-----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, UmhCk1l8XEMeZn9+xoq1FIvlWaV6lKLHTtM1lWfCRrJQWM+ORp1iwX5xOzaxqNJI vOYtivKvtGaPCwQajf5H0Q== /in/edgar/work/20000901/0000891618-00-004507/0000891618-00-004507.txt : 20000922 0000891618-00-004507.hdr.sgml : 20000922 ACCESSION NUMBER: 0000891618-00-004507 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXT INC CENTRAL INDEX KEY: 0001051627 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 943031310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-44704 FILM NUMBER: 715604 BUSINESS ADDRESS: STREET 1: 4821 TECHNOLOGY DRIVE CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106835900 MAIL ADDRESS: STREET 1: 4311 SOLAR WAY CITY: FREMONT STATE: CA ZIP: 94538 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN XTAL TECHNOLOGY DATE OF NAME CHANGE: 19971217 S-3/A 1 f65146a1s-3a.txt AMENDMENT NO.1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 2000. REGISTRATION NO. 333-44704 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 ------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AXT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3031310 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NO.)
4281 TECHNOLOGY DRIVE, FREMONT, CA 94538 (510) 683-5900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MORRIS S. YOUNG CHIEF EXECUTIVE OFFICER AXT, INC. 4281 TECHNOLOGY DRIVE FREMONT, CALIFORNIA 94538 (510) 683-5900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: SALLY J. RAU, ESQ. JOHN T. SHERIDAN, ESQ. JULIE L. HSU, ESQ. KATHLEEN B. BLOCH, ESQ. ELIZABETH O'CALLAHAN, ESQ. JONATHAN BLOCK, ESQ. GRAY CARY WARE & FREIDENRICH LLP JONATHAN LEVY, ESQ. 400 HAMILTON AVENUE WILSON SONSINI GOODRICH & ROSATI, PALO ALTO, CA 94301 PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] 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, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. AXT AND THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION -- SEPTEMBER 1, 2000 PROSPECTUS - -------------------------------------------------------------------------------- 2,200,000 Shares [AXT LOGO] Common Stock - -------------------------------------------------------------------------------- AXT, Inc. is offering 2,100,000 shares of common stock and the selling stockholders are offering 100,000 shares of common stock. AXT will not receive any proceeds from the sale of shares by the selling stockholders. AXT designs, develops, manufactures and distributes high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices such as high-brightness light emitting diodes, or HB LEDs, and vertical cavity surface emitting lasers, or VCSELs. The shares of AXT are included for quotation in the Nasdaq National Market under the symbol "AXTI." On August 31, 2000 the reported last sale price of AXT's common stock in the Nasdaq National Market was $38.625 per share.
Per Share Total Public offering price................................. $ $ Underwriting discounts and commissions................ $ $ Proceeds, before expenses, to AXT..................... $ $ Proceeds to selling stockholders...................... $ $
SEE "RISK FACTORS" ON PAGES 4 TO 13 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE SHARES OF AXT. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- The underwriters may, under some circumstances, purchase up to 330,000 additional shares from AXT at the public offering price, less underwriting discounts and commissions. Delivery and payment for the shares will be on , 2000. PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES CIBC WORLD MARKETS WIT SOUNDVIEW ABN AMRO ROTHSCHILD A DIVISION OF ABN AMRO INCORPORATED , 2000 PACIFIC CREST SECURITIES 3 Set forth on the left-hand side of the inside front cover page are graphics of selected end-market applications into which AXT's products are incorporated. The following graphics and captions are included: o a graphic of a wireless handset above the caption "WIRELESS COMMUNICATIONS AXT's compound semiconductor substrates are used by semiconductor device manufacturers in high-performance wireless communications applications." o a graphic of optical fiber above the caption "FIBER OPTIC COMMUNICATIONS AXT's InP substrates and VCSELs are used in next generation fiber optic communications applications." o a graphic of full-color outdoor displays above the caption "DISPLAYS Large, full-color displays, like this one in Tokyo, which incorporate LEDs that are manufactured on compound semiconductor substrates, attract attention with news broadcasts, sports events and commercial advertisements." o a graphic of a traffic light above the caption "TRAFFIC SIGNALS LEDs manufactured on compound semiconductor substrates are being used in traffic lights worldwide." A caption at the bottom of the page reads "As a result of the limitations of silicon-based technologies, semiconductor device manufacturers are increasingly using compound semiconductor substrates to improve the performance of semiconductor devices and to enable new generations of high-performance electronic and opto-electronic applications." Set forth on the inside back cover page are graphics of selected products which are designed, developed, manufactured and distributed by AXT. The following graphic and caption is included: o a graphic of various sizes of compound semiconductor crystals above the caption "We believe our proprietary VGF technique for manufacturing compound semiconductor substrates provides significant benefits over traditional methods and has enabled us to become a leading manufacturer of compound semiconductor substrates." 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary................. 1 Risk Factors....................... 4 Forward-Looking Statements......... 14 Use of Proceeds.................... 15 Price Range of Common Stock and Dividend Policy.................. 15 Capitalization..................... 16 Selected Consolidated Financial Data............................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 19 Business........................... 28 Management......................... 40
PAGE ---- Certain Transactions............... 42 Principal and Selling Stockholders..................... 43 Underwriting....................... 44 United States Federal Income Tax Consequences to Non-United States Holders.......................... 46 Legal Matters...................... 48 Experts............................ 48 Where You Can Find More Information...................... 48 Information Incorporated By Reference........................ 49 Index to Consolidated Financial Statements....................... F-1
- -------------------------------------------------------------------------------- American Xtal Technology, AXT, the AXT logo, Laserlyte, Opti, Lyte Optronics, Safe Escape and Minibrite are all trademarks of AXT, Inc. This prospectus contains trademarks of other companies. - -------------------------------------------------------------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any other date other than the date on the front cover of this prospectus. i 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully. AXT We design, develop, manufacture and distribute high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices, such as high-brightness light emitting diodes, or HB LEDs, and vertical cavity surface emitting lasers, or VCSELs. Our substrate products are used primarily in fiber optic communications, wireless communications and lighting display applications. We believe our proprietary vertical gradient freeze, or VGF, technique for manufacturing compound semiconductor substrates provides significant benefits over traditional methods and has enabled us to become a leading manufacturer of compound semiconductor substrates. We pioneered the commercial use of VGF technology to manufacture gallium arsenide, or GaAs, substrates and have used VGF technology to manufacture substrates from other materials, such as indium phosphide, or InP, and germanium, or Ge. Customers for our substrates include Agilent Technologies, Alpha Industries, EMCORE, Nortel Networks, RF Micro Devices, SDL and Sumitomo Chemical. Our acquisition of Lyte Optronics provided us with expertise in epitaxial processes for manufacturing opto-electronic semiconductor devices. We have used these capabilities to make blue, green and cyan HB LEDs and VCSELs. Our opto-electronic semiconductor devices are used in a wide range of applications, such as solid-state lighting and fiber optic communications. We have recently undertaken an initiative to significantly expand our substrate and device manufacturing capacity and to reduce the overall cost structure of our manufacturing operations. The semiconductor industry is experiencing rapid technological changes. These changes are driven primarily by increased transmission and storage of voice, video and data over communications networks and the Internet. This growth has generated increased demand for devices to send, receive and display information, as well as new wireless and wireline networks used to transmit information. This increased demand has created a growing need for power efficient, high-performance electronic systems that operate at very high frequencies and can be produced cost-effectively in high volumes. To address these demands, semiconductor device manufacturers are increasingly using compound semiconductor substrates, such as GaAs and InP, to improve the performance of semiconductor devices and to enable new applications. Our strategy is to strengthen our position as a leading developer and supplier of high-performance compound semiconductor substrates and to develop a leading position in the market for opto-electronic semiconductor devices by: - expanding our GaAs substrate manufacturing capacity and decreasing our manufacturing cost structure; - strengthening our position in the InP substrate market; - advancing our VGF technology leadership; - enhancing our opto-electronic semiconductor devices; and - leveraging existing customer relationships. We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. We changed our name from American Xtal Technology, Inc. to AXT, Inc. in July 2000. Our principal executive offices are located at 4281 Technology Drive, Fremont, California 94538, and our telephone number is (510) 683-5900. 1 6 THE OFFERING Shares offered by AXT................. 2,100,000 shares Shares offered by the selling stockholders.......................... 100,000 shares Common stock outstanding after this offering.............................. 21,282,155 shares Use of proceeds by AXT................ Repayment of debt and general corporate purposes, including working capital and capital expenditures. Nasdaq National Market symbol......... AXTI The number of shares of common stock to be outstanding after this offering is based on 18,948,000 shares outstanding as of June 30, 2000, adjusted to include 234,155 shares of common stock issued in a private placement to 11 stockholders at $36.306 per share in July 2000, and does not include: - 2,641,756 shares of common stock issuable upon exercise of options outstanding as of June 30, 2000, with a weighted average exercise price of $14.65 per share; - 3,239,831 shares of common stock available for issuance as of June 30, 2000 under our 1993 and 1997 stock option plans; - 778,837 shares of common stock available for issuance as of June 30, 2000 under our 1998 employee stock purchase plan; - 980,655 shares of preferred stock outstanding; and - up to 330,000 shares that the underwriters may purchase from us if they exercise their over-allotment option in full. RISK FACTORS You should consider the risk factors and the impact of various events that could adversely affect our business before investing in our common stock. 2 7 SUMMARY CONSOLIDATED FINANCIAL DATA
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------- --------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ----------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: Revenue................................. $24,117 $31,272 $43,313 $61,314 $81,521 $39,680 $52,878 Gross profit............................ 9,344 10,235 13,663 22,365 24,152 9,469 20,680 Income from operations.................. 4,122 4,109 2,453 8,143 4,240 (1,704) 8,412 Income (loss) before extraordinary item.................................. 2,793 2,351 820 4,284 680 (2,520) 4,325 Extraordinary item -- net of tax benefits.............................. -- -- -- -- (508) (508) -- Net income (loss)................... $ 2,793 $ 2,351 $ 820 $ 4,284 $ 172 $(3,028) $ 4,325 Basic income (loss) per share: Income (loss) before extraordinary item................................ $ 0.96 $ 0.65 $ 0.22 $ 0.27 $ 0.04 $ (0.14) $ 0.23 Net income (loss)................... 0.96 0.65 0.22 0.27 0.01 (0.16) 0.23 Diluted income (loss) per share: Income (loss) before extraordinary item................................ $ 0.23 $ 0.19 $ 0.06 $ 0.26 $ 0.03 $ (0.14) $ 0.21 Net income (loss)................... 0.23 0.19 0.06 0.26 0.01 (0.16) 0.21 Shares used in per share calculations: Basic................................. 2,921 3,595 3,697 16,076 18,655 18,451 18,687 Diluted............................... 11,913 12,524 13,598 16,325 19,771 18,451 20,178
JUNE 30, 2000 --------------------------- ACTUAL AS ADJUSTED --------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 5,149 $ 89,788 Working capital............................................. 34,669 119,308 Total assets................................................ 137,172 221,821 Long-term capital leases, net of current portion............ 8,137 8,137 Long-term debt, net of current portion...................... 14,034 14,034 Total stockholders' equity.................................. 69,246 153,885
Revenue from our substrates division and consumer products division is included in all periods presented. Revenue from our visible emitters division is included from the time of the acquisition of the visible emitter business on September 29, 1998. See Note 6 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The as adjusted information above reflects the application of the net proceeds from our sale of 234,155 shares of common stock at a price of $36.306 per share to 11 investors in a private placement in July 2000 and of 2,100,000 shares of common stock by us in this offering assuming a public offering price of $38.625 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. 3 8 RISK FACTORS You should carefully consider the risks described below, in addition to the other information in this prospectus, before purchasing shares of our common stock. Each of these risk factors could adversely affect our business, financial condition and operating results as well as adversely affect the value of an investment in our common stock. RISKS RELATED TO OUR BUSINESS UNPREDICTABLE FLUCTUATIONS IN OUR OPERATING RESULTS COULD DISAPPOINT ANALYSTS OR OUR INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. We may not be able to sustain our historical growth rate, and we may experience significant fluctuations in our revenue and earnings in the future. Our quarterly and annual revenue and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: - fluctuations in demand for our products; - expansion of our manufacturing capacity; - expansion of our operations in China; - limited availability and increased cost of raw materials; - integration of Lyte Optronics and its business, operations and facilities with our operations; - the volume and timing of orders from our customers; - fluctuation of our manufacturing yields; - decreases in the prices of our competitors' products; - costs incurred in connection with any future acquisitions of businesses or technologies; - increases in our expenses, including expenses for research and development; and - our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner. Due to these factors, we believe that period-to-period comparisons of our operating results may not be a meaningful indicator of our future performance. It is possible that in some future quarter, our operating results may be below the expectations of securities analysts or investors. If this occurs, the price of our common stock would likely decline. IF WE FAIL TO EXPAND OUR MANUFACTURING CAPACITY, WE MAY NOT BE ABLE TO MEET DEMAND FOR OUR PRODUCTS, LOWER OUR COSTS OR INCREASE REVENUE. In order to increase production, we must build new facilities, expand our existing facilities and purchase additional manufacturing equipment. If we do not expand our manufacturing capacity, we will be unable to increase production, adversely impacting our ability to reduce unit costs, margins and improve our operating results. We are currently constructing additional capacity and facilities in California and China. Our expansion activities subject us to a number of risks, including: - unforeseen environmental or engineering problems; - unavailability or late delivery of production equipment; - delays in completing new facilities; - delays in bringing production equipment on-line; 4 9 - work stoppages or delays; - unanticipated cost increases; and - restrictions imposed by requirements of local, state or federal regulatory agencies. If any of these risks occurs, construction may be costlier than anticipated and completion could be delayed, which could hurt our ability to expand capacity and increase our sales. In addition, if we experience delays in expanding our manufacturing capacity, we might not be able to timely meet customer requirements, and we could lose future sales. We are also making substantial investments in equipment and facilities as part of our capacity expansion. To offset the additional fixed operating expenses, we must increase our revenue by increasing production and improving yields. If demand for our products does not grow or if our yields do not improve as anticipated, we may be unable to offset these costs against increased revenue, which would adversely impact our operating results. WE HAVE LIMITED EXPERIENCE WITH SOME OF OUR NEW PRODUCTS, AND WE MAY NOT BE ABLE TO ACHIEVE ANTICIPATED SALES OF THESE PRODUCTS. To date, we have limited experience producing and selling our HB LED and VCSEL products, and we may be unable to successfully market and sell these products. To market and sell our HB LED and VCSEL products, we will have to develop additional distribution channels. In addition, we must apply our proprietary VGF technique to new substrate products and successfully introduce and market new opto-electronic semiconductor devices, including LED and VCSEL products. IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS TO RESPOND TO RAPIDLY CHANGING CUSTOMER REQUIREMENTS, OUR ABILITY TO GENERATE SALES AND OBTAIN NEW CUSTOMERS MAY SUFFER. Our success depends on our ability to offer new products that incorporate leading technology and respond to technological advances. In addition, our new products must meet customer needs and compete effectively on quality, price and performance. The life cycles of our products are difficult to predict because the markets for our products are characterized by rapid technological change, changing customer needs and evolving industry standards. If our competitors introduce products employing new technologies, our existing products could become obsolete and unmarketable. If we fail to offer new products, we may not generate sufficient revenue to offset our development costs and other expenses or meet our customers' requirements. Other companies, including IBM, are actively developing substrate materials that could be used to manufacture devices that could provide the same high-performance, low-power capabilities as GaAs-based devices at competitive prices. If these substrate materials are successfully developed and semiconductor device manufacturers adopt them, demand for our GaAs substrates could decline and our revenue could suffer. The development of new products can be a highly complex process, and we may experience delays in developing and introducing new products. Any significant delays could cause us to fail to timely introduce and gain market acceptance of new products. Further, the costs involved in researching, developing and engineering new products could be greater than anticipated. OUR OPERATING RESULTS DEPEND IN LARGE PART ON FURTHER CUSTOMER ACCEPTANCE OF OUR EXISTING SUBSTRATE PRODUCTS AND ON OUR ABILITY TO DEVELOP NEW PRODUCTS BASED ON OUR CORE VGF TECHNOLOGY. A majority of GaAs substrates are manufactured from crystals grown using the traditional Liquid Encapsulated Czochralski, or LEC, or Horizontal-Bridgeman, or HB, techniques. In order to expand sales of our products, we must continue to promote our VGF technique as a preferred process for producing substrates, and we must offer products with superior prices and performance on a timely basis and in sufficient volumes. If we fail to gain increased market acceptance of our VGF technique, we may not achieve anticipated revenue growth. 5 10 INTENSE COMPETITION IN THE MARKETS FOR OUR PRODUCTS COULD PREVENT US FROM INCREASING REVENUE AND SUSTAINING PROFITABILITY. The markets for our products are intensely competitive. We face competition for our substrate products from other manufacturers of substrates, such as Freiberger, Hitachi Cable, Japan Energy, Litton Airtron and Sumitomo Electric and from semiconductor device manufacturers that produce substrates for their own use, and from companies, such as IBM, that are actively developing alternative materials to GaAs. We believe that at least one of our competitors has recently begun shipping GaAs substrates manufactured using a technique similar to our VGF technique. Other competitors may develop and begin using similar technology. If we are unable to compete effectively, our revenue may not increase and we may not continue to be profitable. We face many competitors that have a number of significant advantages over us, particularly in our compound semiconductor device products, including: - greater experience in the business; - more manufacturing experience; - broader name recognition; and - significantly greater financial, technical and marketing resources. Our competitors could develop new or enhanced products that are more effective than the products that we have developed or may develop. For example, some competitors in the HB LED market offer devices that are brighter than our HB LEDs. Some of our competitors may also develop technologies that enable the production of commercial products with characteristics similar to or better than ours, but at a lower cost. We expect the intensity of competition to increase in the future. Competitive pressures could reduce our market share, require us to reduce the prices of our products, affect our ability to recover costs or result in reduced gross margins. IF WE HAVE LOW PRODUCT YIELDS, THE SHIPMENT OF OUR PRODUCTS MAY BE DELAYED AND OUR OPERATING RESULTS MAY BE ADVERSELY IMPACTED. Our products are manufactured using complex technologies, and the number of usable substrates and devices we can produce can fluctuate as a result of many factors, including: - impurities in the materials used; - contamination of the manufacturing environment; - substrate breakage; - equipment failure, power outages or variations in the manufacturing process; and - performance of personnel involved in the manufacturing process. Because many of our manufacturing costs are fixed, our revenue could decline if our yields decrease. We have experienced product shipment delays and difficulties in achieving acceptable yields on both new and older products, and delays and poor yields have adversely affected our operating results. We may experience similar problems in the future and we cannot predict when they may occur or their severity. In addition, many of our manufacturing processes are new and are still being refined, which can result in lower yields, particularly as we focus on producing higher diameter substrates and new opto-electronic semiconductor devices. For example, we recently began manufacturing six-inch GaAs wafers and have also made substantial investments in equipment and facilities to manufacture blue, green and cyan HB LEDs. If we are unable to produce adequate quantities of our high-brightness LEDs and VCSELs, we may not be able to meet customer demand and our revenue may decrease. 6 11 DEMAND FOR OUR PRODUCTS MAY DECREASE IF OUR CUSTOMERS EXPERIENCE DIFFICULTY MANUFACTURING, MARKETING OR SELLING THEIR PRODUCTS. Our products are used as components in our customers' products. Accordingly, demand for our products is subject to factors affecting the ability of our customers to successfully introduce and market their products, including: - the competition our customers face in their particular industries; - the technical, manufacturing, sales and marketing and management capabilities of our customers; - the financial and other resources of our customers; and - the inability of our customers to sell their products if they infringe third party intellectual property rights. If demand for the products offered by our customers decreases, our customers may reduce purchases of our products. WE PURCHASE CRITICAL RAW MATERIALS FROM SINGLE OR LIMITED SOURCES, AND COULD LOSE SALES IF THESE SOURCES FAIL TO FILL OUR NEEDS. We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our products, including key materials such as gallium, arsenic and quartz. We generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts and none of our suppliers guarantees supply of raw materials to us. If we lose any of our key suppliers, our manufacturing efforts could be significantly hampered and we could be prevented from timely producing and delivering products to our customers. We have experienced delays obtaining critical raw materials, including gallium, due to shortages of these materials. We may experience delays due to shortages of materials and may be unable to obtain an adequate supply of materials. These shortages and delays could result in higher materials costs and cause us to delay or reduce production of our products. If we have to delay or reduce production, we could fail to meet customer delivery schedules, and our revenue and operating results could suffer. IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE MAY BE SUBJECT TO SIGNIFICANT FINES OR CESSATION OF OUR OPERATIONS. We are subject to federal, state and local environmental laws and regulations. