and particularly regarding the advisability of making an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and pursuant to the corresponding provisions, if any, of applicable state laws (including without limitation Section 17122.7(b) of the California Revenue and Taxation Code, as amended (the "Rev. & Tax. Code") if applicable); or ____(b) has knowingly chosen not to consult a tax advisor. 3. The undersigned hereby avers that, with respect to the purchase of shares, the undersigned [check as applicable]: ____(a) will make an election under Section 83(b) solely for purposes of Section 56(b)(3) of the Code (and analogous state law, if any) relating to the Alternative Minimum Tax, and a "protective" election under Section 83(b) (and analogous state law, if any) for all other income tax purposes. ____(b) will not make an election under Section 83(b) of the Code (and analogous state law, if any) for any purpose. 4. With respect to any election under Section 83(b) of the Code, "protective" or otherwise, indicated in paragraph (3) above, the undersigned herewith submits an executed copy of the appropriate form of election and acknowledges that copies thereof have been duly and timely filed with the appropriate offices of the Internal Revenue Service and applicable state taxing authorities and that the undersigned will attach a copy of the form of election to the undersigned's federal income tax return for the year of the purchase and, if required, to the undersigned's state income tax return(s) for the same period. 1 15 5. Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's purchase of shares under the Agreement or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. Date: -------------------------------- ---------------------------------------- (Purchaser) Date: -------------------------------- ---------------------------------------- (Purchaser) 2 16 ELECTION PURSUANT TO SECTION 83(B) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY TRANSFERRED IN CONNECTION WITH THE PERFORMANCE OF SERVICES ----------------- The undersigned hereby makes the election, modified to the extent described in paragraph 9 below, authorized by Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations thereunder, with respect to shares of Common Stock AMERICAN XTAL TECHNOLOGY (the "Company") described below acquired by the undersigned on the date shown below. To the extent permitted, this election shall also serve as election under analogous state law. As required by the Treasury Regulations under Section 83(b), the undersigned supplies herewith the following information: 1. The undersigned's name and address are: Name: --------------------------------------------------- Address: ------------------------------------------------ ------------------------------------------------ 2. The undersigned has taxpayer identification number _________________ 3. The property with respect to which this protective election is made consists of ____________ shares of Common Stock, no par value, of the Company. 4. The date on which the above-described property was transferred to the undersigned was ______________, 19__. 5. As of the date of transfer, the property was subject to the following substantial risk of forfeiture: --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- 6. The fair market value of the property at the time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) was $__________ per share. 7. The amount paid for the property by the undersigned was $____________ per share. 8. A copy of this election has been furnished to the Company, and a copy of this election will be attached to the undersigned's federal income tax return for the year to which this election relates. 1 17 9. If the property was acquired by the exercise of an Incentive Stock Option within the meaning of Section 422 of the Code then, except in the event of a "disqualifying disposition " of the property, this election is protective only and does not constitute an agreement to report or include as income subject to federal income tax amounts which, but for this election, are not so reportable or includible. Date: --------------------------------- ---------------------------------------- (Purchaser) 2 EX-10.5 11 1998 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.5 AMERICAN XTAL TECHNOLOGY 1998 EMPLOYEE STOCK PURCHASE PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1 ESTABLISHMENT. The American Xtal Technology 1998 Employee Stock Purchase Plan (the "Plan") is hereby established effective as of the effective date of the initial registration by the Company of its Stock under Section 12 of the Securities Exchange Act of 1934, as amended (the "Effective Date"). 1.2 PURPOSE. The purpose of the Plan is to advance the interests of Company and its shareholders by providing an incentive to attract, retain and reward Eligible Employees of the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan provides such Eligible Employees with an opportunity to acquire a proprietary interest in the Company through the purchase of Stock. The Company intends that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments or replacements of such section), and the Plan shall be so construed. 1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued. 2. DEFINITIONS AND CONSTRUCTION. 2.1 DEFINITIONS. Any term not expressly defined in the Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means a committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means American Xtal Technology, a California corporation, or any successor corporation thereto. 1 2 (e) "COMPENSATION" means, with respect to any Offering Period, base wages or salary, commissions, overtime, bonuses, annual awards, other incentive payments, shift premiums, and all other compensation paid in cash during such Offering Period before deduction for any contributions to any plan maintained by a Participating Company and described in Section 401(k) or Section 125 of the Code. Compensation shall not include reimbursements of expenses, allowances, long-term disability, workers' compensation or any amount deemed received without the actual transfer of cash or any amounts directly or indirectly paid pursuant to the Plan or any other stock purchase or stock option plan, or any other compensation not included above. (f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in Section 5 for eligibility to participate in the Plan. (g) "EMPLOYEE" means a person treated as an employee of a Participating Company for purposes of Section 423 of the Code. A Participant shall be deemed to have ceased to be an Employee either upon an actual termination of employment or upon the corporation employing the Participant ceasing to be a Participating Company. For purposes of the Plan, an individual shall not be deemed to have ceased to be an Employee while such individual is on any military leave, sick leave, or other bona fide leave of absence approved by the Company of ninety (90) days or less. In the event an individual's leave of absence exceeds ninety (90) days, the individual shall be deemed to have ceased to be an Employee on the ninety-first (91st) day of such leave unless the individual's right to reemployment with the Participating Company Group is guaranteed either by statute or by contract. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual's employment or termination of employment, as the case may be. For purposes of an individual's participation in or other rights, if any, under the Plan as of the time of the Company's determination, all such determinations by the Company shall be final, binding and conclusive, notwithstanding that the Company or any governmental agency subsequently makes a contrary determination. (h) "FAIR MARKET VALUE" means, as of any date, if there is then a public market for the Stock, the closing price of a share of Stock (or the mean of the closing bid and asked prices if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. If there is then no public market for the Stock, the Fair Market Value on any relevant date shall be as determined by the Board. Notwithstanding the foregoing, the Fair Market Value per share of Stock on the Effective Date shall be deemed to be the public offering price set forth in the final prospectus filed with the Securities and Exchange Commission in connection with the initial public offering of the Stock. (i) "OFFERING" means an offering of Stock as provided in Section 2 3 (j) "OFFERING DATE" means, for any Offering, the first day of the Offering Period with respect to such Offering. (k) "OFFERING PERIOD" means a period established in accordance with Section 6.1. (l) "PARENT CORPORATION" means any present or future "parent corporation" of the Company, as defined in Section 424(e) of the Code. (m) "PARTICIPANT" means an Eligible Employee who has become a participant in an Offering Period in accordance with Section 7 and remains a participant in accordance with the Plan. (n) "PARTICIPATING COMPANY" means the Company or any Parent Corporation or Subsidiary Corporation designated by the Board as a corporation the Employees of which may, if Eligible Employees, participate in the Plan. The Board shall have the sole and absolute discretion to determine from time to time which Parent Corporations or Subsidiary Corporations shall be Participating Companies. (o) "PARTICIPATING COMPANY GROUP" means, at any point in time, the Company and all other corporations collectively which are then Participating Companies. (p) "PURCHASE DATE" means, for any Purchase Period, the last day of such period. (q) "PURCHASE PERIOD" means a period established in accordance with Section 6.2. (r) "PURCHASE PRICE" means the price at which a share of Stock may be purchased under the Plan, as determined in accordance with Section 9. (s) "PURCHASE RIGHT" means an option granted to a Participant pursuant to the Plan to purchase such shares of Stock as provided in Section 8, which the Participant may or may not exercise during the Offering Period in which such option is outstanding. Such option arises from the right of a Participant to withdraw any accumulated payroll deductions of the Participant not previously applied to the purchase of Stock under the Plan and to terminate participation in the Plan at any time during an Offering Period. (t) "STOCK" means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2. (u) "SUBSCRIPTION AGREEMENT" means a written agreement in such form as specified by the Company, stating an Employee's election to participate in the Plan and authorizing payroll deductions under the Plan from the Employee's Compensation. (v) "SUBSCRIPTION DATE" means the last business day prior to the Offering Date of an Offering Period or such earlier date as the Company shall establish. 