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. If we fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury and fines or suspension or cessation of our operations. We are cooperating with the California Occupational Safety and Health Administration, or Cal-OSHA, in an investigation primarily regarding impermissible levels of potentially hazardous materials in certain areas of our manufacturing facility in Fremont, California. In May 2000, Cal-OSHA levied a fine against us in the amount of $313,655 for alleged health and safety violations. Although we are appealing the citations, and have put in place engineering, administrative and personnel protective equipment programs to address these issues, we may have to pay this fine, and further penalties, including criminal penalties, could be levied against us or our management. Our ability to expand or continue to operate our present locations could be restricted or we could be required to acquire costly remediation equipment or incur other significant expenses. In addition, existing or future changes in laws or regulations may require us to incur significant expenditures or liabilities, or may restrict our operations. THE LOSS OF ONE OR MORE OF OUR KEY SUBSTRATE CUSTOMERS WOULD SIGNIFICANTLY HURT OUR OPERATING RESULTS. A small number of substrate customers have historically accounted for a substantial portion of our total revenue. Our top five substrate customers accounted for 34.9% of our substrate revenue in 1997, 7 12 39.5% of our substrate revenue in 1998, 34.3% of our substrate revenue in 1999 and 26.2% of our substrate revenue in the six months ended June 30, 2000. Our substrate revenue accounted for 58.5% of our total revenue in 1997, 70.4% of our total revenue in 1998, 69.6% in 1999, and 85.7% in the six months ended June 30, 2000. We expect that a significant portion of our future revenue will continue to be derived from a limited number of substrate customers. Our customers are not obligated to purchase a specified quantity of our products or to provide us with binding forecasts of product purchases. In addition, our customers may reduce, delay or cancel orders at any time without any significant penalty. If we lose a major customer or if a customer cancels, reduces or delays orders, our revenue would decline. In addition, customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future period. DEFECTS IN OUR PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS. Our products are complex and may contain defects. In the past we have experienced quality control problems with some of our LED and consumer products, which caused customers to return products to us. If we continue to experience quality control problems, or experience these problems in our other products, customers may cancel or reduce orders or purchase products from our competitors. Defects in our products could cause us to incur higher manufacturing costs and suffer product returns and additional service expenses, all of which could adversely impact our operating results. We are also developing new products and product enhancements, including substrates and compound semiconductor device products. If our new products contain defects when released, our customers may be dissatisfied and we may suffer negative publicity or customer claims against us, lose sales or experience delays in market acceptance of our new products. CYCLICALITY IN THE SEMICONDUCTOR INDUSTRY COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY. Our business depends in significant part upon manufacturers of semiconductor devices, as well as the current and anticipated market demand for such devices and the products using such devices. The semiconductor industry is highly cyclical. The industry has in the past, and will likely in the future, experience periods of oversupply that result in significantly reduced demand for semiconductor devices and components, including our products. When these periods occur, our operating results and financial condition are adversely affected. OUR SUBSTRATE AND OPTO-ELECTRONIC SEMICONDUCTOR DEVICE PRODUCTS HAVE A LONG SALES CYCLE THAT MAKES IT DIFFICULT TO PLAN OUR EXPENSES AND FORECAST OUR RESULTS. Customers typically place orders with us for our substrate and opto-electronic semiconductor device products three months to a year or more after our initial contact with them. The sale of our products may be subject to delays due to our customers' lengthy internal budgeting, approval and evaluation processes. During this time, we may incur substantial expenses and expend sales, marketing and management efforts while the customers evaluate our products. These expenditures may not result in sales of our products. If we do not achieve anticipated sales in a period as expected, we may experience an unplanned shortfall in our revenue. As a result, we may not be able to cover expenses, causing our operating results to vary. In addition, if a customer decides not to incorporate our products into its initial design, we may not have another opportunity to sell products to this customer for many months or even years. We anticipate that sales of any future substrate and opto-electronic semiconductor device products under development will also have lengthy sales cycles and will, therefore, be subject to risks substantially similar to those inherent in the lengthy sales cycle of our current substrate and opto-electronic semiconductor device products. IF WE FAIL TO MANAGE OUR POTENTIAL GROWTH, OUR OPERATIONS MAY BE DISRUPTED. We have experienced a period of rapid growth and expansion that has strained our management and other resources, and we expect this rapid growth to continue. Our acquisition of Lyte Optronics, together with expansion of our manufacturing capacity, has placed and continues to place a significant strain on our 8 13 operations and management resources. If we fail to manage our growth effectively, our operations may be disrupted. To manage our growth effectively, we must implement additional and improved management information systems, further develop our operating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintain close coordination among our executive, engineering, accounting, marketing, sales and operations organizations. We will spend substantial sums to support our growth and may incur additional unexpected costs. Our systems, procedures or controls may not be adequate to support our operations, and we may be unable to expand quickly enough to exploit potential market opportunities. Our future operating results will also depend on expanding sales and marketing, research and development and administrative support. If we cannot attract qualified people or manage growth effectively, our business and operating results could be adversely affected. ANY FUTURE ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DISTRACT MANAGEMENT ATTENTION. As part of our strategy, we may consider acquisitions of, or significant investments in, businesses that offer products, services and technologies complementary to ours, such as our acquisition of Lyte Optronics in May 1999. Acquisitions entail numerous risks, including: - we may have difficulty assimilating the operations, products and personnel of the acquired businesses; - our ongoing business may be disrupted; - we may incur unanticipated costs; - our management may be unable to manage the financial and strategic position of acquired or developed products, services and technologies; - we may be unable to maintain uniform standards, controls and procedures and policies; and - our relationships with employees and customers may be impaired as a result of any integration. For example, we incurred substantial costs in connection with our acquisition of Lyte Optronics, including the assumption of approximately $11.0 million of debt, much of which has been repaid or renegotiated, resulting in a decline of cash available. We incurred one-time charges and merger-related expenses of $2.8 million and an extraordinary item of $508,000 relating to the early extinguishment of debt in the quarter ended June 30, 1999 as a result of the acquisition. Ten percent of the shares issued to the Lyte Optronics' stockholders are held in escrow to satisfy any claims that we may bring under the acquisition agreement. We have filed certain claims under the agreement and expect that all of the shares held in escrow will be returned to us in satisfaction of these claims. To the extent that we issue shares of our stock or other rights to purchase stock in connection with any future acquisitions, dilution to our existing stockholders will result and our earnings per share may suffer. Any future acquisitions may not generate additional revenue or provide any benefit to our business. IF ANY OF OUR FACILITIES IS DAMAGED, WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS. The ongoing operation of our manufacturing and production facilities in California and China is critical to our ability to meet demand for our products. If we are not able to use all or a significant portion of our facilities for prolonged periods for any reason, we will not be able to manufacture products for our customers. For example, a natural disaster, fire or explosion caused by our use of combustible chemicals and high temperatures during our manufacturing processes would render some or all of our facilities inoperable for an indefinite period of time. Actions outside of our control, such as earthquakes, could also damage our facilities, rendering them inoperable. All of our crystal growth is currently performed at our Fremont, California facilities, which are located very near to an active seismic fault line. If we are unable 9 14 to operate our facilities and manufacture our products, we will lose customers and revenue and our business will be harmed. IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR ACHIEVE OUR OBJECTIVES. Our success depends upon the continued service of Morris S. Young, Ph.D., our president, chairman of the board and chief executive officer, as well as other key management and technical personnel. We do not have long-term employment contracts with, or key person life insurance on, any of our key personnel. In addition, we have only recently hired our chief financial officer, and need to retain senior marketing personnel, particularly for our new opto-electronic semiconductor device products. We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. The competition for these employees is intense, especially in Silicon Valley, and we cannot assure you that we will be successful in attracting and retaining new personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could make it difficult for us to manage our business and meet key objectives, including the timely introduction of new products. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY LOSE VALUABLE ASSETS OR INCUR COSTLY LITIGATION. We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology. However, we believe that, due to the rapid pace of technological innovation in the markets for our products, our ability to establish and maintain a position of technology leadership also depends on the skills of our development personnel. Despite our efforts to protect our intellectual property, a third party could develop products or processes similar to ours. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around our patents. We believe that at least one of our competitors has begun to ship GaAs substrates produced using a process similar to our VGF technique. Our competitors may also develop and patent improvements to the VGF, LED and VCSEL technologies upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents. It is possible that pending or future United States or foreign patent applications made by us will not be approved, that our issued patents will not protect our intellectual property, or that third parties will challenge the ownership rights or the validity of our patents. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property. Our competitors may be able to legitimately ascertain non-patented proprietary technology embedded in our systems. If this occurs, we may not be able to prevent the development of technology substantially similar to ours. We may have to resort to costly litigation to enforce our intellectual property rights, to protect our trade secrets or know-how or to determine their scope, validity or enforceability. Enforcing or defending our proprietary technology is expensive, could cause us to divert resources and may not prove successful. Our protective measures may prove inadequate to protect our proprietary rights, and if we fail to enforce or protect our rights, we could lose valuable assets. WE MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT MAY BE COSTLY TO RESOLVE AND COULD DIVERT MANAGEMENT ATTENTION. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business. The markets in which we compete are comprised of competitors 10 15 who in some cases hold substantial patent portfolios covering aspects of products that could be similar to ours. We could become subject to claims that we are infringing patent, trademark, copyright or other proprietary rights of others. Litigation to determine the validity of alleged claims could be time-consuming and result in significant expense to us and divert the efforts of our technical and management personnel, whether or not the litigation is ultimately determined in our favor. If a lawsuit is decided against us, we could be subject to significant liabilities, requiring us to seek costly licenses or preventing us from manufacturing and selling our products. We may not be able to obtain required licensing agreements on terms acceptable to us or at all. RISKS RELATED TO OUR INTERNATIONAL OPERATIONS WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM INTERNATIONAL SALES, AND OUR ABILITY TO SUSTAIN AND INCREASE OUR INTERNATIONAL SALES INVOLVES SIGNIFICANT RISKS. Our revenue growth depends in part on the expansion of our international sales and operations. International sales represented 29.2% of our total revenue for 1997, 31.7% for 1998, 48.5% for 1999 and 47.3% for the six months ended June 30, 2000. We expect that sales to customers outside the U.S. will continue to represent a significant portion of our revenue. Our dependence on international sales involves a number of risks, including: - changes in tariffs, import restrictions and other trade barriers; - unexpected changes in regulatory requirements; - longer periods to collect accounts receivable; - changes in export license requirements; - political and economic instability; - unexpected changes in diplomatic and trade relationships; and - foreign exchange rate fluctuations. Our sales are denominated in U.S. dollars, except for sales to our Japanese and some Taiwanese customers, which are denominated in Japanese yen. Thus, increases in the value of the U.S. dollar could increase the price of our products in non-U.S. markets and make our products more expensive than competitors' products in these markets. Also, denominating some sales in Japanese yen subjects us to fluctuations in the exchange rates between the U.S. dollar and the Japanese yen. The functional currencies of our Japanese and Chinese subsidiaries are the local currencies. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for these subsidiaries, as well as in translation of the assets and liabilities of these assets at each balance sheet date. If we do not effectively manage the risks associated with international sales, our revenue and financial condition could be adversely affected. IF OUR EXPANSION IN CHINA IS MORE COSTLY THAN WE EXPECT, OUR OPERATING RESULTS WILL SUFFER. As part of our planned expansion of our manufacturing capacity, we are building new facilities and expanding existing facilities in China. If we are unable to build and expand our Chinese facilities in a timely manner, we may not be able to increase production of our products and increase revenue as planned. If our expansion in China proves more costly than we anticipate or we incur greater ongoing costs than we expect, our operating results would be adversely affected. If we do not realize expected cost savings once our expansion is complete in China, our margins may be negatively impacted and our operating results may suffer. 11 16 CHANGES IN CHINA'S POLITICAL, SOCIAL AND ECONOMIC ENVIRONMENT MAY AFFECT OUR FINANCIAL PERFORMANCE. Our financial performance may be affected by changes in China's political, social and economic environment. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting technology companies, foreign investment, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business and operate our manufacturing facilities in China. Any imposition of surcharges or any increase in Chinese tax rates could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasons without compensation to us. If the government of China were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our products in China. China has from time to time experienced instances of civil unrest and hostilities. Confrontations have occurred between the military and civilians. Events of this nature could influence the Chinese economy, result in nationalization of foreign-owned operations such as ours, and could negatively affect our ability to operate our facilities in China. RISKS RELATED TO THE OFFERING OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE. Our stock price has fluctuated significantly since we began trading on the Nasdaq National Market. For the 12 months ended August 31, 2000, the high and low sales prices of our common stock were $47.00 and $12.063. A number of factors could cause the price of our common stock to continue to fluctuate substantially, including: - actual or anticipated fluctuations in our quarterly or annual operating results; - changes in expectations about our future financial performance or changes in financial estimates of securities analysts; - announcements of technological innovations by us or our competitors; - new product introduction by us or our competitors; - large customer orders or order cancellations; and - the operating and stock price performance of comparable companies. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. WE MAY NEED ADDITIONAL CAPITAL TO FUND EXPANSION OF OUR MANUFACTURING CAPACITY AND OUR FUTURE OPERATIONS, WHICH MAY NOT BE AVAILABLE. We may need capital in addition to the net proceeds of this offering to fund expansion of our manufacturing and production capacity and our future operations or acquisitions. If we raise additional capital through the sale of equity or debt securities, the issuance of such securities could result in dilution to existing stockholders. These securities could have rights, preferences and privileges that are senior to those of holders of our common stock. For example, in December 1998 we issued debt securities for the purchase and improvement of our facilities in Fremont, California. If we require additional capital in the future, it might not be available on acceptable terms, or at all. If we are unable to obtain additional capital when needed, we may be required to reduce the scope of our planned expansion of our manufacturing capacity or of our product development and marketing efforts, which could adversely affect our business and operating results. 12 17 PROVISIONS IN OUR CHARTER, BYLAWS OR DELAWARE LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY. Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a merger, acquisition or change of control of us, or changes in our management. These provisions include: - the division of our board of directors into three separate classes, each with three year terms; - the right of our board to elect a director to fill a space created by a board vacancy or the expansion of the board; - the ability of our board to alter our bylaws; - the ability of our board to authorize the issuance of up to 2,000,000 shares of blank check preferred stock; and - the requirement that only our board or the holders of at least 10% of our outstanding shares may call a special meeting of our stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions prohibit large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless: - 66 2/3% of the shares of voting stock not owned by these large stockholders approve the merger or combination, or - the board of directors approves the merger or combination or the transaction which resulted in the large stockholder owning 15% or more of our outstanding voting stock. WE WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS. Although we plan to repay debt and fund expansion of our facilities with a major portion of the proceeds of this offering, our management has discretion as to how to spend the proceeds from this offering. They may spend these proceeds in ways with which our stockholders may not agree. Management's allocation of the proceeds of this offering may not benefit our business and the investment of the proceeds may not yield a favorable return. A LARGE NUMBER OF SHARES OF OUR COMMON STOCK MAY BE SOLD IN THE MARKET FOLLOWING THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. Sales of substantial numbers of shares of our common stock in the public market after this offering, or the perception that those sales may be made, could cause the market price of our common stock to decline. Based on shares outstanding as of June 30, 2000, following this offering, we will have 21,282,155 shares of common stock outstanding or 21,612,155 shares if the underwriters' over-allotment option is exercised in full. Of these, 2,184,762 shares are subject to lock-up agreements with the underwriters of this offering, and may not be sold for 90 days following the date of this prospectus, subject to the restrictions imposed by the federal securities laws on sales by affiliates. However, Prudential Securities Incorporated may waive these lock-up restrictions at its sole discretion without notice. In addition, we have agreed to file a registration statement with the Securities and Exchange Commission within ten days of the completion of this offering, covering the 234,155 shares of our common stock issued in our private placement in July 2000. 13 18 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us, including among other things: - general economic and business conditions, both nationally and internationally; - our expectations and estimates concerning future financial performance, financing plans and the impact of competition; - anticipated trends in our business; - existing and future regulations affecting our business; and - other risk factors set forth under "Risk Factors" in this prospectus. In addition, in this prospectus, the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "could," "plan" and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. 14 19 USE OF PROCEEDS The net proceeds to us from our sale of 2,100,000 shares of common stock in this offering are estimated to be approximately $76.1 million, or $88.3 million if the underwriters exercise their over-allotment option in full, based upon an assumed public offering price of $38.625 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering for general corporate purposes, including working capital and capital expenditures for our manufacturing expansion, and to repay approximately $8.0 million of indebtedness under our revolving line of credit. We may also use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to our business, although we are not currently negotiating any acquisitions and we have no agreements with any third party for any acquisition. Prior to using the proceeds in the manner described above, we plan to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities or guaranteed obligations of the United States government. We will not receive any proceeds from the sale of common stock by the selling stockholders. Borrowings under our revolving line of credit, which expires May 31, 2002, bear interest at variable rates based upon the bank's reference rate or LIBOR. At June 30, 2000, our line of credit bore interest at 10.0%. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock has been quoted in the Nasdaq National Market under the symbol "AXTI" since May 20, 1998. The following table sets forth the high and low sales prices of our common stock for the periods indicated, as reported in the Nasdaq National Market.