3 4 (w) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of the Company, as defined in Section 424(f) of the Code. 2.2 CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan, of any form of agreement or other document employed by the Company in the administration of the Plan, or of any Purchase Right shall be determined by the Board and shall be final and binding upon all persons having an interest in the Plan or the Purchase Right. Subject to the provisions of the Plan, the Board shall determine all of the relevant terms and conditions of Purchase Rights granted pursuant to the Plan; provided, however, that all Participants granted Purchase Rights pursuant to the Plan shall have the same rights and privileges within the meaning of Section 423(b)(5) of the Code. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election that is the responsibility of or that is allocated to the Company herein, provided that the officer has apparent authority with respect to such matter, right, obligation, determination or election. 3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company may, from time to time, consistent with the Plan and the requirements of Section 423 of the Code, establish, change or terminate such rules, guidelines, policies, procedures, limitations, or adjustments as deemed advisable by the Company, in its sole discretion, for the proper administration of the Plan, including, without limitation, (a) a minimum payroll deduction amount required for participation in an Offering, (b) a limitation on the frequency or number of changes permitted in the rate of payroll deduction during an Offering, (c) an exchange ratio applicable to amounts withheld in a currency other than United States dollars, (d) a payroll deduction greater than or less than the amount designated by a Participant in order to adjust for the Company's delay or mistake in processing a Subscription Agreement or in otherwise effecting a Participant's election under the Plan or as advisable to comply with the requirements of Section 423 of the Code, and (e) determination of the date and manner by which the Fair Market Value of a share of Stock is determined for purposes of administration of the Plan. 4 5 4. SHARES SUBJECT TO PLAN. 4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be Two Hundred Fifty Thousand (250,000) and shall consist of authorized but unissued or reacquired shares of Stock, or any combination thereof. If an outstanding Purchase Right for any reason expires or is terminated or canceled, the shares of Stock allocable to the unexercised portion of such Purchase Right shall again be available for issuance under the Plan. 4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company, or in the event of any merger (including a merger effected for the purpose of changing the Company's domicile), sale of assets or other reorganization in which the Company is a party, appropriate adjustments shall be made in the number and class of shares subject to the Plan and each Purchase Right and in the Purchase Price. If a majority of the shares which are of the same class as the shares that are subject to outstanding Purchase Rights are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "New Shares"), the Board may unilaterally amend the outstanding Purchase Rights to provide that such Purchase Rights are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the Purchase Price of, the outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest whole number, and in no event may the Purchase Price be decreased to an amount less than the par value, if any, of the stock subject to the Purchase Right. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY. 5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a Participating Company is eligible to participate in the Plan and shall be deemed an Eligible Employee, except the following: (a) Any Employee who is customarily employed by the Participating Company Group for less than twenty (20) hours per week; or (b) Any Employee who is customarily employed by the Participating Company Group for not more than five (5) months in any calendar year. 5.2 EXCLUSION OF CERTAIN SHAREHOLDERS. Notwithstanding any provision of the Plan to the contrary, no Employee shall be granted a Purchase Right under the Plan if, immediately after such grant, such Employee would own or hold options to purchase stock of the Company or of any Parent Corporation or Subsidiary Corporation possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of such corporation, as 5 6 determined in accordance with Section 423(b)(3) of the Code. For purposes of this Section 5.2, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of such Employee. 6. OFFERINGS. 6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan shall be implemented by sequential Offerings of approximately twenty-four (24) months duration (an "Offering Period"); provided, however, that the first Offering Period shall commence on the Effective Date and end on January 31, 2000 (the "Initial Offering Period"). Subsequent Offerings shall commence on the first day of February and August of each year and end on the last day of the second January and July, respectively, occurring thereafter. Notwithstanding the foregoing, the Board may establish a different duration for one or more future Offering Periods or different commencing or ending dates for such Offering Periods; provided, however, that no Offering Period may have a duration exceeding twenty-seven (27) months. If the first or last day of an Offering Period is not a day on which the national securities exchanges or Nasdaq Stock Market are open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Offering Period. 6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4) consecutive Purchase Periods of approximately six (6) months duration, or such other number or duration as the Board shall determine. The Purchase Period commencing on the Offering Date of the Initial Offering Period shall end on July 31, 1998. A Purchase Period commencing on or about February 1 shall end on or about the next July 31. A Purchase Period commencing on or about August 1 shall end on or about the next January 31. Notwithstanding the foregoing, the Board may establish a different duration for one or more future Purchase Periods or different commencing or ending dates for such Purchase Periods. If the first or last day of a Purchase Period is not a day on which the national securities exchanges or Nasdaq Stock Market are open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Purchase Period. 7. PARTICIPATION IN THE PLAN. 7.1 INITIAL PARTICIPATION. An Eligible Employee may become a Participant in an Offering Period by delivering a properly completed Subscription Agreement to the office designated by the Company not later than the close of business for such office on the Subscription Date established by the Company for such Offering Period. An Eligible Employee who does not deliver a properly completed Subscription Agreement to the Company's designated office on or before the Subscription Date for an Offering Period shall not participate in the Plan for that Offering Period or for any subsequent Offering Period unless such Eligible Employee subsequently delivers a properly completed Subscription Agreement to the appropriate office of the Company on or before the Subscription Date for such subsequent Offering Period. An Employee who becomes an Eligible Employee after the Offering Date of an Offering Period shall not be eligible to participate in such Offering Period but may participate in any subsequent Offering Period provided such Employee is still an Eligible Employee as of the Offering Date of such subsequent Offering Period. 6 7 7.2 CONTINUED PARTICIPATION. A Participant shall automatically participate in the next Offering Period commencing immediately after the final Purchase Date of each Offering Period in which the Participant participates provided that such Participant remains an Eligible Employee on the Offering Date of the new Offering Period and has not either (a) withdrawn from the Plan pursuant to Section 12.1 or (b) terminated employment as provided in Section 13. A Participant who may automatically participate in a subsequent Offering Period, as provided in this Section, is not required to deliver any additional Subscription Agreement for the subsequent Offering Period in order to continue participation in the Plan. However, a Participant may deliver a new Subscription Agreement for a subsequent Offering Period in accordance with the procedures set forth in Section 7.1 if the Participant desires to change any of the elections contained in the Participant's then effective Subscription Agreement. Eligible Employees may not participate simultaneously in more than one Offering. 8. RIGHT TO PURCHASE SHARES. 8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the Offering Date of each Offering Period, each Participant in such Offering Period shall be granted automatically a Purchase Right consisting of an option to purchase the lesser of (a) that number of whole shares of Stock determined by dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a share of Stock on such Offering Date or (b) five thousand (5,000) shares of Stock. No Purchase Right shall be granted on an Offering Date to any person who is not, on such Offering Date, an Eligible Employee. 8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the provisions of Section 8.1, if the Board establishes an Offering Period of any duration other than twenty-four months, then (a) the dollar amount in Section 8.1 shall be determined by multiplying $2,083.33 by the number of months (rounded to the nearest whole month) in the Offering Period and rounding to the nearest whole dollar, and (b) the share amount in Section 8.1 shall be determined by multiplying 208.33 shares by the number of months (rounded to the nearest whole month) in the Offering Period and rounding to the nearest whole share. 