HIGH LOW ------- ------- 1998: Second Quarter (from May 20, 1998).......................... $15.000 $10.125 Third Quarter............................................... 15.500 7.000 Fourth Quarter.............................................. 10.813 6.000 1999: First Quarter............................................... $22.500 $ 9.063 Second Quarter.............................................. 27.000 19.375 Third Quarter............................................... 35.125 17.750 Fourth Quarter.............................................. 23.875 12.063 2000 First Quarter............................................... $46.625 $14.500 Second Quarter.............................................. 47.000 21.250 Third Quarter (through August 31, 2000)..................... 45.000 31.125
On August 31, 2000, the last reported sale price of our common stock in the Nasdaq National Market was $38.625 per share. We have not declared or paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. It is our policy to retain any future earnings to develop and expand our business. In addition, provisions of our loan and debt covenants prevent us from declaring dividends without the prior consent of our lenders. The payment of dividends, if any, on our common stock in the future will be at the discretion of our board of directors. Our preferred stock accrues dividends at the rate of 5.0% per annum. 15 20 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000: - on an actual basis; and - on an as adjusted basis to reflect our sale of 234,155 shares of common stock in a private placement in July 2000 and the sale of 2,100,000 shares of common stock in this offering at an assumed public offering price of $38.625 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. You should read this table in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus.
JUNE 30, 2000 -------------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Note payable and short-term bank borrowing.................. $ 16,980 $ 16,980 Current portion of long-term debt and capital lease......... 5,299 5,299 -------- -------- Total short-term debt.................................. 22,279 22,279 Long-term debt and capital lease, net of current portion.... 22,171 22,171 Stockholders' equity: Preferred stock $.001 par value, 2,000 shares authorized; 981 shares issued and outstanding actual and as adjusted.......... 1 1 Additional paid-in capital............................. 3,989 3,989 Common stock $.001 par value, 100,000 shares authorized; 18,948 shares issued and outstanding, actual; 21,282 shares issued and outstanding as adjusted..................... 19 21 Additional paid-in capital............................. 48,606 133,243 Deferred compensation..................................... (162) (162) Retained earnings......................................... 16,695 16,695 Cumulative translation adjustments........................ 98 98 -------- -------- Total stockholders' equity........................... 69,246 153,885 -------- -------- Total capitalization................................. $113,696 $198,335 ======== ========
Shares issued and outstanding exclude the following: - 2,641,756 shares of common stock issuable upon exercise of options outstanding as of June 30, 2000 with a weighted average exercise price of $14.65 per share; - 3,239,831 shares of common stock reserved for future issuance as of June 30, 2000 under our 1993 and 1997 stock option plans; - 778,837 shares of common stock reserved for future issuance as of June 30, 2000 under our 1998 employee stock purchase plan; and - 330,000 shares that the underwriters may purchase if they exercise their over-allotment option in full. 16 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated income statement data for each of the three years in the period ended December 31, 1999 and for the six months ended June 30, 2000 and the selected consolidated balance sheet data at December 31, 1998, 1999 and at June 30, 2000 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated income statement data for each of the three years in the period ended December 31, 1997 and the selected consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are derived from audited consolidated financial statements not included in this prospectus. The consolidated income statement data for the six months ended June 30, 1999 are derived from unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of this period.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------- --------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- ----------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED INCOME STATEMENT DATA: Revenue............................................ $24,117 $31,272 $43,313 $61,314 $81,521 $39,680 $52,878 Cost of revenue.................................... 14,773 21,037 29,650 38,949 57,369 30,211 32,198 ------- ------- ------- ------- ------- ------- ------- Gross profit....................................... 9,344 10,235 13,663 22,365 24,152 9,469 20,680 Operating expenses: Selling, general, and administrative............. 4,774 5,534 9,921 11,538 14,016 6,843 8,417 Research and development......................... 448 592 1,289 2,684 3,086 1,520 3,851 Acquisition costs................................ -- -- -- -- 2,810 2,810 -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses....................... 5,222 6,126 11,210 14,222 19,912 11,173 12,268 ------- ------- ------- ------- ------- ------- ------- Income from operations............................. 4,122 4,109 2,453 8,143 4,240 (1,704) 8,412 Interest expense................................... (12) (170) (793) (1,481) (2,150) (1,360) (1,918) Other income and expense........................... 282 (72) (57) 598 729 722 499 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.... 4,392 3,867 1,603 7,260 2,819 (2,342) 6,993 Provision for income taxes......................... 1,599 1,516 783 2,976 2,139 178 2,668 ------- ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item............ 2,793 2,351 820 4,284 680 (2,520) 4,325 Extraordinary item, net of tax benefits............ -- -- -- -- (508) (508) -- ------- ------- ------- ------- ------- ------- ------- Net income......................................... $ 2,793 $ 2,351 $ 820 $ 4,284 $ 172 $(3,028) $ 4,325 ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) per share: Income (loss) before extraordinary item.......... $ 0.96 $ 0.65 $ 0.22 $ 0.27 $ 0.04 $ (0.14) $ 0.23 Extraordinary item............................... -- -- -- -- (0.03) (0.03) -- Net income....................................... 0.96 0.65 0.22 0.27 0.01 (0.16) 0.23 Diluted net income (loss) per share: Income (loss) before extraordinary item.......... $ 0.23 $ 0.19 $ 0.06 $ 0.26 $ 0.03 $ (0.14) $ 0.21 Extraordinary item............................... -- -- -- -- (0.03) (0.03) -- Net income....................................... 0.23 0.19 0.06 0.26 0.01 (0.16) 0.21 Shares used in calculations: Basic............................................ 2,921 3,595 3,697 16,076 18,655 18,451 18,687 Diluted.......................................... 11,913 12,524 13,598 16,325 19,771 18,451 20,178
17 22
DECEMBER 31, ------------------------------------------------- JUNE 30, 1995 1996 1997 1998 1999 2000 ------- ------- ------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 1,121 $ 1,171 $ 3,199 $ 16,438 $ 6,062 $ 5,149 Working capital............................................. 5,144 6,866 12,612 41,644 40,462 34,669 Total assets................................................ 15,067 23,178 37,796 102,983 115,762 137,172 Long-term capital lease, net of current portion............. -- -- -- 3,854 6,853 8,137 Long-term debt, net of current portion...................... 2,350 5,833 7,728 18,416 15,254 14,034 Stockholders' equity........................................ 7,869 10,237 17,387 61,164 62,459 69,246
Revenue from our substrates division and consumer products division is included in all periods presented. Revenue from our visible emitters division is included from the time of the acquisition of the visible emitter business on September 29, 1998. 18 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical information, the discussion in this prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors, including but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We were founded in 1986 to commercialize and enhance our proprietary VGF technique for producing high-performance compound semiconductor substrates. We currently operate three divisions: our substrate division, our visible emitter division and our consumer products division. We made our first substrate sales in 1990 and our substrate division currently sells GaAs and InP substrates to manufacturers of semiconductor devices for use in applications such as fiber optic and wireless telecommunications, LEDs and lasers. We also sell germanium substrates for use in satellite solar cells. We acquired Lyte Optronics, Inc., on May 28, 1999, and currently operate Lyte's historical business as our visible emitter division and consumer products division. The visible emitter division manufactures HB LEDs, VCSELs and laser diodes for the illumination markets, including full-color displays, automobile lighting and traffic signals, as well as fiber optic communications. The consumer products division focuses on the design and marketing of laser-pointing and alignment products for the consumer, commercial and industrial markets. We expect to focus our resources on the substrate and visible emitter divisions. We have been profitable on an annual basis since 1990. Our total revenue was $43.3 million for 1997, $61.3 million for 1998, $81.5 million for 1999 and $52.9 million for the six months ended June 30, 2000. Our net income was $820,000 for 1997, $4.3 million for 1998, $172,000 for 1999 and $4.3 million for the six months ended June 30, 2000. Our five largest customers accounted for 20.4% of our total revenue in 1997, 27.9% in 1998, 22.9% in 1999 and 25.5% for the six months ended June 30, 2000. No customer accounted for more than 10.0% of our total revenue in 1997, 1998, 1999 or the six months ended June 30, 2000. Generally, we do not have long-term or other non-cancelable commitments from our customers and usually sell products pursuant to customer purchase orders. In the first quarter of 2000, we announced plans to expand substantially our production capacity for compound substrates as well as blue, green and cyan HB LEDs. Most of the expansion for substrates will occur at our facilities in China and the remainder of our substrate expansion and all of our visible emitter expansion will occur at our California facilities. We estimate that our capital expenditures for this expansion during the next 12 months will be approximately $47.0 million. In connection with our acquisition of Lyte Optronics and its subsidiaries, we issued approximately 2,247,465 shares of common stock and 980,655 shares of preferred stock with a 5.0% annual dividend rate and $4.0 million liquidation preference over common stock, in exchange for all of the issued and outstanding shares of capital stock of Lyte Optronics. The acquisition was accounted for as a pooling of interests. In connection with the acquisition, we reported a charge of $2.8 million in the second quarter of 1999 to reflect transaction costs and other one-time charges. Ten percent of the shares issued to Lyte Optronics' stockholders are held in escrow to satisfy any claims that we may bring under the acquisition agreement. We have filed claims under the acquisition agreement, and expect that all of the shares held in escrow will be returned to us in satisfaction of these claims. Our revenue primarily consists of product revenues. We recognize revenue upon the shipment of products to the customer provided that we have received a signed purchase order, the price is fixed, collection of resulting receivables is probable, product returns are reasonably estimable and there are no remaining significant obligations. We also provide for future returns based on historical experience at the 19 24 time revenue is recognized. Except for sales in Japan and some sales in Taiwan, which are denominated in Japanese yen, we denominate and collect our international sales in U.S. dollars. Each of our three divisions is responsible for its own sales and marketing activities, and each maintains its own sales and marketing personnel. We sell our substrate products through our direct sales force in the U.S. and Japan and through independent sales representatives in France, Japan, South Korea, Taiwan and the United Kingdom. We sell our HB LED and laser diode products primarily through independent sales representatives to lamp package manufacturers in Taiwan and China. We currently sell our consumer products through a combination of our own direct sales force and independent sales representatives, mostly to customers in the U.S. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total revenues for the periods indicated.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- -------------- 1997 1998 1999 1999 2000 ------ ------ ------ ----- ----- Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.................................... 68.5 63.5 70.4 76.1 60.9 ----- ----- ----- ----- ----- Gross profit....................................... 31.5 36.5 29.6 23.9 39.1 Operating expenses: Selling, general and administrative.............. 22.9 18.8 17.2 17.2 15.9 Research and development......................... 3.0 4.4 3.8 3.8 7.3 Acquisition costs................................ -- -- 3.5 7.1 -- ----- ----- ----- ----- ----- Total operating expenses...................... 25.9 23.2 24.5 28.2 23.2 ----- ----- ----- ----- ----- Income (loss) from operations...................... 5.6 13.3 5.2 (4.3) 15.9 Interest expense................................... (1.8) (2.4) (2.6) (3.4) (3.6) Other income and expense........................... (0.1) 1.0 0.9 1.8 0.9 ----- ----- ----- ----- ----- Income (loss) before provision for income taxes.... 3.7 11.9 3.4 (5.9) 13.2 Provision for income taxes......................... 1.8 4.9 2.6 0.4 5.0 ----- ----- ----- ----- ----- Income (loss) before extraordinary item............ 1.9 7.0 0.8 (6.4) 8.2 Extraordinary item, net of tax benefits............ -- -- (0.6) (1.3) -- ----- ----- ----- ----- ----- Net income......................................... 1.9% 7.0% 0.2% (7.6)% 8.2% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 2000 Revenue. Total revenue increased $13.2 million, or 33.3%, from $39.7 million for the six months ended June 30, 1999 to $52.9 million for the six months ended June 30, 2000. The increase in revenue was primarily due to a $19.2 million, or 73.5%, increase in substrate sales comprised of a $22.8 million, or 106.9% increase in sales of GaAs and InP substrates offset by a $3.6 million decrease in Ge sales and contract revenues. The increase in GaAs and InP substrate sales was a result of increased sales to existing and new customers due in part to strong growth in the fiber optic and wireless handset markets. The decrease in Ge sales was the result of a cancellation of a contract by a major customer due to weakness in the satellite market. Sales at our visible emitter division decreased $4.5 million, or 48.2%, for the six months ended June 30, 2000. Sales at our consumer products division decreased $1.5 million, or 35.6%, due to declining sales prices and lower demand for laser pointer products. Revenue from the substrate division was 65.9% of total revenue, revenue from the visible emitter division was 23.7% of total revenue and revenue from the consumer products division was 10.5% of total revenue for the six months ended June 30, 1999 compared to revenue from the substrate division of 85.7% 20 25 of total revenue, revenue from the visible emitter division of 9.2% of total revenue and revenue from the consumer products division of 5.1% of total revenue for the six months ended June 30, 2000. International revenue decreased from 49.6% of total revenue for the six months ended June 30, 1999 to 47.3% of total revenue for the six months ended June 30, 2000. The decrease in the percentage of revenue was primarily the result of increased substrate sales to domestic customers. Gross margin. Gross margins increased from 23.9% for the six months ended June 30, 1999 to 39.1% for the six months ended June 30, 2000. The gross margin at the substrate division increased from 39.7% for the six months ended June 30, 1999 to 46.6% for the six months ended June 30, 2000. The increase was primarily due to higher volume and the realization of lower labor and manufacturing overhead costs as a result of expanding our wafer production capacity in China. The gross margin at the visible emitter division decreased from negative 1.2% for the period ended June 30, 1999 to negative 23.0% for the six months ended June 30, 2000. The decrease was primarily due to increased costs associated with the start-up of blue LED and other product production. The gross margin at the consumer products division increased from negative 19.3% for the six months ended June 30, 1999 to 24.4% for the six months ended June 30, 2000. The increase was primarily due to manufacturing process improvements and cost reductions. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.6 million, or 23.0%, from $6.8 million for the six months ended June 30, 1999 to $8.4 million for the six months ended June 30, 2000. The increase in selling, general and administrative expenses was primarily due to increases in personnel and related expenses required to support current and future increases in sales volume. As a percentage of total revenue, selling, general and administrative expenses were 17.2% for the six months ended June 30, 1999 compared to 15.9% for the six months ended June 30, 2000. Selling, general and administrative expenses increased 23.0% compared to increased total revenue of 33.3% for the six months ended June 30, 2000. Research and development expenses. Research and development expenses increased $2.3 million, or 153.4%, from $1.5 million for the six months ended June 30, 1999 to $3.9 million for the six months ended June 30, 2000. The increase was primarily the result of increases in personnel and related expenses and materials to support LED and other product research and development at the visible emitter division. As a percentage of total revenue, research and development expenses were 3.8% for the six months ended June 30, 1999 compared to 7.3% for the six months ended June 30, 2000. Interest expense. Interest expense increased $558,000, or 41.0%, from $1.4 million for the six months ended June 30, 1999 to $1.9 million for the six months ended June 30, 2000. The increase was primarily due to using short-term debt to finance the short-term liquidity needs resulting from our increased sales volume as well as the addition of certain capital leases to finance equipment purchases. Other income and expense. Other income and expense decreased $223,000 from $722,000 for the six months ended June 30, 1999 to $499,000 for the six months ended June 30, 2000. The decrease was primarily the result of smaller foreign exchange gains. Provision for income taxes. The effective tax rate was 38.0% for the six months ended June 30, 2000. For the six months ended June 30, 1999, the provision for income taxes reflected the effect of non-deductible acquisition costs of $2.8 million. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenue. Revenue increased 33.0%, or $20.2 million from $61.3 million for 1998 to $81.5 million for 1999. The increase in revenue resulted primarily from a $13.7 million increase in sales of GaAs and InP substrates to existing customers and the addition of new customers, a $12.7 million increase due to the inclusion of the visible emitter division for a full year in 1999 compared to only the fourth quarter in 1998, and a $6.1 million decrease in consumer product sales. The decrease in consumer product sales reflected declining sales prices for laser pointer products, an increase in sales returns due to product quality 21 26 problems and a change in government regulations regarding the allowable strength of laser products sold to the consumer product market in Europe. Revenue from the substrate division was 70.4% of total revenue, revenue from the visible emitter division was 9.6% of total revenue and revenue from the consumer products division was 20.0% of total revenue for 1998 compared to revenue from the substrate division of 69.6% of total revenue, revenue from the visible emitter division of 22.9% of total revenue and revenue from the consumer products division of 7.5% of total revenue for 1999. International revenue, excluding Canada, increased from 29.5% of total revenue, or $18.1 million, for 1998, to 43.9% or $35.8 million for 1999. The increase in international revenue resulted primarily from a $7.3 million increase in GaAs and InP sales to new and existing customers and a $10.0 million increase due to the inclusion of the visible emitter division for a full year in 1999 compared to only the fourth quarter in 1998. Gross margin. Gross margin decreased from 36.5% for 1998 to 29.6% for 1999. The gross margin for substrates decreased slightly from 41.5% to 41.0%, primarily due to a decline in sales prices. The gross margin on products sold by the visible emitter division was 36.2% in 1998 compared to 11.1% in 1999. The decrease in margins at the visible emitter division was primarily due to significant sales price decreases for laser diodes, a $1.5 million charge to settle a patent dispute and a $2.4 million charge to write down obsolete inventory. Excluding these charges, the gross margin was 32.0% in 1999. Gross margin on products sold by the consumer products division decreased from 18.7% in 1998 to negative 19.4% in 1999, due to significant sales prices decreases for laser pointer products and a $2.1 million charge to write down obsolete inventory. Excluding these charges, the gross margin was 14.7% in 1999. Selling, general and administrative expenses. Selling, general and administrative expenses increased 21.5%, or $2.5 million, from $11.5 million for 1998 to $14.0 million for 1999. The inclusion of the visible emitter division for the full year in 1999 compared to only the fourth quarter of 1998 resulted in an increase of $3.3 million. Substrate division expenses increased $1.2 million primarily due to increases in personnel and related expenses required to support additional sales volume. These increases were offset by a decrease of $2.0 million by the consumer products division as a result of the closing of a manufacturing facility located in Arizona in 1998. Selling, general and administrative expenses as a percentage of total revenue decreased from 18.8% for 1998 to 17.2% for 1999. This decrease was primarily due to an increase in total revenue. Research and development expenses. Research and development expenses increased 15.0%, or $402,000, from $2.7 million for 1998, to $3.1 million for 1999. This increase resulted primarily from the inclusion of the visible emitter division for a full year in 1999 compared to only the fourth quarter in 1998. Also, historically the consumer products division did not separately account for its research and development expenses but included them as part of the cost of product revenue and selling, general and administrative expenses. Research and development expenses as a percentage of total revenue decreased from 4.4% of total revenue for 1998 to 3.8% of revenue for 1999. This decrease was primarily due to an increase in total revenue. Acquisition cost. As a result of the acquisition of Lyte Optronics in May 1999, we incurred a number of one-time expenses which totaled approximately $2.8 million. These expenses included fees paid to our investment bankers, accountants, attorneys and other outside consultants and related transaction expenses. Interest expense. Interest expense increased 45.2%, or $669,000 from $1.5 million for 1998, to $2.2 million for 1999. This increase was primarily the result of the inclusion of the visible emitter division for a full year in 1999 compared to only the fourth quarter in 1998, which resulted in increased borrowing on a line of credit. Other income and expense. Other income and expense increased 21.9%, or $131,000 from $598,000 for 1998 to $729,000 for 1999. The increase was primarily the result of foreign exchange gains. 22 27 Provision for income taxes. Income tax expense, excluding the effect of non-deductible acquisition costs of approximately $2.8 million in 1999, decreased from 41.0% to 38.0% of income before provision for income taxes for 1998 and 1999. Extraordinary item, net of tax benefit. In connection with the acquisition of Lyte Optronics in May 1999, we incurred fees associated with a loan that we repaid as part of the transaction. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenue. Revenue increased 41.6%, or $18.0 million from $43.3 million for 1997 to $61.3 million for 1998. The increase in revenue resulted primarily from a $17.8 million increase in the volume of sales of GaAs and InP substrates to existing customers, the addition of new customers and the introduction of Ge substrates in the fourth quarter of 1997. Additionally, there was a $5.9 million increase due to the inclusion of the visible emitter division for the fourth quarter of 1998, offset by a $5.7 million decrease in revenue at the consumer products division reflecting declining sales prices for laser pointer products and a change in government regulations reducing the allowable strength of lasers sold to the consumer market in Europe. Revenue from the substrate division was 58.5% of total revenue, and revenue from the consumer products division was 41.5% of total revenue for 1997 compared to revenue from the substrate division of 70.4% of total revenue, revenue from the visible emitter division of 9.6% of total revenue and revenue from the consumer products division of 20.0% of total revenue for 1998. International revenue, excluding Canada, increased from 26.8% of total revenues for 1997 to 29.5% for 1998. The increase in international revenue resulted primarily from a $3.8 million increase in substrate sales to new and existing customers and a $5.1 million increase due to the inclusion of the visible emitter division for the fourth quarter of 1998, which sells products primarily in Asia, offset by a $2.4 million decrease in sales to Europe by the consumer products division caused by governmental regulation changes reducing the allowable strength of lasers sold to the consumer market. Gross margin. Gross margins increased from 31.5% for 1997 to 36.5% for 1998. The gross margins for substrates increased slightly from 39.9% in 1997 to 41.5% in 1998 reflecting higher yields achieved in GaAs and InP production, partially offset by lower margins on Ge substrates. Total gross margins also benefited from the inclusion of the visible emitter division for the fourth quarter of 1998, which had a 36.2% gross margin. Gross margins on products sold by the consumer products division decreased slightly from 19.8% in 1997 to 18.7% in 1998 due to declining prices for laser pointer products. Selling, general and administrative expenses. Selling, general and administrative expenses increased 16.3%, or $1.6 million, from $9.9 million for 1997 to $11.5 million for 1998. Substrate division expenses increased $2.1 million primarily due to increases in personnel and related expenses required to support additional sales volume. The inclusion of the visible emitter division for the fourth quarter of 1998 added $1.0 million. These increases were offset by a $1.4 million decrease at the consumer products division as a result of closing a manufacturing facility located in Arizona in 1998. Selling, general and administrative expenses as a percentage of total revenue decreased from 22.9% for 1997 to 18.8% for 1998. This percentage decrease was primarily due to the 41.6% increase in revenue. Research and development expenses. Research and development expenses increased 108.2%, or $1.4 million, from $1.3 million for 1997 to $2.7 million for 1998. This increase resulted primarily from hiring additional engineers and the purchase of materials at the substrate division to develop new products and to enhance existing products. Also, historically the consumer products division did not separately account for its research and development expenses but included them as part of its cost of product revenue and selling, general and administrative expenses. Research and development expenses as a percentage of total revenue increased from 3.0% for 1997 to 4.4% for 1998, primarily as a result of the increase in spending. 23 28 Interest expense. Interest expense increased 86.8%, or $688,000 from $793,000 for 1997 to $1.5 million for 1998. This increase was primarily the result of additional borrowings to finance the purchase and lease of buildings and equipment at the substrate and consumer products divisions. Other income and expense. Other income and expense increased from an expense of $57,000 for 1997 to income of $598,000 for 1998. This increase was primarily the result of interest income earned on the $25.8 million in net proceeds raised from our initial public offering in May 1998. Provision for income taxes. Income tax expense decreased from 48.8% of income before provision for income taxes in 1997 to 41.0% in 1998, due to a decrease in non-deductible expenses. SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth selected unaudited quarterly consolidated financial information in dollars for the six quarters ended June 30, 2000. We believe 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, 1999 1999 1999 1999 2000 2000 -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Revenue....................................... $18,897 $20,783 $20,017 $21,824 $23,934 $28,944 Cost of revenue............................... 16,240 13,971 13,077 14,081 14,339 17,859 ------- ------- ------- ------- ------- ------- Gross profit.................................. 2,657 6,812 6,940 7,743 9,595 11,085 Operating expenses: Selling, general and administrative......... 3,647 3,196 3,113 4,060 3,853 4,564 Research and development.................... 662 858 670 896 1,988 1,863 Acquisition costs........................... -- 2,810 -- -- -- -- ------- ------- ------- ------- ------- ------- Total operating expenses............. 4,309 6,864 3,783 4,956 5,841 6,427 ------- ------- ------- ------- ------- ------- Income (loss) from operations................. (1,652) (52) 3,157 2,787 3,754 4,658 Interest expense.............................. (630) (730) (752) (615) (769) (1,149) Other income and expense...................... 693 29 235 349 196 303 ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes....................................... (1,589) (753) 2,640 2,521 3,181 3,812 Provision for income taxes.................... (604) 782 1,003 958 1,209 1,459 ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item....... (985) (1,535) 1,637 1,563 1,972 2,353 Extraordinary item -- net of tax benefits..... -- (508) -- -- -- -- ------- ------- ------- ------- ------- ------- Net income (loss)............................. $ (985) $(2,043) $ 1,637 $ 1,563 $ 1,972 $ 2,353 ======= ======= ======= ======= ======= =======
The following table sets forth selected unaudited quarterly financial information by segment. Revenue: Substrates.................................. $11,731 $14,405 $15,030 $15,566 $19,125 $26,212 Visible emitters............................ 4,600 4,792 3,889 5,359 3,140 1,728 Consumer products........................... 2,566 1,586 1,098 899 1,669 1,004 ------- ------- ------- ------- ------- ------- Total................................ $18,897 $20,783 $20,017 $21,824 $23,934 $28,944 ------- ------- ------- ------- ------- ------- Gross profit: Substrates.................................. $ 4,830 $ 5,549 $ 6,224 $ 6,683 $ 8,682 $12,466 Visible emitters............................ (1,730) 1,622 921 1,248 289 (1,409) Consumer products........................... (443) (359) (205) (188) 624 28 ------- ------- ------- ------- ------- ------- Total................................ $ 2,657 $ 6,812 $ 6,940 $ 7,743 $ 9,595 $11,085 ------- ------- ------- ------- ------- -------
24 29 The following table sets forth selected unaudited quarterly consolidated financial information as a percent of the total revenue for the six quarters ended June 30, 2000.