8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision of the Plan to the contrary, no Participant shall be granted a Purchase Right which permits his or her right to purchase shares of Stock under the Plan to accrue at a rate which, when aggregated with such Participant's rights to purchase shares under all other employee stock purchase plans of a Participating Company intended to meet the requirements of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other limit, if any, as may be imposed by the Code) for each calendar year in which such Purchase Right is outstanding at any time. For purposes of the preceding sentence, the Fair Market Value of shares purchased during a given Offering Period shall be determined as of the Offering Date for such Offering Period. The limitation described in this Section 8.3 shall be applied in conformance with applicable regulations under Section 423(b)(8) of the Code. 7 8 9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be acquired in an Offering Period upon the exercise of all or any portion of a Purchase Right shall be established by the Board; provided, however, that the Purchase Price shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date of the Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase Date. Unless otherwise provided by the Board prior to the commencement of an Offering Period, the Purchase Price for that Offering Period shall be eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on the Purchase Date. 10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of Stock acquired pursuant to the exercise of all or any portion of a Purchase Right may be paid for only by means of payroll deductions from the Participant's Compensation accumulated during the Offering Period for which such Purchase Right was granted, subject to the following: 10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided herein, the amount to be deducted under the Plan from a Participant's Compensation on each payday during an Offering Period shall be determined by the Participant's Subscription Agreement. The Subscription Agreement shall set forth the percentage of the Participant's Compensation to be deducted on each payday during an Offering Period in whole percentages of not less than one percent (1%) (except as a result of an election pursuant to Section 10.3 to stop payroll deductions made effective following the first payday during an Offering) or more than fifteen percent (15%). Notwithstanding the foregoing, the Board may change the limits on payroll deductions effective as of any future Offering Date. 10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided herein. 10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an Offering Period, a Participant may elect to increase or decrease the rate of or to stop deductions from his or her Compensation by delivering to the Company's designated office an amended Subscription Agreement authorizing such change on or before the "Change Notice Date." The "Change Notice Date" shall be a date prior to the beginning of the first pay period for which such election is to be effective as established by the Company from time to time and announced to the Participants. A Participant who elects to decrease the rate of his or her payroll deductions to zero percent (0%) shall nevertheless remain a Participant in the current Offering Period unless such Participant withdraws from the Plan as provided in Section 12.1. 10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company may, in its sole discretion, suspend a Participant's payroll deductions under the Plan as the Company deems advisable to avoid accumulating payroll deductions in excess of the amount that could reasonably be anticipated to purchase the maximum number of shares of Stock permitted during a 8 9 calendar year under the limit set forth in Section 8.3. Payroll deductions shall be resumed at the rate specified in the Participant's then effective Subscription Agreement at the beginning of the next Purchase Period the Purchase Date of which falls in the following calendar year. 10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be maintained for each Participant. All payroll deductions from a Participant's Compensation shall be credited to such Participant's Plan account and shall be deposited with the general funds of the Company. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose. 10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted from a Participant's Compensation pursuant to the Plan. 10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may withdraw all or any portion of the payroll deductions credited to his or her Plan account and not previously applied toward the purchase of Stock by delivering to the Company's designated office a written notice on a form provided by the Company for such purpose. A Participant who withdraws the entire remaining balance credited to his or her Plan account shall be deemed to have withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall be returned to the Participant as soon as practicable after the withdrawal and may not be applied to the purchase of shares in any Offering under the Plan. The Company may from time to time establish or change limitations on the frequency of withdrawals permitted under this Section, establish a minimum dollar amount that must be retained in the Participant's Plan account, or terminate the withdrawal right provided by this Section. 11. PURCHASE OF SHARES. 11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering Period, each Participant who has not withdrawn from the Plan and whose participation in the Offering has not terminated before such Purchase Date shall automatically acquire pursuant to the exercise of the Participant's Purchase Right the number of whole shares of Stock determined by dividing (a) the total amount of the Participant's payroll deductions accumulated in the Participant's Plan account during the Offering Period and not previously applied toward the purchase of Stock by (b) the Purchase Price. However, in no event shall the number of shares purchased by the Participant during an Offering Period exceed the number of shares subject to the Participant's Purchase Right. No shares of Stock shall be purchased on a Purchase Date on behalf of a Participant whose participation in the Offering or the Plan has terminated before such Purchase Date. 11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of shares of Stock which might be purchased by all Participants in the Plan on a Purchase Date exceeds the number of shares of Stock available in the Plan as provided in Section 4.1, the Company shall make a pro rata allocation of the remaining shares in as uniform a manner as shall be practicable and as the Company shall determine to be equitable. Any fractional share resulting from such pro rata allocation to any Participant shall be disregarded. 9 10 11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each Purchase Date, the Company shall arrange the delivery to each Participant, as appropriate, of a certificate representing the shares acquired by the Participant on such Purchase Date; provided that the Company may deliver such shares to a broker that holds such shares in street name for the benefit of the Participant. Shares to be delivered to a Participant under the Plan shall be registered in the name of the Participant, or, if requested by the Participant, in the name of the Participant and his or her spouse, or, if applicable, in the names of the heirs of the Participant. 11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a Participant's Plan account following any Purchase Date shall be refunded to the Participant as soon as practicable after such Purchase Date. However, if the cash to be returned to a Participant pursuant to the preceding sentence is an amount less than the amount that would have been necessary to purchase an additional whole share of Stock on such Purchase Date, the Company may retain such amount in the Participant's Plan account to be applied toward the purchase of shares of Stock in the subsequent Purchase Period or Offering Period, as the case may be. 11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is exercised, in whole or in part, or at the time a Participant disposes of some or all of the shares of Stock he or she acquires under the Plan, the Participant shall make adequate provision for the foreign, federal, state and local tax withholding obligations of the Participating Company Group, if any, which arise upon exercise of the Purchase Right or upon such disposition of shares, respectively. The Participating Company Group may, but shall not be obligated to, withhold from the Participant's compensation the amount necessary to meet such withholding obligations. 11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's Purchase Right remaining unexercised after the end of the Offering Period to which the Purchase Right relates shall expire immediately upon the end of the Offering Period. 11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all or part of his or her Purchase Right shall receive, as soon as practicable after the Purchase Date, a report of such Participant's Plan account setting forth the total payroll deductions accumulated prior to such exercise, the number of shares of Stock purchased, the Purchase Price for such shares, the date of purchase and the cash balance, if any, remaining immediately after such purchase that is to be refunded or retained in the Participant's Plan account pursuant to Section 11.4. The report required by this Section may be delivered in such form and by such means, including by electronic transmission, as the Company may determine. 12. WITHDRAWAL FROM OFFERING OR PLAN. 12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan by signing and delivering to the Company's designated office a written notice of withdrawal on a form provided by the Company for such purpose. Such withdrawal may be elected at any time prior to the end of an Offering Period; provided, however, that if a Participant withdraws from the Plan after the Purchase Date of a Purchase Period, the withdrawal shall not affect shares of Stock acquired by the Participant on such Purchase Date. A Participant who voluntarily withdraws from the Plan is prohibited from resuming participation in the Plan in the same Offering from which he or she withdrew, but may participate in any subsequent Offering by 10 11 again satisfying the requirements of Sections 5 and 7.1. The Company may impose, from time to time, a requirement that the notice of withdrawal from the Plan be on file with the Company's designated office for a reasonable period prior to the effectiveness of the Participant's withdrawal. 12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value of a share of Stock on a Purchase Date of an Offering Period (other than the final Purchase Date of such offering) is less than the Fair Market Value of a share of Stock on the Offering Date for such Offering Period, then every Participant shall automatically be (a) withdrawn from such Offering Period after the acquisition of shares of Stock on the Purchase Date and (b) enrolled in the new Offering Period effective on its Offering Date. A Participant may elect not to be automatically withdrawn from an Offering Period pursuant to this Section 12.2 by delivering to the Company's designated office not later than the close of business on Offering Date new Offering Period a written notice indicating such election. 