QUARTERS ENDED ---------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1999 1999 1999 1999 2000 2000 -------- -------- --------- -------- -------- -------- Revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue............................... 85.9 67.2 65.3 64.5 59.9 61.7 ------- ------- ------- ------- ------- ------- Gross profit.................................. 14.1 32.8 34.7 35.5 40.1 38.3 Operating expenses: Selling, general and administrative......... 19.3 15.4 15.6 18.6 16.1 15.8 Research and development.................... 3.5 4.1 3.3 4.1 8.3 6.4 Acquisition costs........................... -- 13.5 -- -- -- -- ------- ------- ------- ------- ------- ------- Total operating expenses............. 22.8 33.0 18.9 22.7 24.4 22.2 ------- ------- ------- ------- ------- ------- Income (loss) from operations................. (8.7) (0.3) 15.8 12.8 15.7 16.1 Interest expense.............................. (3.3) (3.5) (3.8) (2.8) (3.2) (4.0) Other income and expense...................... 3.6 0.1 1.2 1.6 0.8 1.0 ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes....................................... (8.4) (3.6) 13.2 11.6 13.3 13.1 Provision for income taxes.................... (3.2) 3.8 5.0 4.4 5.1 5.0 ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary item....... (5.2) (7.4) 8.2 7.2 8.2 8.1 Extraordinary item -- net of tax benefits..... -- (2.4) -- -- -- -- ------- ------- ------- ------- ------- ------- Net income (loss)............................. (5.2)% (9.8)% 8.2% 7.2% 8.2% 8.1% ======= ======= ======= ======= ======= =======
Revenue increased from the quarter ended March 31, 1999 to the quarter ended June 30, 2000 primarily due to increases in unit sales of substrates, partially offset by decreases in sales of visible emitter and consumer products. The decrease in visible emitter sales was primarily caused by declines in both the number of laser diode chips sold and their average price. Gross profit margins were higher in the quarters ended March 31 and June 30, 2000 than in previous quarters because substrates, which have a higher profit margin, represented a higher proportion of total sales in these last two quarters. In addition, we were successful in reducing the unit costs of substrates in these last two quarters. Excluding the acquisition costs related to the merger with Lyte Optronics in the quarter ended June 30, 1999, operating expenses generally increased as we added people and equipment in order to generate increased sales. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased $5.8 million, or 14.3%, from $40.5 million at December 31, 1999 to $34.7 million at June 30, 2000. The decrease was primarily due to expenditures for equipment, partially offset by net income. Total long-term debt, including capital leases, increased $7.3 million while property, plant and equipment purchases were $14.5 million during the six months ended June 30, 2000. Cash used in operating activities was $7.1 million for the six months ended June 30, 1999 compared to cash generated from operating activities of $3.9 million for the six months ended June 30, 2000. The increase was primarily due to increased profitability at the substrate division. Our capital expenditures were $3.9 million for the six months ended June 30, 1999 compared to $14.5 million during the six months ended June 30, 2000. The increase in spending was primarily a result of facility expansion and equipment additions in order to increase crystal growth and wafer processing capacity at the substrate division as well as facility expansion and equipment additions at the visible emitter division. We financed these acquisitions in part through capital leases of $2.7 million during the six months ended June 30, 1999 and $3.4 million during the six months ended June 30, 2000. We are currently constructing an additional 32,000 square foot building in Beijing, China to expand substrate wafer processing capacity, a 27,000 square foot building in El Monte, California to expand HB LED and VCSEL epitaxy production and leasehold improvements in a 20,000 square foot building and a 9,000 square foot building to expand our administrative offices and material storage areas in Fremont, California. We are also constructing improvements to our existing production facilities in Fremont, 25 30 California to increase crystal growth and wafer processing capacity. We expect to invest approximately $47.0 million in additional facilities and equipment over the next 12 months. Cash provided by financing activities for the six months ended June 30, 2000 included a $4.0 million note from our bank and $2.3 million in proceeds from the exercise of stock options and purchases of stock under our stock purchase plan. Total debt was $37.1 million at December 31, 1999, compared to $44.5 million at June 30, 2000. We currently have a $15.0 million line of credit with a commercial bank at an interest rate equal to the bank's variable prime rate plus 0.5%. The bank's prime rate was 9.5% at June 30, 2000. This line of credit is secured by all of our assets, other than equipment, and expires on September 30, 2000. At June 30, 2000, $13.0 million was outstanding under the $15.0 million line of credit. On August 28, 2000, we entered into new credit facilities with the bank for a 21-month $20.0 million line of credit and additional 31-month term loans of $6.0 million. This new line of credit will replace the existing $15.0 million facility. On June 15, 2000, we entered into a short-term note with our bank in the amount of $4.0 million. The note bears interest at 1.0% above the lender's variable prime rate, which was 9.5% at June 30, 2000. The principal and unpaid interest of the note is due September 30, 2000. We will repay this note with the proceeds of the new term loans. The proceeds of the note were primarily used to fund our current operating and capital expenditure needs. In July 2000, we raised approximately $8.5 million in a private placement of 234,115 shares of common stock to 11 stockholders. We generally finance equipment purchases through secured equipment loans and capital leases over five-year terms at interest rates ranging from 6.0% to 10.0% per annum. Some of our manufacturing facilities have been financed by long-term borrowings, which were repaid by taxable variable rate revenue bonds in 1998. These bonds mature in 2023 and bear an interest at 2.0% below the prime rate. The bonds are traded in the public market. Repayment of principal and interest under the bonds is supported by a letter of credit from our bank and is paid on a quarterly basis. We have the option to redeem the bonds in whole or in part during their term. At June 30, 2000, $10.7 million was outstanding under these bonds. We anticipate that the combination of existing working capital and the borrowings available under the current and committed credit agreements, together with the net proceeds of this offering, will be sufficient to fund working capital and capital expenditure requirements for the next 12 months. However, our future capital requirements will be dependent on many factors including the rate of revenue growth, our profitability, the timing and extent of spending to support research and development programs, the expansion of our manufacturing facilities, the expansion of our selling and marketing and administrative activities and market acceptance of our products. In addition to the net proceeds from this offering, we may need to raise additional equity and debt financing in the future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 established accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. In June 2000, SFAS 133 was amended by SFAS 138. We have not determined what the effect of SFAS 133 will be on our operations and financial position. We will be required to implement SFAS 133 as amended by SFAS 137, beginning in 2001. We do not expect that adopting the provisions of SFAS 133 will have a material effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the 26 31 basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. We believe that the impact of SAB 101 will have no material effect on our financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44 clarifies the application of Opinion 25" for (a) the definition of an employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not and is not expected to have an impact on our financial position or results of operations. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Since our Japanese and some Taiwanese invoices are denominated in Japanese yen, doing business in Japan subjects us to fluctuations in exchange rates between the U.S. dollar and the Japanese yen. During 1997 we incurred a foreign transaction exchange loss of $186,000, a loss of $24,000 in 1998, a gain of $652,000 in 1999 and a loss of $3,000 during the six months ended June 30, 2000. We purchase foreign exchange contracts to hedge against certain trade accounts receivable in Japanese yen. The outstanding commitments with respect to such foreign exchange contracts had a total contract value of approximately $1.7 million as of June 30, 2000. Many of the contracts were entered into six months prior to the due date and the dates coincide with the receivable terms on customer invoices. By matching the receivable collection date and contract due date, we attempt to minimize the impact of foreign exchange fluctuations. The fair market value of long-term fixed and variable interest rate debt is subject to interest rate risk. The effect of an immediate 10% change in interest rates would not have a material impact on our future operating results or cash flows. 27 32 BUSINESS OVERVIEW We design, develop, manufacture and distribute high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices, such as high-brightness light emitting diodes, or HB LEDs, and vertical cavity surface emitting lasers, or VCSELs. Our substrate products are used primarily in fiber optic communications, wireless communications and lighting display applications. We believe our proprietary vertical gradient freeze, or VGF, technique for manufacturing compound semiconductor substrates provides significant benefits over traditional methods and has enabled us to become a leading manufacturer of compound semiconductor substrates. We pioneered the commercial use of VGF technology to manufacture gallium arsenide, or GaAs, substrates and have used VGF technology to manufacture substrates from other materials, such as indium phosphide, or InP, and germanium, or Ge. Customers for our substrates include Alpha Industries, Agilent Technologies, EMCORE, Nortel Networks, RF Micro Devices, SDL and Sumitomo Chemical. Our acquisition of Lyte Optronics provided us with expertise in epitaxial processes for manufacturing opto-electronic semiconductor devices. We have used these capabilities to make blue, green and cyan HB LEDs and VCSELs. Our opto-electronic semiconductor devices are used in a wide range of applications, such as solid-state lighting and fiber optic communications. We have recently undertaken an initiative to significantly expand our substrate and device manufacturing capacity and to reduce the overall cost structure of our manufacturing operations. INDUSTRY BACKGROUND Historically, most semiconductor devices were created on a single crystal base material, or substrate, of silicon. Today, however, a growing number of electronic and opto-electronic devices are being developed with requirements that exceed the capabilities of silicon. Many of these devices address the continually increasing demand to send, receive and display information on high-speed wireless and wireline networks. This demand has created a growing need for power-efficient high-performance systems that can operate at high frequencies and can be produced cost-effectively in high volumes. These systems enable the growth and development of a wide range of end-user applications. For example, International Data Corporation, or IDC, expects the number of mobile wireless devices for Internet access and other data transmission to grow from 10.0 million units in 1999 to more than 562.0 million units by 2004. Other examples of applications for these systems include: - fiber optic networks and optical systems within these networks; - new voice and high-speed wireless data systems; - infrared emitters and optical detectors in computer systems; - solid-state lighting, including exterior and interior automobile lighting; and - satellite communications systems. As a result of the limitations of silicon-based technologies, semiconductor device manufacturers are increasingly using compound semiconductor substrates to improve the performance of semiconductor devices and to enable these new applications. This shift is occurring even though these compound semiconductor substrates are more expensive. Compound semiconductor substrates are composed of multiple elements that include a metal, such as gallium, aluminum or indium, and a non-metal, such as arsenic, phosphorus or nitrogen. The resulting compounds include gallium arsenide, indium phosphide and gallium nitride. Advantages of devices manufactured on compound substrates over devices manufactured using silicon substrates include: - operation at higher speeds; - lower power consumption; - less noise and distortion; and - opto-electronic properties that enable devices to emit and detect light. 28 33 The first step in producing a compound semiconductor substrate is to grow a crystal of the materials. Historically, two processes have been used to grow crystals: the Liquid Encapsulated Czochralski, or LEC, technique and the Horizontal-Bridgeman, or HB, technique. We believe two trends are reducing the appeal of these techniques: more semiconductor devices are being formed using an epitaxial process and semiconductor device manufacturers are switching their production lines to six-inch diameter substrates. The LEC and HB techniques each have difficulties producing six-inch, high-quality, low-cost compound semiconductor substrates for epitaxial processing. We introduced our VGF technique in 1986 to respond to the limitations inherent in the LEC and HB techniques. Compound semiconductor substrates enable the development of a wide range of electronic products including power amplifiers and radio frequency integrated circuits used in wireless handsets. Compound substrates can also be used to create opto-electronic products including HB LEDs and VCSELs used in solid state lighting and fiber optic communications. HB LEDs are solid-state compound semiconductor devices that emit light. The global demand for HB LEDs is experiencing rapid growth because HB LEDs have a long useful life, consume approximately 10% of the power consumed by incandescent or halogen lighting and improve display visibility. Applications where HB LEDs are increasingly used include wireless handset displays, automotive displays, full color video displays, traffic lights and various consumer applications. According to Strategies Unlimited, an independent industry analyst, the market for HB LEDs is expected to grow from $600.0 million in 1999 to approximately $1.2 billion by 2004. VCSELs are semiconductor lasers that emit light in a cylindrical beam and offer significant advantages over traditional laser diodes, including greater control over beam size and wavelength, reduced manufacturing complexity and packaging costs, lower power consumption and higher frequency performance. Electronics and computing systems manufacturers are using VCSELs in a broad range of end-market applications, including fiber optic switching and routing, such as Gigabit Ethernet for communications networks and Fibre Channel for storage area networks. According to ElectroniCast, an independent industry analyst, the market for VCSELs is expected to grow from $247.0 million in 1999 to approximately $2.8 billion by 2004. THE AXT ADVANTAGE We are a leading developer and supplier of high-performance compound semiconductor substrates and opto-electronic semiconductor devices, including HB LEDs and VCSELs. There are four key causes of our success: Our VGF technology is a competitive advantage. We pioneered the commercial use of VGF technology to manufacture GaAs substrates and we believe that through the use of VGF we have become the leading worldwide supplier of GaAs substrates. Our VGF process produces substrates with high mechanical strength and physical and chemical uniformity, as well as a low defect rate. The following changes in our customers' technologies are increasing demand for substrates with these features: - Greater use of epitaxy rather than ion implantation. Many of the newest generation of high-performance semiconductor devices for fiber optic and wireless communications applications, including heterojunction bipolar transistors, or HBTs, and pseudomorphic high electron mobility transistors, or PHEMTs, are popular because they offer lower power consumption and better device linearity than their predecessors. These devices are created using epitaxial processed substrates. Our VGF substrates are more suitable for these applications than are our competitors' products. - Switch to six-inch diameter wafers. Many of our semiconductor device manufacturing customers are switching their GaAs production lines to six-inch diameter substrates in order to reduce unit costs and increase capacity. Our VGF technique is better suited to developing six-inch substrates than are competing methods. - Introduction of InP substrates. Even GaAs cannot meet the requirements for increasing system performance and network bandwidth of some applications, including SONET OC-768 applications 29 34 that operate at speeds up to 40 gigabits per second. Manufacturers of these devices are turning to InP substrates that can support these features. We have successfully used our VGF technique to develop InP and we were among the first to offer four-inch InP substrates. In addition, VGF technology gives us further benefits. - Customer technology independence. Our semiconductor device manufacturing customers often compete among themselves. For example, several of our customers compete for technological leadership in the wireless handset market. These customers or end-users all require devices made on GaAs substrates. We are, therefore, largely immune from the effects of such competition and benefit from an overall need for faster, more power efficient electronic and opto-electronic devices. - Faster and less expensive capacity expansion. We build our own crystal growing equipment rather than ordering it from third-party vendors. This capability, coupled with the fact that our equipment is less expensive and simpler to manufacture than LEC equipment, enables us to increase our capacity faster and at lower cost than our competitors. This ability is particularly beneficial in the current rapid growth environment for six-inch GaAs and all InP substrates. Retaining the equipment manufacturing process within AXT also helps protect our proprietary technology. Some customers specify VGF substrates. Our wafers are qualified with most of the key suppliers of GaAs and InP semiconductor devices. The qualification process, which is lengthy and must be repeated for each customer, can be a barrier to entry for a new material or supplier. Furthermore, certain of our customers now specify that they will only accept VGF-grown substrates for their manufacturing processes. As the businesses of these customers grow, we are well-positioned to grow with them as a key supplier. Our low-cost manufacturing is an advantage. We use our technology and economics of scale to be a low-cost manufacturer. Our expansion in China provides us with a combination of lower costs for facilities, labor and materials than we encountered in the United States and positions us to gain access to low-cost raw materials supply sources. Furthermore, as we increase our production capacity, we are able to spread fixed costs over a larger revenue base, thereby leveraging our cost structure and achieving economies of scale. We entered the opto-electronic semiconductor device market quickly through our acquisition of Lyte Optronics. Our acquisition of Lyte Optronics provided us with expertise in epitaxial processes for manufacturing high-volumes of opto-electronic semiconductor devices. High-quality epitaxy is a key requirement for most of today's advanced opto-electronic semiconductor devices, such as HB LEDs and VCSELs. Since acquiring Lyte Optronics, we have developed opto-electronic products that are among the more difficult to create using epitaxy, including green HB LEDs and VCSELs. We have filed five patent applications for our approach to fabricating HB LEDs. We believe that we can be an important additional domestic source of these devices. THE AXT STRATEGY Our goals are to strengthen our position as the leading developer and supplier of high-performance compound semiconductor substrates and to develop a leading position in the market for opto-electronic semiconductor devices. Key elements of our strategy include: Expand GaAs substrate manufacturing capacity and decrease manufacturing cost structure. We are increasing our production capacity in order to increase our share of the market for GaAs substrates. We believe that we can extend our leadership position by increasing our manufacturing capacity more rapidly than competitors and in a manner that enables us to further lower unit production costs. Much of this capacity increase will be for production of our six-inch diameter GaAs substrates. We further believe that expanding our manufacturing operations in China will allow us to increase capacity more quickly and at lower cost. Furthermore, this expansion will allow us to form strategic alliances with suppliers of key raw materials. 30 35 Strengthen our leadership position in the InP market. We believe that there will be rapid growth in demand for the next generation of high speed fiber optic devices, such as devices used in SONET OC-768 applications. These products are manufactured on InP substrates and we are positioning ourselves to be the leading supplier of InP substrates by significantly expanding our production capacity. Our sales of InP substrates during the six-month period ended June 30, 2000 grew 261% compared to our sales of InP substrates during the six-month period ended June 30, 1999. Advance VGF technology leadership. We believe that our ability to produce high-quality substrates using VGF technology continues to provide us with a competitive advantage in the high growth compound semiconductor substrate markets. We intend to continue our investment in research and development in order to expand our leadership position in the commercial use of VGF technology. For example, we intend to leverage our existing knowledge in growing six-inch GaAs substrates to grow longer crystals, which will further reduce our costs. We are also launching an effort to develop six-inch diameter InP substrates in response to customer requests. Enhance our opto-electronic semiconductor devices. We intend to further penetrate the high growth HB LED and VCSEL markets through continued investment in research and development and expansion of production capacity. We are expanding our manufacturing capacity by adding metal-organic chemical vapor deposition, or MOCVD, reactors and are modifying our epitaxial process to improve device performance and yield. We have invested in the research and infrastructure required to grow our own sapphire substrates, which are used in producing blue, green and cyan LEDs. During the next year we expect to increase our VCSEL sales and develop our chip fabrication capabilities, which will enable us to develop one- and two-dimensional VCSEL arrays. Leverage existing customer relationships. We currently sell our GaAs substrates to more than 200 customers and believe that we are a qualified provider to most of the significant users worldwide of GaAs substrates. We intend to capitalize on our relationships with our customers in order to both expand sales of GaAs substrates and sell other compound substrates, such as InP. We also intend to establish alliances and joint development arrangements with customers in emerging high growth markets to develop new products, increase manufacturing efficiencies and more effectively serve our customers' needs. 31 36 TECHNOLOGY Our core technologies include our proprietary VGF technique used to produce high quality crystals that are processed into compound substrates, and our epitaxy technologies that enable us to manufacture blue, green and cyan HB LEDs and VCSELs. [VGF DIAGRAM] Our VGF technique is designed to control the crystal-growth process with minimal temperature variation and is the technique we use to produce our GaAs, InP and Ge substrates. Unlike traditional techniques, our VGF technique places the hot compound melt above the cool crystal, thereby reducing the turbulence of the 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 us to grow crystals that have a relatively low defect density and high uniformity. The crystal, and the resulting substrate, are mechanically strong, resulting in lower breakage rates during a customer's manufacturing process. Since the temperature gradient is controlled electronically rather than by physical movement, the sensitive crystal is not disturbed. In addition, the melt and growing crystal are contained in a closed chamber, which isolates the crystal from the outside environment to reduce potential contamination. This substrate isolation allows for more precise control of the gallium-to-arsenic ratio, resulting in better consistency and uniformity of the crystals. Our VGF technique offers several benefits when compared to traditional crystal growing technologies. The Liquid Encapsulated Czochralski, or LEC, technique is the traditional method for producing semi-insulating GaAs substrates for electronic applications. 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. Unlike the VGF technique, the LEC technique is designed so that the hotter GaAs melt is located beneath the cooler crystal, resulting in greater turbulence in the melt, and at a temperature gradient that is significantly higher than the VGF technique. The turbulence and high temperature cause LEC-grown crystals to have a higher dislocation density than VGF-grown crystals, resulting in a higher rate of breakage during the device manufacturing process. As an open process, the LEC technique also results in greater propensity for contamination and difficulty 32 37 controlling the ratio of gallium to arsenic. It requires large, complex electro-mechanical systems that are expensive and require highly skilled personnel to operate. Our VGF technique also offers advantages over the Horizontal-Bridgeman, or HB, technique, for producing semi-conducting GaAs substrates for opto-electronic applications. The HB technique holds the GaAs melt in a semi-cylindrical container, causing crystals grown using the HB method to have a semi-circular, or D-shaped, cross-section. Accordingly, more crystal material is discarded when the D-shaped substrate is subsequently trimmed to a round shape. In addition, crystals grown using the HB technique have a higher defect density than VGF-grown crystals. The HB technique cannot be used cost-effectively to produce substrates greater than three inches in diameter. The HB technique houses the GaAs melt in a quartz container during the growth process, which can contaminate the GaAs melt with silicon impurities, making it unsuitable for producing semi-insulating GaAs substrates. The following table provides a comparison of these three techniques: - ---------------------------------------------------------------------------------------------------------- VGF HB LEC - ---------------------------------------------------------------------------------------------------------- Substrate applications Electronic and Opto-electronic Electronic opto-electronic - ---------------------------------------------------------------------------------------------------------- Largest wafer size 6" 3" 6" available - ---------------------------------------------------------------------------------------------------------- Stress/defect levels Very Low Low High - ---------------------------------------------------------------------------------------------------------- Crystal purity Good Poor Good - ---------------------------------------------------------------------------------------------------------- Applicability to multiple GaAs, InP, Ge GaAs GaAs, InP, GaP materials - ---------------------------------------------------------------------------------------------------------- Equipment and labor cost Very Low Low High - ---------------------------------------------------------------------------------------------------------- Amount of waste material Very Low High Low - ---------------------------------------------------------------------------------------------------------- Equipment flexibility Versatile Limited Limited - ---------------------------------------------------------------------------------------------------------- Equipment downtime Minimal Moderate High - ---------------------------------------------------------------------------------------------------------- Number of competitors Few Many Many - ----------------------------------------------------------------------------------------------------------
VCSEL devices include single lasers as well as one- and two-dimensional arrays of lasers. Array products are more highly valued than single lasers because they provide greater bandwidth, but are harder to form because they require epitaxial structures that possess very high uniformity in chemical composition and low variation in thickness. These features are hard to achieve because the epitaxial process used to make a VCSEL device places approximately 200 layers of epitaxial structure on a substrate, as compared to the less than 10 layers of material deposited on a substrate to make an HB LED. Our epitaxial process, which includes proprietary in situ monitoring techniques, allows us to manufacture highly reliable VCSEL wafers that demonstrate comparatively low threshold currents and high output power and are sufficiently uniform to produce one- and two-dimensional VCSEL devices. We employ both ion implantation and oxidation processes to produce VCSEL devices from our wafers. We create our opto-electronic semiconductor devices using MOCVD, which is an epitaxial technique to synthesize compound semiconductor thin films onto substrates. MOCVD reactors are available from multiple sources and wafers fabricated using MOCVD generally possess a better combination of uniformity and optical and electronic properties and are easier to produce cost-effectively in high volumes than wafers manufactured by other methods, such as molecular beam epitaxy, vapor phase epitaxy or liquid phase epitaxy. As a result, MOCVD reactors have become the choice of the opto-electronic industry for fabricating devices such as LEDs, VCSELs and laser diodes. We modify our MOCVD reactors to improve their performance and use a proprietary growth recipe that controls temperature, material impurity, defect density, material thickness and layer composition while allowing for multiple wafer batch replication. 33 38 PRODUCTS We design, develop, manufacture and distribute high-performance semiconductor substrates, as well as opto-electronic devices, such as HB LEDs, VCSELs and laser diodes. The table below sets forth our products and selected applications: - ----------------------------------------------------------------------------------------------------- PRODUCT APPLICATIONS - ----------------------------------------------------------------------------------------------------- SUBSTRATES ELECTRONIC OPTO-ELECTRONIC GaAs - Cellular phones - LEDs - Direct broadcast television - Lasers - High-performance transistors - Optical couplers - Satellite communications - Displays InP - Fiber optic communications - Fiber optic communications - Satellite communications - Lasers - High-performance transistors - Automotive collision avoidance radars Ge - Satellite solar cells - ----------------------------------------------------------------------------------------------------- VISIBLE EMITTERS Blue, green and cyan HB - Full color displays LEDs - Lighting for the interior and exterior of automobiles - Traffic signals - Back lighting for cellular phones and instrument panels - White light for general illumination VCSELs - Fiber optic and wireless communications Laser diodes - Pointer products - ----------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS Laser diode-based products - Business presentations - Fire safety egress LED-based products - LED flashlight - -----------------------------------------------------------------------------------------------------
Substrates. We currently sell compound substrates manufactured from GaAs and InP, as well as single-element substrates manufactured from Ge. We supply GaAs substrates in two-, three-, four-, five-and six-inch diameters. We manufacture InP substrates in two-, three- and four-inch diameters and Ge substrates in four-inch diameters. We are developing and intend to initiate production of sapphire substrates. Visible Emitters. We sell blue, green and cyan HB LED products in wafer and chip form. We began selling blue HB LED products in the first quarter of 2000 and have recently begun shipping green and cyan HB LEDs in test quantities. We introduced our first VSCEL product in August 2000. Consumer Products. We sell laser pointers and products that use laser diodes manufactured by our visible emitter division and other sources. We announced two new consumer products for shipment during the first half of 2000: Safe Escape, a laser fire escape system, and MiniBrite, an LED flashlight. 34 39 CUSTOMERS We sell our compound semiconductor substrates worldwide to leading semiconductor device manufacturers. Our top substrate customers include: Agilent Technologies Kopin RF Micro Devices Alpha Industries Motorola SDL Alpha Photonics Nortel Networks Spectrolab EMCORE Osram Sumitomo Chemical Epistar Picogiga TRW Space & Defense Eptaxial Products Precision Opto Wafer Visual Photonics Epitaxy Epitronics Quantum Epitaxial Designs
We sell our laser diode and HB LED products primarily to customers that incorporate them into lighting products. Our top laser diode and HB LED customers include Harvatek and King Brite. MANUFACTURING We believe that our success is partially due to our manufacturing efficiency and high product yields and we continually emphasize quality and process control throughout our manufacturing operations. We perform our substrate manufacturing operations at our facilities in Fremont, California and Beijing, China. As part of our plan to reduce manufacturing costs, we are shifting many of our labor-intensive processes to our facilities in China, where costs, including labor costs, are generally lower. We intend to transfer the majority of our substrate manufacturing operations to China by the end of 2001. We believe that our capital investment and subsequent operating costs are lower for our manufacturing facilities in China relative to the U.S. Many of our manufacturing operations are fully automated and computer monitored or controlled, enhancing reliability and yield. We use proprietary equipment in our substrate manufacturing operations to protect our intellectual property and control the timing and pace of capacity additions. By assembling our own equipment, we can quickly increase capacity without incurring delays caused by ordering additional equipment or converting older equipment to new technologies. Our epitaxial wafer production is located in El Monte, California and most of our laser diode assembly is done in Xiamen, China. Our Fremont and Beijing substrate facilities are ISO 9002 certified, and we are working toward ISO certification for our other manufacturing facilities. We depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates. We generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts. Although we seek to maintain sufficient inventory levels of certain materials to guard against interruptions in supply and to meet our near term needs, and have to date been able to obtain sufficient supplies of materials in a timely manner, there may be shortages of certain key materials, such as gallium. Accordingly, to help ensure continued supply of materials, we have formed strategic alliances with suppliers of key raw materials required to manufacture our products. We believe that these alliances will be advantageous in procuring materials to support our continued growth. We use MOCVD equipment to manufacture our opto-electronic devices. We currently have several new MOCVD reactors on order and expect that these additional machines will meet our needs for the foreseeable future. The substrate materials and raw wafers used in our visible emitter products are purchased from our substrate division and other sources. The production of a number of our consumer products, including laser pointers, is being outsourced to contractors in Asia in order to reduce product costs and manufacturing overhead. We have established quality control procedures and personnel in Asia to support our outsourced manufacturing. SALES AND MARKETING Each of our three divisions is responsible for its own sales and marketing activities, and each maintains its own sales and marketing personnel. In addition, each of our divisions advertises in trade publications, distributes promotional materials, publishes technical articles, conducts marketing programs 35 40 and participates in industry trade shows and conferences in order to raise market awareness of our products. Substrates. We sell our substrate products through our direct sales force in the U.S. and Japan and through independent sales representatives in France, Japan, South Korea, Taiwan and the United Kingdom. Our direct sales force consists of sales engineers who are knowledgeable in the manufacture and use of compound and single-element substrates. Our 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. We believe that maintaining a close relationship with customers and providing them with ongoing technical support improves customer satisfaction and will provide us with a competitive advantage in selling other substrates to our customers. The substrate division has launched a program with selected customers in which we will guarantee that high volumes of six-inch GaAs and other substrates will be delivered on specific dates and the customer will make a prepayment for part of the value of its order. We intend to allow several major customers to participate in this program. Visible Emitters. We sell our HB LED products primarily through independent sales representatives to lamp package manufacturers in Taiwan and China. We intend to expand sales of these products in the U.S. and Europe primarily using our direct sales force. The majority of our laser diode chips are sold in China and elsewhere in Asia, primarily through independent sales representatives. We sell our VCSEL devices through our direct sales force. Consumer Products. We currently sell our consumer products through a combination of our own direct sales force and independent sales representatives. Most of our sales are to customers in the U.S. RESEARCH AND DEVELOPMENT To maintain and improve our competitive position, we focus our research and development efforts on designing new proprietary processes and products, improving the performance of existing products and reducing manufacturing costs. We have assembled a multi-disciplinary team of highly skilled scientists, engineers and technicians to meet our research and development objectives. As a result of our ongoing research and development activities, we believe that we offer superior quality products. For example, some customers now qualify substrates manufactured using our VGF technique as the only acceptable material in their design specifications. Our current substrate research and development activities focus on continued development and enhancement of six-inch GaAs crystals, including improved yield, greater substrate strength and increased crystal length. We continue to develop other compound substrates, such as InP and a low boron version of our standard GaAs substrates and are initiating research into development of six-inch InP products. We are developing and intend to initiate production of sapphire substrates. We are focusing on all three major stages of LED development: epitaxy, wafer fabrication and die fabrication. Our goal is to improve brightness and yield, create specific colors and enhance uniformity of product, both within and across production runs. Specific colors are created by controlling the indium content of the epitaxial layers, which we achieve, in part, from modifications that we make to our MOCVD reactors. The wafer and die fabrication experience we gained in our Lyte Optronics laser diode operation has helped us develop similar techniques for LEDs. We began research in 1999 to develop VCSEL devices with uniform epitaxy structures on three-inch wafers and announced VCSEL wafer products in August 2000. We continue to improve their performance characteristics and intend to develop one- and two-dimensional array VCSEL chips. We have historically funded a significant portion of our research and development efforts through contracts with the U.S. government and customer funded research projects, although we do not have any projects underway currently. Under our contracts, we retain rights to the VGF and wafer fabrication technology that we have developed. The U.S. government retains the rights to utilize the technologies we 36 41 develop for government purposes only. During the period from 1997 to 1999 these contracts amounted to $5.9 million. Currently, our research and development is internally funded. COMPETITION The semiconductor industry is characterized by rapid technological change and price erosion, as well as intense foreign and domestic competition. We believe we currently have a leading position in the existing markets for compound semiconductor substrates and devices primarily as a result of our expertise in VGF technology. However, we believe we face actual and potential competition from a number of established domestic and international companies. We believe that the primary competitive factors in the markets in which our products compete are: - quality; - price; - performance; - meeting customer specifications; - customer support and satisfaction; and - customer investment in competing technologies. Our ability to compete in target markets also depends on factors such as: - the timing and success of the development and introduction of new products by us and our competitors; - the availability of adequate sources of raw materials; and - protection of our products by effective use of intellectual property laws and general economic conditions. Our primary competition in the market for compound semiconductor substrates includes Freiberger, Hitachi Cable, Japan Energy, Litton Airtron and Sumitomo Electric. In addition, we also face competition from compound semiconductor device manufacturers that produce substrates for their own internal use, and from companies such as IBM that are actively developing alternative compound semiconductor materials. Our primary competition in the market for LED products include Cree, LumiLED, Nichia Chemicals, Toyoda Gosei and United Epitaxy. In general, LED manufacturers in Taiwan and China have a competitive pricing advantage due to low overhead and small research and development investments. Cree, Nichia Chemicals, Sony and Toyoda Gosei have significant patent portfolios that other competitors, including us, must either design around or license. We compete with Agilent, EMCORE and Honeywell in the market for VCSEL devices. Our primary competition in the market for consumer products includes Alpec and Transverse. PROTECTION OF OUR INTELLECTUAL PROPERTY Our success and the competitive position of our VGF technique depend on our ability to maintain trade secrets and other intellectual property protections. We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology. We believe that, due to the rapid pace of technological innovation in the markets for our products, our ability to establish and maintain a position of technology leadership depends as much on the skills of our development personnel as upon the legal protections afforded our existing technologies. To protect our trade secrets, we take certain measures to ensure their secrecy, such as executing non-disclosure agreements with our employees, customers and suppliers. 37 42 However, reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. To date, we have been issued four U.S. patents which relate to our VGF products and processes. We have five U.S. patent applications pending which relate to our LED or laser diode technology, and have patent applications pending in Europe, Canada, China, Japan and Korea which are based on one of our U.S. patents that relates to our VGF processes. We have no issued foreign patents. We have two patents and two patent applications pending relating to our consumer products. ENVIRONMENTAL REGULATIONS We are 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 our 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 arsenic. We cannot guarantee that our control systems will be successful in preventing a release of these materials or other adverse environmental conditions. Any release or other failure to comply with present or future environmental laws and regulations could result in the imposition of significant fines against us, the suspension of production or a cessation of operations. We are cooperating with the California Occupational Safety and Health Administration, or Cal-OSHA, in an investigation regarding impermissible levels of potentially hazardous materials in certain areas of our manufacturing facility in Fremont, California. In May 2000, Cal-OSHA levied a fine against us in the amount of $313,655 for alleged health and safety violations. Further penalties, including criminal penalties, could be levied against us or our management. We are appealing the citations, and have put in place engineering, administrative and personnel protective equipment programs to address this issue. The facility is in full operation and to our knowledge, no accidents or injuries resulted from this matter. EMPLOYEES As of June 30, 2000, we had 1,121 full-time employees, of whom 901 were principally engaged in manufacturing, 166 in sales and administration and 54 in research and development. Of these employees, 696 are located in the U.S., 422 in China and three in Japan. Our success is in part dependent on our ability to attract and retain highly skilled workers. None of our employees is represented by a union and we have never experienced a work stoppage. We consider our relations with our employees to be good. 38 43 PROPERTIES Our principal properties are as follows:
SQUARE LOCATION FEET PROPERTY DESCRIPTION -------- ------ -------------------- Fremont, CA 58,000 Production and Administration Fremont, CA 80,000 Production Fremont, CA 20,292 Administration Fremont, CA 9,280 Warehouse Monterey Park, CA 22,000 Production and Administration Torrance, CA 6,674 Administration Torrance, CA 15,027 Production El Monte, CA 26,652 Production El Monte, CA 6,281 Production Beijing, China 31,000 Production Beijing, China 31,000 Production Beijing, China 32,000 Production Xiamen, China 14,000 Production
All of the properties listed above are owned except for 20,292 square feet in Fremont, the lease for which expires May 2005, 9,280 square feet in Fremont, the lease for which expires in June 2005, 6,281 square feet in El Monte, the lease for which expires in December 2006 and the two Torrance properties, the leases for which expire in May 2003. We consider each facility to be in good operating condition and adequate for its present use, and believe that each facility has sufficient plant capacity to meet its current and anticipated operating requirements. 39 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS As of August 31, 2000, our executive officers and directors were as follows:
NAME AGE POSITION ---- --- -------- Morris S. Young, Ph.D. ..................... 55 Chairman of the Board of Directors, President and Chief Executive Officer Donald L. Tatzin............................ 48 Chief Financial Officer and Director Davis Zhang................................. 43 President, Substrate Division Xiao Gordon Liu, Ph.D....................... 36 Senior Vice President, Marketing and Sales, and Engineering and Development Heng Liu, Ph.D. ............................ 40 President, XtalLED Division Bingwen Liang, Ph.D. ....................... 39 Acting President, VCSEL Division Jesse Chen.................................. 42 Director B.J. Moore.................................. 64 Director