12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary withdrawal from the Plan pursuant to Sections 12.1 or automatic withdrawal from an Offering pursuant to Section 12.2, the Participant's accumulated payroll deductions which have not been applied toward the purchase of shares of Stock (except, in the case of an automatic withdrawal pursuant to Section 12.2, for an amount necessary to purchase an additional whole share as provided in Section 11.4) shall be refunded to the Participant as soon as practicable after the withdrawal, without the payment of any interest, and the Participant's interest in the Plan or the Offering, as applicable, shall terminate. Such accumulated payroll deductions to be refunded in accordance with this Section may not be applied to any other Offering under the Plan. 13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Upon a Participant's ceasing, prior to a Purchase Date, to be an Employee of the Participating Company Group for any reason, including retirement, disability or death, or the failure of a Participant to remain an Eligible Employee, the Participant's participation in the Plan shall terminate immediately. In such event, the payroll deductions credited to the Participant's Plan account since the last Purchase Date shall, as soon as practicable, be returned to the Participant or, in the case of the Participant's death, to the Participant's legal representative, and all of the Participant's rights under the Plan shall terminate. Interest shall not be paid on sums returned pursuant to this Section 13. A Participant whose participation has been so terminated may again become eligible to participate in the Plan by again satisfying the requirements of Sections 5 and 7.1. 14. CHANGE IN CONTROL. 14.1 DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. 11 12 (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "Transferee Corporation(s)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "Acquiring Corporation"), may assume the Company's rights and obligations under the Plan. If the Acquiring Corporation elects not to assume the Company's rights and obligations under outstanding Purchase Rights, the Purchase Date of the then current Purchase Period shall be accelerated to a date before the date of the Change in Control specified by the Board, but the number of shares of Stock subject to outstanding Purchase Rights shall not be adjusted. All Purchase Rights which are neither assumed by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control shall terminate and cease to be outstanding effective as of the date of the Change in Control. 15. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be transferred in any manner otherwise than by will or the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. 16. COMPLIANCE WITH SECURITIES LAW. The issuance of shares under the Plan shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities. A Purchase Right may not be exercised if the issuance of shares upon such exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any securities exchange or market system upon which the Stock may then be listed. In addition, no Purchase Right may be exercised unless (a) a registration statement under the Securities Act of 1933, as amended, shall at the time of exercise of the Purchase Right be in effect with respect to the shares issuable upon exercise of the Purchase Right, or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Purchase Right may be issued in accordance with the terms of an applicable exemption from the registration requirements of said Act. The inability of the Company to obtain from any regulatory body 12 13 having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of a Purchase Right, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation, and to make any representation or warranty with respect thereto as may be requested by the Company. 17. RIGHTS AS A SHAREHOLDER AND EMPLOYEE. A Participant shall have no rights as a shareholder by virtue of the Participant's participation in the Plan until the date of the issuance of a certificate for the shares purchased pursuant to the exercise of the Participant's Purchase Right (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 4.2. Nothing herein shall confer upon a Participant any right to continue in the employ of the Participating Company Group or interfere in any way with any right of the Participating Company Group to terminate the Participant's employment at any time. 18. LEGENDS. The Company may at any time place legends or other identifying symbols referencing any applicable federal, state or foreign securities law restrictions or any provision convenient in the administration of the Plan on some or all of the certificates representing shares of Stock issued under the Plan. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to a Purchase Right in the possession of the Participant in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include but shall not be limited to the following: "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE)." 19. NOTIFICATION OF SALE OF SHARES. The Company may require the Participant to give the Company prompt notice of any disposition of shares acquired by exercise of a Purchase Right within two years from the date of granting such Purchase Right or one year from the date of exercise of such Purchase Right. The Company may require that until such time as a Participant disposes of shares acquired upon 13 14 exercise of a Purchase Right, the Participant shall hold all such shares in the Participant's name (or, if elected by the Participant, in the name of the Participant and his or her spouse but not in the name of any nominee) until the lapse of the time periods with respect to such Purchase Right referred to in the preceding sentence. The Company may direct that the certificates evidencing shares acquired by exercise of a Purchase Right refer to such requirement to give prompt notice of disposition. 20. NOTICES. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating Company Group, members of the Board and any officers or employees of the Participating Company Group to whom authority to act for the Board or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same. 22. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend or terminate the Plan, except that (a) such termination shall not affect Purchase Rights previously granted under the Plan, except as permitted under the Plan, and (b) no amendment may adversely affect a Purchase Right previously granted under the Plan (except to the extent permitted by the Plan or as may be necessary to qualify the Plan as an employee stock purchase plan pursuant to Section 423 of the Code or to obtain qualification or registration of the shares of Stock under applicable federal, state or foreign securities laws). In addition, an amendment to the Plan must be approved by the shareholders of the Company within twelve (12) months of the adoption of such amendment if such amendment would authorize the sale of more shares than are authorized for issuance under the Plan or would change the definition of the corporations that may be designated by the Board as Participating Companies. 14 15 IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing American Xtal Technology 1998 Employee Stock Purchase Plan was duly adopted by the Board of Directors of the Company on ________________, 1998. ------------------------------------ Secretary 15 16 PLAN HISTORY ___________, 1998 Board adopts the Plan, with an initial reserve of 250,000 shares. ___________, 1998 Shareholders approve Plan, with an initial reserve of 250,000 shares. 17 AMERICAN XTAL TECHNOLOGY 1998 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT NAME (Please print): __________________________________________________________ (Last) (First) (Middle) [ ] Original Application for the Offering Period beginning ____________, 199__. [ ] Change in Payroll Deduction rate effective with the pay period ending ___________________, 199__. I hereby elect to participate in the 1998 Employee Stock Purchase Plan (the "Plan") of American Xtal Technology (the "Company") and subscribe to purchase shares of the Company's Stock in accordance with this Subscription Agreement and the Plan. I hereby authorize payroll deductions in the amount of ________ percent (in whole percentages not less than 1% (unless an election to stop deductions is being made) or more than 15%) of my "COMPENSATION" on each payday throughout the "OFFERING PERIOD" in accordance with the Plan. I understand that these payroll deductions will be accumulated for the purchase of shares of Stock at the applicable purchase price determined in accordance with the Plan. I understand that, except as otherwise provided by the Plan, I will automatically purchase shares on each Purchase Date under the Plan unless I withdraw from the Plan by giving written notice on a form provided by the Company or unless my employment terminates. I understand that I will automatically participate in each subsequent Offering that commences immediately after the last day of an Offering in which I am participating until I withdraw from the Plan by giving written notice on a form provided by the Company or my employment terminates. Shares I purchase under the Plan should be issued in the name(s) set forth below. (Shares may be issued in the participant's name alone or together with the participant's spouse as community property or in joint tenancy.) NAME(S): __________________________________________________________ ADDRESS: __________________________________________________________ MY SOCIAL SECURITY NUMBER: ____________________________________________ I agree to make adequate provision for the federal, state, local and foreign tax withholding obligations, if any, which may arise upon my purchase of shares under the Plan and/or my disposition of such shares. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet such withholding obligations. I agree that, unless otherwise permitted by the Company, until I dispose of the shares I purchased under the Plan, I will hold such shares in the name(s) entered above (and not in the name of any nominee) for at least two years from the first day of the Offering Period in which, and at least one year from the Purchase Date on which, I acquired such shares. I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING PARAGRAPH (A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE PLAN. I FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF A DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE COMPANY MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A DISQUALIFYING DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE SERVICE THE ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING DISPOSITION. I am familiar with the provisions of the Plan and agree to participate in the Plan subject to all of its provisions. I understand that the Board of Directors of the Company reserves the right to terminate the Plan or to amend the Plan and my right to purchase stock under the Plan to the extent provided by the Plan. I understand that the effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. Date: ____________________ Signature:______________________________________ 18 AMERICAN XTAL TECHNOLOGY 1998 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL NAME (Please print): __________________________________________________________ (Last) (First) (Middle) I hereby elect to withdraw from the Offering under American Xtal Technology 1998 Employee Stock Purchase Plan (the "Plan") which began on _________________________, 19____ and in which I am currently participating (the "Current Offering"). ELECT EITHER A OR B BELOW: [ ] A. I elect to terminate immediately my participation in the Current Offering and in the Plan. I request that the Company cease all further payroll deductions from my Compensation under the Plan (provided that I have given sufficient notice prior to the next payday). I request that all payroll deductions credited to my account under the Plan (if any) not previously used to purchase shares under the Plan shall not be used to purchase shares on the next Purchase Date of the Current Offering. Instead, I request that all such amounts be paid to me as soon as practicable. I understand that this election immediately terminates my interest in the Current Offering and in the Plan. [ ] B. I elect to terminate my participation in the Current Offering and in the Plan following my purchase of shares on next Purchase Date of the Current Offering. I request that the Company cease all further payroll deductions from my Compensation under the Plan (provided that I have given sufficient notice prior to the next payday). I request that all payroll deductions credited to my account under the Plan (if any) not previously used to purchase shares under the Plan shall be used to purchase shares on the next Purchase Date of the Current Offering to the extent permitted by the Plan. I understand that this election will terminate my interest in the Current Offering and in the Plan immediately following such purchase. I request that any cash balance remaining in my account under the Plan after my purchase of shares be paid to me as soon as practicable. I understand that by making this election I am terminating my interest in the Plan and that no further payroll deductions will be made (provided that I have given sufficient notice prior to the next payday) unless I elect in accordance with the Plan to become a participant in another Offering under the Plan by filing a new Subscription Agreement with the Company. Date: ____________________ Signature:______________________________________ EX-10.6 12 LOAN AGREEMENT WITH U.S. BANK 1 Exhibit 10.6 [U.S. BANK LOGO] LOAN AGREEMENT
| PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS| |-------------- ---------- ---------- -------- ------ ---------- ---------- ------- --------| |$15,000,000.00 03-12-1998 05-15-1998 320-26 04368 380 0215644521 83408 | References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: AMERICAN XTAL TECHNOLOGY Lender: U.S. BANK NATIONAL ASSOCIATION 4311 Solar Way Fremont Business Banking Fremont, CA 94538 39510 Paseo Padre Pkwy Fremont, CA 94538 ============================================================================================================
THIS LOAN AGREEMENT between AMERICAN XTAL TECHNOLOGY ("Borrower") and U.S. BANK NATIONAL ASSOCIATION ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of MARCH 4, 1998, and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means AMERICAN XTAL TECHNOLOGY. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $15,000,000.00; or (b) the sum of (i) 80.000% of the aggregate amount of Eligible Accounts, plus (ii) 50.000% of the aggregate amount of Eligible inventory (not to exceed in corresponding Loan amount based on Eligible Inventory $5,500,000). BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which the goods have not been shipped or delivered,or the services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any 2 03-12-1998 LOAN AGREEMENT Page 2 LOAN NO. 320-26 (Continued) - -------------------------------------------------------------------------------- provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay his debts (including its payrolls) as such debts come due. (j) Accounts which have not been paid in full within 90 DAYS from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 90 DAYS from the invoice date is in excess of 25.000% of the total amount outstanding on the account. (k) That portion of the Accounts of any single Account Debtor which exceeds 20.000% of all of Borrower's Accounts. (l) DATINGS, PROGRESS BILLINGS, RETAINAGES, CASH SALES, COD, U.S. GOVERNMENT, AFFILIATES/INTERCOMPANY, POTENTIAL OFFSETS, SERVICE CHARGES, OFFICERS/EMPLOYEES, OTHER; FOREIGN ADVANCES WILL BE ALLOWED AS PRE-QUALIFIED BY BANK. ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all of Borrower's Inventory as defined below except: (a) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (b) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. (c) ELIGIBLE INVENTORY FOR PURPOSES OF DETERMINING THE BORROWER'S BORROWING BASE SHALL BE DEFINED AS RAW MATERIAL AT COST AND SCRAP VALUE OF WIP AND FINISHED GOODS. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. the words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. INVENTORY. The word "Inventory" means all of Borrower's raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower's custody or possession and all returns on Accounts. LENDER. The word "Lender" means U.S. BANK NATIONAL ASSOCIATION, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation of any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. 3 LOAN AGREEMENT 03-12-1998 Page 3 LOAN NO. 320-26 (Continued) =============================================================================== WORKING CAPITAL. The words "Working Capital" means Borrower's current assets, excluding expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, inventory, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested either orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts, general intangibles, and inventory. Lender's Security Interests in the Collateral shall be continuing lines and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. With respect to the Inventory, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and records iteming and describing the kind, type, quality, and quantity of Inventory, Borrower's Inventory costs and selling prices, and the daily withdrawals to Inventory. The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's Accounts and Inventory: 4311 SOLAR WAY, FREMONT, CA 94538. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and Inventory and Eligible Accounts and Eligible Inventory, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and Eligible Inventory and such other matters and information relating to the Accounts and Inventory as Lender may request. Supplemental schedules shall be delivered according to the following schedule: MONTHLY, QUARTERLY IF LINE NOT IN USE, WITHIN 30 DAYS REGARDLESS OF USE. BORROWER AGREES TO PROVIDE LENDER WITH MONTHLY ACCOUNTS RECEIVABLES AND ACCOUNTS PAYABLE AGINGS ACCOMPANIED WITH A BORROWING BASE CERTIFICATE. BORROWER AGREES TO PROVIDE LENDER WITH MONTHLY SCHEDULE OF ELIGIBLE INVENTORY TO INCLUDE RAW MATERIALS AT COST PLUS SCRAP VALUE OF WORK IN PROGRESS AND FINISHED GOODS. ADDITIONALLY BORROWER WILL PROVIDE LENDER WITH A DEBTOR NAME AND ADDRESS LISTING (TOP 50 CUSTOMERS IN TERMS OF YEAR TO DATE SALES), ANNUALLY. 4 03-12-1998 LOAN AGREEMENT Page 4 LOAN NO. 320-26 (CONTINUED) ================================================================================ REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender; (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the Inventory, Borrower represents and warrants to Lender: (a) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (b) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) The value of the Inventory will be determined on a consistent accounting basis; (d) Except as agreed to the contrary by Lender in writing, all Eligible Inventory is now and at all times hereafter will be in Borrower's physical possession and shall not be held by others on consignment, sale on approval, or sale or return; (e) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; (f) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender's name evidencing the storage of Inventory; and (g) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. NOTIFICATION BASIS. Borrower agrees and understands that this Loan shall be on a notification basis pursuant to which Lender shall directly collect and receive all proceeds and payments from the Accounts in which Lender has a security interest. In order to facilitate the foregoing, Borrower agrees to deliver to Lender, upon demand, any and all of Borrower's records, ledger sheets, payment cards, and other documentation, in the form requested by Lender, with regard to the Accounts. Borrower further agrees that Lender shall have the right to notify each Account Debtor, pay such proceeds and payments directly to Lender, and to do any and all other things as Lender may deem to be necessary and appropriate, within its sole discretion, to carry out the terms and intent of this Agreement. Lender shall have the further right, where appropriate and within Lender's sole discretion, to file suit, either in its own name or in the name of Borrower, to collect any and all such Accounts. Borrower further agrees that Lender may take such other actions, either in Borrower's name or Lender's name, as Lender may deem appropriate within its sole judgment, with regard to collection and payment of the Accounts, without affecting the liability of Borrower under this Agreement or on the Indebtedness. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. 5 03-12-1998 LOAN AGREEMENT Page 5 LOAN NO. 320-26 (Continued) =============================================================================== TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 4311 SOLAR WAY, FREMONT, CA 94538. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than forty five (45) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $18,000,000.00. WORKING CAPITAL. Maintain Working Capital in excess of $10,000,000.00. CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities in excess of 1.25 to 1.00. CASH FLOW REQUIREMENTS. Maintain Cash Flow at not less than the following level: 1.50 TO 1.00 DEFINED AS: NET PROFIT AFTER TAXES + DEPRECIATION AND AMORTIZATION + INTEREST EXPENSE - DIVIDENDS - WITHDRAWS - INTERNALLY FUNDED FIXED ASSETS DIVIDED BY CURRENT PORTION OF LONG TERM DEBT + INTEREST EXPENSE. TESTED ANNUALLY AT FISCAL YEAR END. THIS DEFINITION SHALL SUPERSEDE ANY INCONSISTENT DEFINITION IN THIS AGREEMENT. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. 6 03-12-1998 LOAN AGREEMENT Page 6 LOAN NO. 320-26 (Continued) ================================================================================ TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender QUARTERLY and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly an in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or return any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ADDITIONAL COVENANTS AND PROVISIONS. TANGIBLE NET WORTH $18,000,000.00. MINIMUM TANGIBLE NET WORTH COVENANT TO 7 03-12-1998 LOAN AGREEMENT PAGE 7 LOAN NO. 320-26 (CONTINUED) ================================================================================ STEP-UP BY 100% OF ANY NEW EQUITY. DEBT TO TANGIBLE NET WORTH RATIO NOT GREATER THAN 2.25 TO 1.00; DEBT/TANGIBLE NET WORTH TO BE RECAST UPON COMPLETION OF IPO. PRIOR WRITTEN APPROVAL IS REQUIRED BY THE BANK OF ANY INVESTMENT ACQUISITION OVER $250,000.00. COMPLIANCE IS TO BE TESTED QUARTERLY. AUDITS BORROWER AGREES TO SUBMIT TO ONE COLLATERAL AUDIT PER YEAR TO BE PERFORMED BY LENDERS INTERNAL STAFF OR LENDER APPROVED EXTERNAL EXAMINERS. DIRECT VERIFICATIONS SHALL BE REQUIRED. BORROWER AGREES TO PAY ALL LENDER'S EXPENSES INCURRED IN CONNECTION WITH THE COLLATERAL AUDIT. MAINTAIN SEMI-ANNUAL PROFITABILITY GREATER THAN ZERO. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will be become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SACRAMENTO COUNTY, THE STATE OF CALIFORNIA. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Lender and Borrower agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any 8 03-12-1998 LOAN AGREEMENT PAGE 8 LOAN NO. 320-26 (CONTINUED) ================================================================================ similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this agreement shall be given in writing, may be sent to telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. 9 03-12-1998 LOAN AGREEMENT Page 9 LOAN NO. 320-26 (Continued) ================================================================================ BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH 12, 1998. BORROWER: AMERICAN XTAL TECHNOLOGY X /s/ MORRIS YOUNG --------------------------------- Authorized Officer LENDER: U.S. BANK NATIONAL ASSOCIATION By: [SIG] --------------------------------- Authorized Officer ================================================================================ LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24c(c) 1998 CFI ProServices, Inc. All rights reserved. [CA-C40 E3.24 F3.24 AMERIX.LN C3. OVL] 10 LOAN #0215644521-59 MODIFICATION AGREEMENT OTHER THAN MONTHLY PAYMENTS THIS AGREEMENT, dated March 12, 1998 is made by and between AMERICAN XTAL TECHNOLOGY, hereinafter called "Borrower," and U.S. BANK NATIONAL ASSOCIATION, hereinafter called "Lender," in consideration of the mutual benefits and agreements herein contained. 1. This agreement applies to a certain promissory note, held by Lender, dated May 27, 1997, in the principal amount of Seven Hundred Fifty Thousand Dollars and 00/100 ($750,000.00), with the final payment due on March 2, 1998, the maturity date of the note, made by American Xtal Technology. The note is secured by mortgage or deed of trust, also held by Lender, dated the same date as the note, and made by the same maker(s) thereof, on property situated in the County of Alameda, State of California, and recorded May 29, 1997, Instrument #97131856, in the office of the Recorder of said County. 2. The outstanding principal balance of the note on March 12, 1998 is $556,741.72 and the undisbursed funds are $193,258.28. Borrower promises and agrees to pay any outstanding balance plus interest to Lender according to the terms of the note and this modification agreement. 3. Borrower and Lender agree that the note and mortgage or deed of trust are modified as follows: A. The maturity date of the promissory note is hereby amended from March 2, 1998 to April 2, 1998. B. Guarantors, Theodore Young, PH.D. and Morris Young, PH.D., have been released as guarantors on this loan. 4. If is further agreed and understood that all of the covenants and conditions of the above mentioned mortgage or deed of trust shall remain in full force and effect except for the amendments and modifications herein agreed upon. 5. Nothing herein contained shall in any manner affect the priority or lien of the mortgage or deed of trust securing this note. IN WITNESS WHEREOF, the Borrower has caused these presents to be duly executed the day year first above written. BORROWER: AMERICAN XTAL TECHNOLOGY /s/ MORRIS YOUNG - -------------------------------- Morris Young, Ph.D., President 1 11 IN WITNESS WHEREOF, U.S. BANK NATIONAL ASSOCIATION has caused these presents to be executed by its proper officer and its corporate seal hereunto affixed the __ day of March, 1998. U.S. BANK NATIONAL ASSOCIATION By: [SIG] ---------------------------------- ITS: RELATIONSHIP MANAGER 12 ALTERNATIVE RATE OPTIONS PROMISSORY NOTE (PRIME RATE, LIBOR) $15,000,000.00 Dated as of: MARCH 12, 1998 AMERICAN XTAL TECHNOLOGIES ("Borrower") U.S. BANK NATIONAL ASSOCIATION ("Lender") 1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to repay all sums which Lender may from time to time advance to Borrower ("Advances") under a: [ ] single disbursement loan. Amounts loaned to Borrower hereunder will be disbursed in a single Advance in the amount shown in Section 2. [X] revolving line of credit. No Advances shall be made which create a maximum amount outstanding at any one time which exceeds the maximum amount shown in Section 2. However, Advances hereunder may be borrowed, repaid and reborrowed, and the aggregate Advances loaned hereunder which may exceed maximum amount. 2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances outstanding under this note ("Principal Balance") at one time shall not exceed $15,000,000.00. 3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or order at 1420 5TH AVENUE, SEATTLE, WA 98101 the Principal Balance of this note, with interest thereon at the rate(s) specified in Sections 4 and 11 below. 4. INTEREST RATE. The interest rate on the Principal Balance outstanding may vary from time to time pursuant to the provisions of this note. Subject to the provisions of this note, Borrower shall have the option from time to time of choosing to pay interest at the rate or rates and for the applicable periods of time based on the rate options provided herein; provided, however, that once Borrower notifies Lender of the rate option chosen in accordance with the provisions of this note, such notice shall be irrevocable. The rate options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined herein. (a) DEFINITIONS. The following terms shall have the following meanings: "Business Day" means any day other than a Saturday, Sunday, or other day that commercial banks in Sacramento, California, Portland, Oregon or New York City are authorized or required by law to close; provided, however that when used in connection with a LIBOR rate, LIBOR Amount or LIBOR Interest Period such term shall also exclude any day on which dealings in U.S. dollar deposits are not carried on in the London Interbank market. LIBOR Amount" means each principal amount for which Borrower chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest Period. "LIBOR Interest Period" means as to any LIBOR Amount, a period of 1, 2 or 3 months commencing on the date the LIBOR Borrowing Rate becomes applicable thereto; provided, however, that: (i) the first day of each LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest Period shall be selected which would extend beyond MAY 15, 1999; (iii) no LIBOR Interest Period shall extend beyond the date of any principal payment required under Section 6 of this note, unless the sum of the Prime Rate Amount, plus LIBOR Amounts with LIBOR Interest Periods ending on or before the scheduled date of such principal payment, plus principal amounts remaining unborrowed under a line of credit, equals or exceeds the amount of such principal payment; (iv) any LIBOR Interest Period which would otherwise expire on a day which is not a Business Day, shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such LIBOR Interest Period into another calendar month, in which event the LIBOR Interest Period shall end on the immediately preceding Business Day; and (v) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall on the last Business Day of a calendar month. "LIBOR Rate" means, for any LIBOR Interest Period, the rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as its LIBOR Rate, based on Lender's determination, on the basis of such factors as Lender deems relevant, of the rate of interest at which U.S. dollar deposits would be offered to U.S. Bank National Association in the London Interbank market at approximately 11 a.m. London time on the date which is two Business Days prior to the first day of such LIBOR Interest Period for delivery on the first day of such LIBOR Interest Period for the number of months therein; provided, however, that the LIBOR Rate shall be adjusted to take into account the maximum reserves required to be maintained for Eurocurrency liabilities by banks during each such LIBOR Interest Period as specified in Regulation D of the Board of Governors of the Federal Reserve System or any successor regulation. "Prime Rate" means the rate of interest which Lender from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which Lender collects from any borrower or class of borrowers. When the Prime Rate is applicable under Section 4(b) or 11(b), the interest rate hereunder shall be adjusted without notice effective on the day the Prime Rate changes, but in no event shall the rate of interest be higher than allowed by law. "Prime Rate Amount" means any portion of the Principal Balance bearing Interest at the Prime Borrowing Rate. (b) THE PRIME BORROWING RATE. (i) The Prime Borrowing Rate is a per annum rate equal to the Prime Rate plus 0.50% UPON COMPLETION OF IPO WITH A RESULTING NET WORTH GREATER THAN $30,000,000.00, RATE WILL DECREASE TO PRIME RATE PLUS 0.00% per annum. (ii) Whenever Borrower desires to use the Prime Borrowing Rate option, Borrower shall give Lender notice orally or in writing in accordance with Section 15 of this note, which notice shall specify the requested effective date (which must be a Business Day) and principal amount of the Advance or increase in the Prime Rate Amount, and whether Borrower is requesting a new Advance under a line of credit or conversion of a LIBOR Amount to the Prime Borrowing Rate. (iii) Subject to Section 11 of this note, interest shall accrue on the unpaid Principal Balance at the Prime Borrowing Rate unless and except to the extent that the LIBOR Borrowing Rate is in effect. (c) THE LIBOR BORROWING RATE (i) The LIBOR Borrowing Rate is the LIBOR Rate plus 2.81% AND UPON COMPLETION OF IPO WITH A RESULTING NET WORTH GREATER THAN $30,000,000.00, RATE WILL DECREASE TO LIBOR RATE PLUS 2.31% per annum. (ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day. Borrower may request an Advance, conversion of any portion of the Prime Rate Amount to a LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR Amount, at such rate only by giving Lender notice in accordance with Section 4(c)(iii) before 10:00 a.m. (Portland, Oregon time) on such day. 13 (iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option, Borrower shall give Lender irrevocable notice (either in writing or orally and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) two (2) Business Days prior to the desired effective date of such rate. Any oral notice shall be given by, and any written notice or confirmation of an oral notice shall be signed by, the person(s) authorized in Section 15 of this note, and shall specify the requested effective date of the rate, LIBOR Interest Period and LIBOR Amount, and whether Borrower is requesting a new Advance at the LIBOR Borrowing Rate under a line of credit, conversion of all or any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR Interest Period for an outstanding LIBOR Amount. Notwithstanding any other term of this note, Borrower may elect the LIBOR Borrowing Rate in the minimum principal amount of $100,000.00 and in multiples of $50,000.00 above such amount; provided, however, that no more than FOUR separate LIBOR interest Periods may be in effect at any one time. (iv) If at any time the LIBOR Rate is unascertainable or unavailable to Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is then in effect, (A) it shall terminate automatically with respect to all LIBOR Amounts (i) on the last day of each then applicable LIBOR Interest Period, if Lender may lawfully continue to maintain such loans, or (ii) immediately if Lender may not lawfully continue to maintain such loans through such day, and (B) subject to Section 11, the Prime Borrowing Rate automatically shall become effective as to such amounts upon such termination. (v) If at any time after the date hereof (A) any revision in or adoption of any applicable law, rule, or regulation or in the interpretation or administration thereof (i) shall subject Lender or its Eurodollar lending office to any tax, duty, or other charge, or change the basis of taxation of payments to Lender with respect to any loans bearing interest based on the LIBOR Rate, or (ii) shall impose or modify any reserve, insurance, special deposit, or similar requirements against assets of, deposits with or for the account of, or credit extended by Lender or its Eurodollar lending office, or impose on Lender or its Eurodollar lending office and other condition affecting any such loans, and (B) the result of any of the foregoing is (i) to increase the cost to Lender of making or maintaining any such loans or (ii) to reduce the amount of any sum receivable under this note by Lender or its Eurodollar lending office, Borrower shall pay Lender within 15 days after demand by Lender such additional amount as will compensate Lender for such increased cost or reduction. The determination hereunder by Lender of such additional amount shall be conclusive in the absence of manifest error. If Lender demands compensation under this Section 4(c)(v), Borrower may upon three (3) Business Days' notice to Lender pay the accrued interest on all LIBOR Amounts, together with any additional amounts payable under Section 4(c)(vi). Subject to Section 11, upon Borrower's paying such accrued interest and additional costs, the Prime Borrowing Rate immediately shall be effective with respect to the unpaid principal balance of such LIBOR Amounts. (vi) Borrower shall pay to Lender, on demand, such amount as Lender reasonably determines (determined as though 100% of the applicable LIBOR Amount had been funded in the London interback market) is necessary to compensate Lender for any direct or indirect losses, expenses, liabilities, costs, expenses or reductions in yield to Lender, whether incurred in connection with liquidation or re-employment of funds or otherwise, incurred or sustained by Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount, termination of the LIBOR Borrowing Rate or conversion of a LIBOR Amount to the Prime Borrowing Rate on a day other than the last day of the applicable LIBOR Interest Period (including as a result of acceleration or a notice pursuant to Section 4(c)(v)); or (B) Any failure of Borrower to borrow, continue or prepay any LIBOR Amount or to convert any portion of the Prime Rate Amount to a LIBOR Amount after Borrower has given a notice thereof to Lender. (vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay interest based on such rate, plus any other applicable taxes or charges hereunder, even though Lender may have obtained the funds loaned to Borrower from sources other than the London interbank market. Lender's determination of the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in the absence of manifest error. (viii) Notwithstanding any other term of this note, Borrower may not select the LIBOR Borrowing Rate if an event of default hereunder has occurred and is continuing. (ix) Nothing contained in this note, including without limitation the determination of any LIBOR Interest Period or Lender's quotation of any LIBOR Borrowing Rate, shall be construed to prejudice Lender's right, if any, to decline to make any requested Advance or to require payment on demand. 5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will be computed at the applicable rate based on a 360-day year and applied to the actual number of days elapsed. 6. PAYMENT SCHEDULE. (a) Principal. Principal shall be paid: [ ] on demand. [ ] on demand, or if no demand, on [X] on MAY 15, 1999. [ ] subject to Section 8, in installments of [ ] _____ each, plus accrued interest, beginning on _____ and on the same day of each _____ thereafter until _____ when the entire Principal Balance plus interest thereon shall be due and payable. [ ] _____ each, including accrued interest, beginning on _____ and on the same day of each _____ thereafter until _____ when the entire Principal Balance plus interest thereon shall be due and payable. (b) Interest. (i) Interest on the Prime Rate Amount shall be paid: [X] on the 12TH day of APRIL, 1988 and on the same day of each MONTH thereafter prior to maturity and at maturity. [ ] at maturity. [ ] at the time each principal installment is due and at maturity. [ ] (ii) Interest on all LIBOR Amounts shall be paid: [X] on the last day of the applicable LIBOR Interest Period, and if such LIBOR Interest Period is longer than three months, on the last day of each three month period occurring during such LIBOR Interest Period, and at maturity. [ ] on the ____ day of _____ and on the same day of each _____ thereafter prior to maturity and at maturity. [ ] at maturity. [ ] at the time each principal installment is due and at maturity. [ ] 7. PREPAYMENT. (a) Prepayments of all or any part of the Prime Rate Amount may be made at any time without penalty. (b) Except as otherwise specifically set forth herein, Borrower may not prepay all or any part of any LIBOR Amount or terminate any LIBOR Borrowing Rate, except on the last of the applicable LIBOR Interest Period. (c) Principal prepayments will not postpone the date of or change the amount of any regularly scheduled payment. At the time of any principal prepayment, all accrued interest, fees, costs and expenses shall also be paid. 8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note changes the holder of this note may, from time to time, in holder's sole discretion, increase or decrease the amount of each of the installments remaining unpaid at the time of such change in rate to an amount holder in its sole 14 discretion deems necessary to continue amortizing the Principal Balance at the same rate established by the installment amounts specified in Section 6(a), whether or not a "balloon" payment may also be due upon maturity of this note. Holder shall notify the undersigned of each such change in writing. Whether or not the installment amount is increased under this Section 8, Borrower understands that, as a result of increases in the rate of interest the final payment due, whether or not a "balloon" payment, shall include the entire Principal Balance and Interest thereon then outstanding, and may be substantially more than the installment specified in Section 6. 9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in any month there is no day on which a scheduled payment would otherwise be due (e.g. February 31), such payment shall be paid on the last banking day of that month. 10. PAYMENT BY AUTOMATIC DEBIT. [ ] Borrower hereby authorizes Lender to automatically deduct the amount of all principal and interest payments from account number at . If there are insufficient funds in the account to pay the automatic deduction in full, Lender may allow the account to become overdrawn, or Lender may reverse the automatic deduction. Borrower will pay all the fees on the account which result from the automatic deductions, including any overdraft and non-sufficient funds charges. If for any reason Lender does not charge the account for a payment, or if an automatic payment is reversed, the payment is still due according to this note. If the account is a Money Market Account, the number of withdrawals from that account is limited as set out in the account agreement. Lender may cancel the automatic deduction at any time in its discretion. Provided, however, if no account number is entered above, Borrower does not want to make payments by automatic debit. 11. DEFAULT. (a) Without prejudice to any right of Lender to require payment on demand or to decline to make any requested Advance, each of the following shall be an event of default: (i) Borrower fails to make any payment when due. (ii) Borrower fails to perform or comply with any term, covenant or obligation in this note or any agreement related to this note, or in any other agreement or loan Borrower has with Lender. (iii) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this note or perform Borrower's obligations under this note or any related documents. (iv) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates or dissolves, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (vi) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (vii) Any of the events described in this default section occurs with respect to any general partner in Borrower or any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted not to be, in full force and effect. (viii) There is any material adverse change in the financial condition or management of Borrower or Lender in good faith deems itself insecure with respect to the payment or performance of Borrower's obligations to Lender. If this note is payable on demand, the inclusion of specific events of default shall not prejudice Lender's right to require payment on demand or to decline to make any requested Advance. (b) Without prejudice to any right of Lender to require payment on demand, upon the occurrence of an event of default, Lender may declare the entire unpaid Principal Balance on this note and all accrued unpaid interest immediately due and payable, without notice. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the interest rate on this note to a rate equal to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the maximum rate permitted by applicable law. In addition, if any payment of principal or interest is 15 or more days past due, Borrower will be charged a late charge of 5% of the delinquent payment. 12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall, at any time, be conclusive evidence of the unpaid Principal Balance and interest owing on this note. Notwithstanding any other provisions of this note, in the event holder makes Advances hereunder which result in an unpaid Principal Balance on this note which at any time exceeds the maximum amount specified in Section 2, Borrower agrees that all such Advance, with interest, shall be payable on demand. 13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is a revolving line of credit or a non-revolving line of credit, Borrower agrees that Lender is under no obligation and has not committed to make any Advances hereunder. Each Advance hereunder shall be made at the sole option of Lender. 14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and agrees that (a) Lender is entitled to demand Borrower's immediate payment in full of all amounts owing hereunder and (b) neither anything to the contrary contained herein or in any other loan documents (including but not limited to, provisions relating to defaults, rights of cure, default rate of interest, installment payments, late charges, periodic review of Borrower's financial condition, and covenants) nor any act of Lender pursuant to any such provisions shall limit or impair Lender's right or ability to require Borrower's payment in full of all amounts owing hereunder immediately upon Lender's demand. 15. REQUESTS FOR ADVANCES. (a) Any Advance may be made or interest rate option selected upon the request of Borrower (if an individual), any of the undersigned (if Borrower consists of more than one individual), any person or persons authorized in subsection (b) of this Section 15, and any person or persons otherwise authorized to execute and deliver promissory notes to Lender on behalf of Borrower. (b) Borrower hereby authorizes any of the following individuals to request Advances and to select interest rate options: unless Lender is otherwise instructed in writing. (c) All Advances shall be disbursed by deposit directly to Borrower's account number at branch of Lender, or by cashier's check issued to Borrower. (d) Borrower agrees that Lender shall have no obligation to verify the identity of any person making any request pursuant to this Section 15, and Borrower assumes all risks of the validity and authorization of such requests. In consideration of Lender agreeing, at its sole discretion, to make Advances upon such requests, Borrower promises to pay holder, in accordance with the provisions of this note, the Principal Balance together with interest thereon and other sums due hereunder, although any Advances may have been requested by a person or persons not authorized to do so. 16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations periodically. At the time of the review, Borrower will furnish Lender with any additional information regarding Borrower's financial condition and business operations that Lender requests. This information may include but is not limited to, financial statements, tax returns, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets and forecasts. If upon review, Lender, in its sole discretion, determines that there has been a material adverse change in Borrower's financial condition, Borrower will be in default. Upon default, Lender shall have all rights specified herein. 17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid and addressed to Borrower at the last known address of Borrower as shown on holder's records. If Borrower consists of more than one person, notification of any of said persons shall be complete notification of all. 18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced, Borrower promises to pay all costs of collecting overdue amounts. Without limiting the foregoing, in the event that holder consults an attorney regarding the enforcement of any of its rights under this note or any document securing the same, or if this note is placed in the hands of an attorney for collection or if suit or litigation is brought to enforce this note or any document securing the same, Borrower promises to pay all costs thereof including such additional sums as the court or arbitrator(s) may adjudge reasonable as attorney fees, including without limitation, costs and attorney fees incurred in any appellate court, in any proceeding under the bankruptcy code, or in any receivership and post-judgment attorney fees incurred in enforcing any judgment. 19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or otherwise, waives diligence, demand, presentment for payment, notice of non-payment, protest and notice of protest and waives all defenses based on suretyship or impairment of collateral. Without notice to Borrower and without diminishing or affecting Lender's rights or Borrower's obligations hereunder, Lender may deal in any manner with any person who at any time is liable for, or provides any real or personal property collateral for, any indebtedness of Borrower to Lender, including the indebtedness evidenced by this note. Without limiting the foregoing, Lender may, in its sole discretion: (a) make secured or unsecured loans to borrower and agree to any number of waivers, modifications, extensions and renewals of any length of such loans, including the loan evidenced by this note; (b) impair, release (with or without substitution of 15 new collateral), fail to perfect a security interest in, fail to preserve the value of, fail to dispose of in accordance with applicable law, any collateral provided by any person; (c) sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. 20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers are joint and several and are binding upon any marital community of which any of the undersigned are members. Holder's rights and remedies under this note shall be cumulative. 21. SEVERABILITY. If any term of provisions of this note is declared by a court of competent jurisdiction to be illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable, and this note shall be construed as if such illegal, invalid or unenforceable provisions had not been contained herein. 22. ARBITRATION. (a) Either Lender Borrower may require that all disputes, claims, counterclaims and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this note or any transaction of which this note is a part (the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title of the U.S. Code. All Claims will be subject to the statutes of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the arbitration procedure (as opposed to any Claims of Borrower) would be to materially impair Lender's ability to realize on any collateral securing the Loan. (b) If arbitration occurs and each party's Claim is less than $100,000, one neutral arbitrator will decide all issues; if any party's Claim is $100,000 or more, three neutral arbitrators will decide all issues. All arbitrators will be active California State Bar members in good standing. All arbitration hearings will be held in Sacramento, California. In addition to all other powers, the arbitrator(s) shall have the exclusive right to determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. (c) If either party institutes any judicial proceeding relating to the Loan, such action shall not be a waiver of the right to submit any Claim to arbitration. In addition, each has the right before, during and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non-judicial foreclosure against real or personal property collateral; and (iv) provisional remedies, including injunction, appointment of receiver, attachment, claim and delivery and replevin. 23. GOVERNING LAW. This note shall be governed by and construed and enforced in accordance with the laws of the State of California without regard to conflicts of law principles; provided, however, that to the extent that Lender has greater rights or remedies under Federal law, this provision shall not be deemed to deprive Lender of such rights and remedies as may be available under Federal law. EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DOCUMENT. AMERICAN XTAL TECHNOLOGY Borrower Name (Corporation, Partnership or other Entity) BY: /s/ MORRIS YOUNG ---------------------------------- MORRIS YOUNG, PH.D., PRESIDENT BY: ---------------------------------- _______________________________________________________________________________ For valuable consideration, Lender agrees to the terms of the arbitration provision set forth in this note. Lender Name: U.S. Bank National Association By: [SIG] --------------------------------------- Title: RELATIONSHIP MANAGER ------------------------------------ Date: 3/12/98 ------------------------------------- EX-21.1 13 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 EXHIBIT 21.1 -- LIST OF SUBSIDIARIES AXT-Japan, a wholly-owned subsidiary of the Company. EX-23.1 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated February 6, 1998, relating to the financial statements of American Xtal Technology, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." PRICE WATERHOUSE LLP San Jose, California March 16, 1998 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,054 0 6,105 100 8,361 18,503 15,985 3,884 30,613 4,294 0 0 8,553 867 9,171 30,613 23,014 25,335 13,674 15,227 4,248 0 570 5,256 1,998 3,258 0 0 0 3,258 1.11 0.25
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