Mr. Jesse Chen and Mr. B.J. Moore are members of the compensation and audit committees. Dr. Xiao Gordon Liu, Dr. Heng Liu and Dr. Bingwen Liang are not executive officers or directors but are deemed to be significant employees who make or are expected to make a significant contribution to our business. Morris S. Young, Ph.D. co-founded AXT in 1986 and has served as chairman of our board of directors since February 1998 and president and chief executive officer, as well as a director, since 1989. From 1985 to 1989, Dr. Young was a physicist at Lawrence Livermore National Laboratory. Dr. Young holds a bachelor of science degree in metallurgical engineering from Chengkung University, Taiwan, a master of science degree in metallurgy from Syracuse University and a Ph.D. in metallurgy from Polytechnic University. Donald L. Tatzin has served as a director since February 1998 and as chief financial officer since August 2000. From April 2000 to August 2000, Mr. Tatzin served as our interim chief financial officer. From 1993 to 1998, Mr. Tatzin served as executive vice president of Showboat, a gaming company. In addition, Mr. Tatzin served as a director for Sydney Harbour Casino, an Australian gaming company, from April 1995 to October 1996 and as its chief executive officer from April 1996 to October 1996. From 1976 to 1993, Mr. Tatzin was a director and consultant with Arthur D. Little. Mr. Tatzin holds a bachelor of science degree in economics and a bachelor of science and masters degrees in city planning from the Massachusetts Institute of Technology and a master of science degree in economics from Australian National University. Davis Zhang co-founded AXT in 1986 and served as senior vice president, production from January 1994 until August 1999, and as president of the substrate division since August 1999. From 1987 to 1993, Mr. Zhang served as our senior production manager. Mr. Zhang holds a bachelor of science degree in mechanical engineering from Northern Communication University, Beijing, China. Xiao Gordon Liu, Ph.D. joined us in June 1995 as senior engineer and was promoted to vice president, engineering and development in November 1998 and to senior vice president, marketing and sales, and engineering and development in August 2000. Prior to joining us, Dr. Liu was a postdoctoral fellow and associate specialist at University of California at Berkeley and a research associate at the University of Lund, Sweden. Dr. Liu holds a Ph.D. in physics from the University of Lund, Sweden and has published more than 30 scientific papers. Heng Liu, Ph.D. joined us in September 1999 as director of LED epitaxy and was promoted to president of the newly formed XtalLED division in March 2000. From September 1994 to September 1999, Dr. Liu worked at the opto-electronics division of Hewlett-Packard Company as a research and development engineer. Dr. Liu holds an undergraduate degree from National Chiao-Tung University in Taiwan, a masters degree in physics from University of Oregon and a Ph.D. in engineering from North Carolina State University. 40 45 Bingwen Liang, Ph.D. joined us in January 2000 as director of advanced technologies and was subsequently promoted to acting president of the VCSEL division. From November 1999 to January 2000, Dr. Liang was research and development manager of the III-V materials group in the fiber-optic communication division of Agilent Technologies. From July 1993 to November 1999, Dr. Liang was a research and development manager for Hewlett-Packard Company. Dr. Liang has a Ph.D. in applied physics from the University of California at San Diego and has published more than 45 scientific papers. Jesse Chen has served as a director 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, 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 bachelor of science degree in aeronautical engineering from Chenkung University, Taiwan and a master of science degree in electrical engineering from Loyola Marymount University. B.J. Moore has served as a director 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 boards of directors for Adaptec, 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 bachelor of science degree and a master of science degree in electrical engineering from the University of Tennessee. BOARD COMPOSITION Our board of directors currently consists of four members, as a result of the resignation of Theodore S. Young in August 2000. We anticipate adding a fifth director to fill our vacancy on the board by June 2001. Our certificate of incorporation and bylaws provide that the terms of office of the members of the board of directors are divided into three classes: class I, whose term will expire at the annual meeting of stockholders to be held in 2002, class II, whose term will expire at the annual meeting of stockholders to be held in 2003, and class III, whose term will expire at the annual meeting of stockholders to be held in 2001. The class I director is Morris S. Young, the class II directors are Jesse Chen and Donald L. Tatzin and the class III director is B.J. Moore. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election. As a result, only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their terms. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the board of directors may delay or prevent changes in our control or management. In addition, our bylaws provide that the authorized number of directors may only be changed by a resolution of the board of directors. BOARD COMMITTEES The audit committee of our board of directors recommends or will recommend the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our independent auditors, including the results and scope of their audit. The audit committee currently consists of Messrs. Chen and Moore. We anticipate appointing an additional director prior to June 15, 2001, who will serve as a third member of the audit committee, as required by the rules and regulations of the Nasdaq Stock Market. The compensation committee of our board of directors reviews and recommends to the board the compensation and benefits of all of our executive officers, administers our stock option plans and establishes and reviews general policies relating to compensation and benefits of our employees. The compensation committee currently consists of Messrs. Chen and Moore. 41 46 CERTAIN TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1999, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are 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 our voting securities or members of that person's immediate family had or will have a direct or indirect material interest other than the transactions described below. Equipment & Materials, a California corporation engaged in international trading and quartzware fabrication, supplies us with various raw materials from China and has manufactured quartzware for us. Christina X. Li, the sole shareholder and president of Equipment & Materials, is the wife of Davis Zhang, the president of our substrate division. Purchases from Equipment & Materials were approximately $1.5 million for 1997, $3.7 million for 1998, $3.6 million for 1999 and $3.5 million for the six months ended June 30, 2000. In August 2000, we entered into a business transfer and acquisition agreement with Demeter Technology, a Delaware corporation founded by Theodore S. Young, the former president of our fiber optic division and a former member of our board of directors, and Robert Shih, the former chief technology officer of our visible emitter division. Under this agreement, we have agreed to transfer certain non-core rights to Demeter relating to our research and development activities in the field of fiber optics. We have entered into non-compete agreements with Messrs. Shih and Young that prohibit them from certain activities, including the manufacture of VCSEL devices. We have leased to Demeter a portion of our owned facility in El Monte, California, subleased a portion of our rented facility in El Monte, California, leased certain equipment, including an MOCVD machine, and sold certain inventory relating to fiber optics. In exchange, Demeter has granted to us a warrant to purchase up to 4.5 million shares of its Series A convertible preferred stock at a price of $0.5714 per share. We anticipate that some of our employees previously engaged in research and development relating to fiber optics products and services will join Demeter. 42 47 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information known to us with respect to beneficial ownership of our common stock as of August 31, 2000, and as adjusted to reflect the sale of common stock offered by us and the selling stockholders, in this offering, for: - each person known by us to own beneficially more than 5% of the outstanding shares; - each of our directors; - each executive officer; and - all executive officers and directors as a group. Except as otherwise indicated, the principal address of each of the stockholders below is c/o AXT, Inc., 4281 Technology Drive, Fremont, California 94538. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this prospectus are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY OWNED PRIOR TO BEING OWNED AFTER THE OFFERING OFFERED THE OFFERING ------------------- ------- -------------------- NAME OF BENEFICIAL OWNERS AND SELLING STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT - -------------------------------------------------- --------- ------- --------- ------- Morris S. Young(1).......................... 1,995,479 10.6% 80,000 1,915,479 9.0 % Donald L. Tatzin(2)......................... 21,050 * -- 21,050 * Davis Zhang(3).............................. 270,608 1.4% 20,000 250,608 1.3 % Jesse Chen(4)............................... 18,750 * -- 18,750 * B.J. Moore(5)............................... 18,750 * -- 18,750 * All directors and executive officers as a group (5 persons).................................. 2,324,762 12.3% 100,000 2,224,762 10.5 %
- --------------- * Less than 1% (1) Includes 731,071 shares held by the Morris & Vicke Young Trust, 1,104,200 shares held by the Morris Young Family Ltd. Partnership, 20,000 shares held by the children of Dr. Young and 70,208 shares subject to options exercisable within 60 days of June 30, 2000. Also includes 20,000 shares held jointly by George Liu, Dr. Young's father-in-law, and Vicke Young, Dr. Young's spouse, of which Dr. Young disclaims beneficial ownership, and 50,000 shares recently transferred into an exchange fund, of which Dr. Young disclaims beneficial ownership. (2) Includes 18,750 shares subject to options exercisable within 60 days of the date of this prospectus. (3) Includes 96,100 shares directly held by Davis Zhang, 29,000 shares held by Christina X. Li, Mr. Zhang's spouse, 16,000 shares held by Mr. Zhang's minor children and 92,500 shares subject to options exercisable within 60 days of the date of this prospectus. (4) Includes 18,750 shares subject to options exercisable within 60 days of the date of this prospectus. (5) Includes 11,250 shares subject to options exercisable within 60 days of the date of this prospectus. 43 48 UNDERWRITING We and the selling stockholders have entered into an underwriting agreement with Prudential Securities Incorporated, CIBC World Markets Corp., Wit SoundView Corporation, ABN AMRO Incorporated and Pacific Crest Inc. acting as underwriters. We and the selling stockholders are obligated to sell, and the underwriters are obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to certain conditions in the underwriting agreement, each underwriter has severally agreed to purchase the shares indicated opposite its name:
NUMBER UNDERWRITERS OF SHARES ------------ --------- Prudential Securities Incorporated.......................... CIBC World Markets Corp. ................................... Wit SoundView Corporation................................... ABN AMRO Incorporated....................................... Pacific Crest Inc........................................... --------- Total.................................................. 2,200,000 =========
The underwriters may sell more shares than the total number of shares offered on the cover page of this prospectus and they have, for a period of 30 days from the date of this prospectus, an over-allotment option to purchase up to 330,000 additional shares from us. If any additional shares are purchased, the underwriters will severally purchase the shares in the same proportion as per the table above. The underwriters have advised us and the selling stockholders that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriters may allow to selected dealers a concession not in excess of $ per share, and these dealers may allow a concession not in excess of $ per share to some other dealers. After the shares are released for sale to the public, the underwriters may change the offering price and the concessions. We and the selling stockholders have agreed to pay to the underwriters the following fees, assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares:
TOTAL FEES ------------------------------------------------ FEE WITHOUT EXERCISE OF FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------- ---------------------- ---------------------- Fees paid by us.......................... Fees paid by the selling stockholders....
In addition, we estimate that we will spend approximately $1.0 million in expenses for this offering, including those of the selling stockholders. We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in respect of these liabilities. We and our executive officers and directors will have entered into lock-up agreements under which we and they agree not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 90 days from the date of this prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the underwriters. Prudential Securities Incorporated may, at any time and without notice, waive the terms of these lock-up agreements. We have agreed to file a registration statement with the Securities and Exchange Commission no later than 10 days after the consummation of this offering, covering 234,155 shares issued in a private placement in July 2000. 44 49 Prudential Securities Incorporated, on behalf of the underwriters, may engage in the following activities in accordance with applicable securities rules: - Create a syndicate short position by making short sales of our common stock and may purchase our common stock on the open market to cover syndicate short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in the offering. Short sales can be either covered or naked. Covered short sales are sales made in an amount not greater than the underwriters' over-allotment options to purchase additional shares in the offering. Naked short sales are sales in excess of the over-allotment options. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. - Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. Prudential Securities Incorporated, on behalf of the underwriters, may close out any covered short position by either exercising the over-allotment options or purchasing shares in the open market and must close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the covered short position, Prudential Securities Incorporated, on behalf of the underwriters, will consider, among other things, the price of the shares. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. - Penalty bids permitting the representatives to reclaim concessions from a syndicate member for the shares purchased in the stabilizing or short covering transactions. These activities, which may be commenced and discontinued at any time, may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. Also, and prior to the pricing of the shares, and until such time when a stabilizing bid may have been made, some or all of the underwriters who are market makers in the shares may make bids for or purchases of shares subject to certain restrictions, known as passive market making activities. Each underwriter has represented that it has complied and will comply with all applicable laws and regulations in connection with the offer, sale or delivery of the shares and related offering materials in the United Kingdom, including: - the Public Offers of Securities Regulations 1995; - the Financial Services Act 1986; and - the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended). Prudential Securities Incorporated facilitates the marketing of new issues online through its PrudentialSecurities.com division. Clients of Prudential Advisor(SM), a full service brokerage firm program, may view offering terms and a prospectus online and place orders through their financial advisors. A prospectus in electronic format is also being made available on an Internet website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition, other dealers purchasing shares from Wit SoundView in this offering have agreed to make a prospectus in electronic format available on websites maintained by each of these dealers. 45 50 UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of the material United States federal income tax consequences of the ownership and disposition of our common stock to a non-United States holder. For the purpose of this discussion, a non-United States holder is any holder that for United States federal income tax purposes is not a United States person. For purposes of this discussion, the term United States person means: - an individual citizen or resident of the United States; - a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States or any political subdivision thereof; - an estate whose income is subject to United States federal income tax regardless of its source; or - a trust (x) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (y) which has made an election to be treated as a United States person. If a partnership holds common stock, the tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. This discussion does not address all aspects of United States federal income taxation that may be relevant in light of a non-United States holder's special tax status or special tax situations. United States expatriates, life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions, investors whose functional currency is other than the United States dollar, and investors that hold common stock as part of a hedge, straddle or conversion transaction are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any tax consequences arising under the laws of any state, local or non-United States taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. ACCORDINGLY, EACH NON-UNITED STATES HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK. DIVIDENDS We have not paid any dividends on our common stock and we do not plan to pay any dividends for the foreseeable future. However if we do pay dividends on our common stock, those payments will constitute dividends for United States tax purposes to the extent paid from our current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent those dividends exceed our current and accumulated earnings and profits, the dividends will constitute a return of capital and will first reduce a holder's basis, but not below zero, and then will be treated as gain from the sale of stock. Any dividend paid to a non-United States holder of common stock generally will be subject to United States withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, a non-United States holder must provide us with an IRS form W-8BEN certifying to your qualification for the reduced rate. Dividends received by a non-United States holder that are effectively connected with a United States trade or business conducted by the non-United States holder are exempt from such withholding tax. In order to obtain this exemption, a non-United States holder must provide us with an IRS Form W-8ECI certifying to such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to United States persons, net of certain deductions and credits. 46 51 In addition to the graduated tax described above, dividends received by a corporate non-U.S. holder that are effectively connected with a United States trade or business of the corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. A non-United States holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the Internal Revenue Service, or IRS. GAIN ON DISPOSITION OF COMMON STOCK A non-United States holder generally will not be subject to United States federal income tax on any gain realized upon the sale or other disposition of our common stock unless: - the gain is effectively connected with a United States trade or business of the non-United States holder (which gain, in the case of a corporate non-United States holder, must also be taken into account for branch profits tax purposes); - the non-United States holder is an individual who holds his or her common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or - we are or have been a "United States real property holding corporation" for United States federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder's holding period for our common stock. We have determined that we are not and do not believe that we will become a "United States real property holding corporation" for United States federal income tax purposes. BACKUP WITHHOLDING AND INFORMATION REPORTING Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient's country of residence. Dividends paid to a non-United States holder at an address within the United States may be subject to backup withholding at a rate of 31% if the non-United States holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payer. Backup withholding generally will not apply to dividends paid to non-United States holders at an address outside the United States on or prior to December 31, 2000 unless the payer has knowledge that the payee is a United States person. Under recently finalized Treasury Regulations regarding withholding and information reporting, payment of dividends to non-United States holders at an address outside the United States after December 31, 2000 may be subject to backup withholding at a rate of 31% unless such non-United States holder satisfies various certification requirements. Under current Treasury Regulations, the payment of the proceeds of the disposition of common stock to or through the United States office of a broker is subject to information reporting and backup withholding at a rate of 31% unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. Generally, the payment of the proceeds of the disposition by a non-United States holder of common stock outside the United States to or through a foreign office of a broker will not be subject to backup withholding but will be subject to information reporting requirements if the broker is a United States person or has certain other connections to the United States, unless the broker has documentary evidence in its files of the holder's non-United States status and certain other conditions are met, or the holder otherwise establishes an exemption. Neither backup withholding nor information reporting generally will apply to a payment of the proceeds of a disposition of common stock by or through a foreign office of a foreign broker not subject to the preceding sentence. 47 52 In general, the recently promulgated final Treasury Regulations, described above, do not significantly alter the substantive withholding and information reporting requirements but would alter the procedures for claiming benefits of an income tax treaty and change the certifications procedures relating to the receipt by intermediaries of payments on behalf of the beneficial owner of shares of common stock. Non-United States holders should consult their tax advisors regarding the effect, if any, of those final Treasury Regulations on an investment in our common stock. Those final Treasury Regulations generally are effective for payments made after December 31, 2000. Backup withholding is not an additional tax. Rather, the United States income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the IRS. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for AXT 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 audited financial statements as of December 31, 1998, 1999 and June 30, 2000 and for each of the three years in the period ended December 31, 1999 and for the six months ended June 30, 2000 included in this Prospectus, except as they relate to Lyte Optronics, Inc. as of December 31, 1998 and for the two years in the period then ended, have been audited by PricewaterhouseCoopers LLP, independent accountants, and, insofar as they relate to Lyte Optronics, Inc. as of December 31, 1998 and for the two years in the period then ended, by Arthur Andersen LLP, independent accountants, whose reports thereon appear herein. Such financial statements have been so included in reliance on the reports of such independent accountants given on the authority of said firms as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-3 under the Securities Act of 1933, as amended, with the Securities and Exchange Commission. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are a part of the registration statement. For further information with respect to us and our common stock, please refer to the registration statement and the exhibits and schedules filed with it. You may read and copy any document which we file with the SEC at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, or in New York, New York and Chicago, Illinois. We are also subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended. We file reports, proxy statements and other information with the SEC to comply with the Exchange Act. These reports, proxy statements and other information can be inspected and copied on the Internet at http://www.sec.gov; at the SEC's regional offices at: Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 to obtain information regarding the operation of the Public Reference Room. Reports, proxy statements and other information concerning our company also may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. 48 53 INFORMATION INCORPORATED BY REFERENCE The SEC allows us to incorporate by reference the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus. Any information that we file with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any additional documents we file with the SEC. This registration statement incorporates by reference the documents listed below that we have previously filed with the Securities and Exchange Commission. They contain important information about us and our financial condition. The following documents filed with the SEC are incorporated by reference into this prospectus: - our Definitive Proxy Statement relating to the Annual Meeting of Stockholders held June 7, 2000. All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of the offering of securities contemplated by this prospectus shall be deemed to be incorporated by reference in this prospectus. Such documents shall be considered to be a part of this prospectus from the date of filing of such documents. Any statement contained in a document incorporated by reference or deemed to be incorporated by reference into this prospectus shall be deemed to be modified or superseded for all purposes of this prospectus and the registration statement to the extent that a statement contained in this prospectus, in any document incorporated by reference or in any subsequently filed document which also is incorporated or deemed to be incorporated by reference in this prospectus modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. We will provide without charge to each person, including any beneficial owner, to whom a copy of this prospectus has been delivered a copy of any and all of the documents referred to above which have been or may be incorporated in this prospectus by reference and were not delivered with this prospectus. We will not deliver exhibits to such documents, unless such exhibits are specifically incorporated by reference. We will provide this information upon written or oral request by a person to whom we delivered a copy of the prospectus. Requests for such copies should be directed to our principal executive offices located at 4281 Technology Drive, Fremont, California 94538, Attention: Secretary. Our general telephone number is (510) 683-5900. 49 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants -- PricewaterhouseCoopers LLP....................................................... F-2 Report of Independent Public Accountants -- Arthur Andersen LLP....................................................... F-3 Consolidated Balance Sheets................................. F-4 Consolidated Income Statements.............................. F-5 Consolidated Statement of Stockholders' Equity.............. F-6 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of AXT, Inc. In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of AXT, Inc. and its subsidiaries at December 31, 1998 and 1999 and June 30, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 and for the six months ended June 30, 2000 in conformity with accounting principles generally accepted in the United States. 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. The consolidated financial statements give retroactive effect to the merger of Lyte Optronics, Inc. on May 28, 1999 in a transaction accounted for as a pooling of interests, as described in Note 2 to the consolidated financial statements. We did not audit the financial statements of Lyte Optronics, Inc. at December 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, which statements reflect total assets of $25,435,000 as of December 31, 1998 and total revenues of $17,978,000 and $18,137,000 for each of the two years in the period ended December 31, 1998. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Lyte Optronics, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California August 28, 2000 F-2 56 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Lyte Optronics, Inc.: We have audited the consolidated balance sheet of Lyte Optronics, Inc. (a Nevada corporation) and Subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' investment and cash flows for the two years in the period ended December 31, 1998 (not presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lyte Optronics, Inc. and Subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the two years in the period ended December 31, 1998 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Los Angeles, California May 27, 1999 F-3 57 AXT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, -------------------- JUNE 30, 1998 1999 2000 -------- -------- -------- ASSETS: Current assets: Cash and cash equivalents................................ $ 16,438 $ 6,062 $ 5,149 Accounts receivable, net of allowance for doubtful accounts of $1,648, $778 and $1,702................... 13,128 17,561 20,889 Inventories.............................................. 25,300 35,470 43,630 Prepaid expenses and other current assets................ 3,271 8,945 6,071 Deferred income taxes.................................... 2,452 3,210 4,585 -------- -------- -------- Total current assets.................................. 60,589 71,248 80,324 Property, plant and equipment, net......................... 37,624 40,865 52,476 Other assets............................................... 1,927 1,405 2,427 Goodwill................................................... 2,843 2,244 1,945 -------- -------- -------- Total assets.......................................... $102,983 $115,762 $137,172 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Short-term bank borrowing................................ $ 1,928 $ 11,298 $ 12,980 Note payable............................................. -- -- 4,000 Accounts payable......................................... 7,850 8,294 12,575 Accrued liabilities...................................... 5,242 7,464 10,801 Current portion of long-term debt........................ 2,733 1,568 1,862 Current portion of capital lease obligation.............. 1,192 2,162 3,437 -------- -------- -------- Total current liabilities............................. 18,945 30,786 45,655 Long-term debt, net of current portion..................... 18,416 15,254 14,034 Long-term capital lease, net of current portion............ 3,854 6,853 8,137 Other long-term liabilities................................ 604 410 100 -------- -------- -------- Total liabilities..................................... 41,819 53,303 67,926 -------- -------- -------- Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $.001 par value; 2,000 shares authorized; 981 shares issued and outstanding................................ 1 1 1 Additional paid-in capital............................... 3,999 3,989 3,989 Common stock, $.001 par value; 100,000 shares authorized; 18,393, 18,659 and 18,948 shares issued and outstanding....... 18 19 19 Additional paid-in capital............................... 45,248 46,321 48,606 Deferred compensation.................................... (327) (217) (162) Retained earnings........................................ 12,198 12,370 16,695 Cumulative translation adjustments....................... 27 (24) 98 -------- -------- -------- Total stockholders' equity............................ 61,164 62,459 69,246 -------- -------- -------- Total liabilities and stockholders' equity............ $102,983 $115,762 $137,172 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 58 AXT, INC. CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- --------------------- 1997 1998 1999 1999 2000 ------- ------- ------- ----------- ------- (UNAUDITED) Revenue.......................................... $43,313 $61,314 $81,521 $39,680 $52,878 Cost of revenue.................................. 29,650 38,949 57,369 30,211 32,198 ------- ------- ------- ------- ------- Gross profit..................................... 13,663 22,365 24,152 9,469 20,680 Operating expenses: Selling, general and administrative............ 9,921 11,538 14,016 6,843 8,417 Research and development....................... 1,289 2,684 3,086 1,520 3,851 Acquisition costs.............................. -- -- 2,810 2,810 -- ------- ------- ------- ------- ------- Total operating expenses.................... 11,210 14,222 19,912 11,173 12,268 ------- ------- ------- ------- ------- Income (loss) from operations.................... 2,453 8,143 4,240 (1,704) 8,412 Interest expense................................. (793) (1,481) (2,150) (1,360) (1,918) Other income and expense......................... (57) 598 729 722 499 ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.......................................... 1,603 7,260 2,819 (2,342) 6,993 Provision for income taxes....................... 783 2,976 2,139 178 2,668 ------- ------- ------- ------- ------- Income (loss) before extraordinary item.......... 820 4,284 680 (2,520) 4,325 Extraordinary item, net of tax benefits.......... -- -- (508) (508) -- ------- ------- ------- ------- ------- Net income (loss)................................ $ 820 $ 4,284 $ 172 $(3,028) $ 4,325 ======= ======= ======= ======= ======= Basic income (loss) per share: Income (loss) before extraordinary item........ $ 0.22 $ 0.27 $ 0.04 $ (0.14) $ 0.23 Extraordinary item............................. -- -- (0.03) (0.03) -- Net income (loss).............................. 0.22 0.27 0.01 (0.16) 0.23 Diluted income (loss) per share: Income (loss) before extraordinary item........ $ 0.06 $ 0.26 $ 0.03 $ (0.14) $ 0.21 Extraordinary item............................. -- -- (0.03) (0.03) -- Net income (loss).............................. 0.06 0.26 0.01 (0.16) 0.21 Shares used in per share calculations: Basic.......................................... 3,697 16,076 18,655 18,451 18,687 Diluted........................................ 13,598 16,325 19,771 18,451 20,178
The accompanying notes are an integral part of these consolidated financial statements. F-5 59 AXT, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED OTHER PREFERRED STOCK COMMON STOCK COMPREHENSIVE INCOME ---------------- ---------------- DEFERRED RETAINED CUMULATIVE TRANSLATION SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS ADJUSTMENTS ------- ------ ------ ------- ------------ -------- ---------------------- BALANCE AT JANUARY 1, 1997......... 8,929 $2,618 3,648 $ 629 $ 7,094 $(104) Common stock options exercised..... 85 154 Issuance of Series C convertible preferred stock.................. 1,200 5,935 Issuance of Employee Stock Purchase Plan stock....................... 67 232 Deferred compensation.............. 322 $(322) Amortization of deferred compensation..................... 102 Comprehensive income Net income....................... 820 Other comprehensive income Currency translation adjustment................... (93) ------- ------ ------ ------- ----- ------- ----- BALANCE AT DECEMBER 31, 1997....... 10,129 $8,553 3,800 $ 1,337 $(220) $ 7,914 $(197) Common stock options exercised..... 71 138 Issuance of common stock........... 123 724 Issuance of common stock and Series A preferred stock in connection with the acquisition of Alpha Photonics, Inc................... 981 4,000 1,267 7,500 Issuance of common stock as settlement of trade payables..... 4 25 Reacquisition and retirement of common stock..................... (61) Issuance of common stock in connection with financing........ 185 994 Conversion of Series C convertible preferred stock to common stock............................ (10,129) (8,553) 10,129 8,553 Issuance of common stock upon initial public offering.......... 2,875 25,792 Deferred compensation.............. 203 (203) Amortization of deferred compensation..................... 96 Comprehensive income Net income....................... 4,284 Other comprehensive income Currency translation adjustment................... 224 ------- ------ ------ ------- ----- ------- ----- BALANCE AT DECEMBER 31, 1998....... 981 $4,000 18,393 $45,266 $(327) $12,198 $ 27 Common stock options exercised..... 201 648 Repurchase of shares of common stock in connection with the early extinguishment of debt..... (21) (211) Issuance costs..................... (10) (139) Issuance of Employee Stock Purchase Plan stock....................... 86 776 Amortization of deferred compensation..................... 110 Comprehensive income Net income....................... 172 Other comprehensive income Currency translation adjustment................... (51) ------- ------ ------ ------- ----- ------- ----- BALANCE AT DECEMBER 31, 1999....... 981 $3,990 18,659 $46,340 $(217) $12,370 $ (24) ======= ====== ====== ======= ===== ======= ===== Common stock options exercised..... 254 1,967 Issuance of Employee Stock Purchase Plan stock....................... 35 318 Amortization of deferred compensation..................... 55 Comprehensive income Net income....................... 4,325 Other comprehensive income Currency translation adjustment................... 122 ------- ------ ------ ------- ----- ------- ----- BALANCE AT JUNE 30, 2000........... 981 $3,990 18,948 $48,625 $(162) $16,695 $ 98 ======= ====== ====== ======= ===== ======= ===== COMPREHENSIVE TOTAL INCOME ------- ------------- BALANCE AT JANUARY 1, 1997......... $10,237 Common stock options exercised..... 154 Issuance of Series C convertible preferred stock.................. 5,935 Issuance of Employee Stock Purchase Plan stock....................... 232 Deferred compensation.............. -- Amortization of deferred compensation..................... 102 Comprehensive income Net income....................... 820 $ 820 Other comprehensive income Currency translation adjustment................... (93) (93) ------- ------ BALANCE AT DECEMBER 31, 1997....... $17,387 $ 727 ====== Common stock options exercised..... 138 Issuance of common stock........... 724 Issuance of common stock and Series A preferred stock in connection with the acquisition of Alpha Photonics, Inc................... 11,500 Issuance of common stock as settlement of trade payables..... 25 Reacquisition and retirement of common stock..................... -- Issuance of common stock in connection with financing........ 994 Conversion of Series C convertible preferred stock to common stock............................ -- Issuance of common stock upon initial public offering.......... 25,792 Deferred compensation.............. -- Amortization of deferred compensation..................... 96 Comprehensive income Net income....................... 4,284 4,284 Other comprehensive income Currency translation adjustment................... 224 224 ------- ------ BALANCE AT DECEMBER 31, 1998....... $61,164 $4,508 ====== Common stock options exercised..... 648 Repurchase of shares of common stock in connection with the early extinguishment of debt..... (211) Issuance costs..................... (149) Issuance of Employee Stock Purchase Plan stock....................... 776 Amortization of deferred compensation..................... 110 Comprehensive income Net income....................... 172 172 Other comprehensive income Currency translation adjustment................... (51) (51) ------- ------ BALANCE AT DECEMBER 31, 1999....... $62,459 $ 121 ======= ====== Common stock options exercised..... 1,967 Issuance of Employee Stock Purchase Plan stock....................... 318 Amortization of deferred compensation..................... 55 Comprehensive income Net income....................... 4,325 4,325 Other comprehensive income Currency translation adjustment................... 122 122 ------- ------ BALANCE AT JUNE 30, 2000........... $69,246 $4,447 ======= ======
The accompanying notes are an integral part of these consolidated financial statements. F-6 60 AXT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ----------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- -------- -------- ----------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................................... $ 820 $ 4,284 $ 172 $(3,028) $ 4,325 Adjustments to reconcile net income (loss) to cash provided by (used in) operations: Depreciation........................................ 1,341 2,959 5,444 1,162 2,917 Deferred income taxes............................... (518) (1,126) (758) (404) (1,375) Amortization of goodwill............................ -- 149 599 300 299 Stock compensation.................................. 102 96 110 55 55 Changes in assets and liabilities: Accounts receivable............................... (1,984) (4,192) (4,433) (929) (3,328) Inventories....................................... (5,616) (11,074) (10,170) (4,491) (8,160) Prepaid expenses.................................. (435) (1,610) (5,674) (4,407) 2,874 Other assets...................................... 45 (243) 522 790 (1,022) Accounts payable.................................. 1,928 1,540 444 189 4,281 Accrued liabilities............................... 2,168 533 2,222 3,764 3,337 Other long-term liabilities....................... (252) 110 (194) (103) (310) ------- -------- -------- ------- -------- Net cash provided by (used in) operating activities................................... (2,401) (8,574) (11,716) (7,102) 3,893 ------- -------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment.......... (5,227) (14,899) (2,758) (1,238) (11,101) ------- -------- -------- ------- -------- Net cash used in investing activities........... (5,227) (14,899) (2,758) (1,238) (11,101) ------- -------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments of): Issuance of common stock............................ 386 27,648 1,064 359 2,285 Issuance of convertible preferred stock............. 5,935 -- -- -- -- Capital lease payments.............................. (33) (263) (1,958) (422) (868) Short-term bank borrowings.......................... 779 (2,320) 9,370 4,526 5,682 Long-term debt borrowings........................... 2,654 17,002 -- -- -- Long-term debt payments............................. -- (5,574) (4,327) (2,304) (926) ------- -------- -------- ------- -------- Net cash provided by financing activities....... 9,721 36,493 4,149 2,159 6,173 ------- -------- -------- ------- -------- Effect of exchange rate changes....................... (65) 219 (51) (53) 122 ------- -------- -------- ------- -------- Net increase in cash and cash equivalents............. 2,028 13,239 (10,376) (6,234) (913) Cash and cash equivalents at the beginning of the period.............................................. 1,171 3,199 16,438 16,438 6,062 ------- -------- -------- ------- -------- Cash and cash equivalents at the end of the period.... $ 3,199 $ 16,438 $ 6,062 $10,204 $ 5,149 ======= ======== ======== ======= ======== NON CASH ACTIVITY: Acquisition of property, plant and equipment through capital leases.................................... $ -- $ 1,737 $ 5,927 $ 2,654 $ 3,427 SUPPLEMENTAL DISCLOSURES: Interest paid......................................... $ 802 $ 1,481 $ 2,288 $ 730 $ 1,010 Income taxes paid..................................... $ 1,814 $ 4,338 $ 6,268 $ 1,867 $ 870
The accompanying notes are an integral part of these consolidated financial statements. F-7 61 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. THE COMPANY AND SUMMARY OF ACCOUNTING POLICIES The Company AXT, Inc. designs, develops, manufactures, and distributes high-performance compound semiconductor substrates, as well as opto-electronic semiconductor devices, such as high-brightness light-emitting diodes, or HB LEDs, and laser diodes. AXT expanded its markets in 1999 through the acquisition of Lyte Optronics, Inc., or Lyte (see Note 2). Lyte's business now operates as two separate divisions of AXT: the visible emitter division, which focuses on manufacturing LEDs and laser diodes, and the consumer products division, which focuses on designing and marketing laser-pointing, laser-alignment and LED products. The substrate division comprises the third division of AXT. The Company officially changed its name from American Xtal Technology, Inc. to AXT, Inc. on July 7, 2000. 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. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Interim Results (unaudited) The accompanying consolidated balance sheet as of June 30, 1999 and the consolidated statements of income and cash flows for the six months ended June 30, 1999 are unaudited. In the opinion of management, these statements have been prepared on the same accounting basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of results for these periods. The data disclosed in the notes to the consolidated financial statements for this period are unaudited. Foreign Currency Translation The functional currencies of the Company's Japanese and Chinese subsidiaries are the local currencies. Transaction gains and losses resulting from transactions denominated in currencies other than the U.S. dollar for the Company or in the local currencies for the subsidiaries are included in other income for the periods presented. The assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date. Income and expense items are translated at the average rate of exchange for the period. Gains and losses from foreign currency translation are included as a separate component of stockholders' equity. Revenue Recognition The Company recognizes revenue upon the shipment of its products to the customer provided that the Company has received a signed purchase order, the price is fixed, collection of resulting receivables is F-8 62 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) probable, product returns are reasonably estimable and there are no remaining significant obligations. The Company provides for future returns based on historical experience at the time revenue is recognized. Fair Value of Financial Instruments The reported amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. The reported amounts of notes, short-term bank borrowing, loans payable and capital lease obligations approximate fair value due to the market interest rates which these debts bear. Concentration of Credit Risk The Company manufactures and distributes GaAs, InP and Ge substrates, semiconductor laser diodes, LEDs and laser pointer products. 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% of product revenues for the years ended December 31, 1997, 1998, 1999 or the six months ended June 30, 2000. No customer accounted for 10% or more of the trade accounts receivable balance as of December 31, 1998, 1999 or June 30, 2000. Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. Property, Plant and Equipment 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, which vary from three to ten 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 Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," 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 June 30, 2000. F-9 63 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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." Research and Development Research and development costs are expensed as incurred. 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. Comprehensive Income In 1998, the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment by owners and distribution to owners. The difference between net income and comprehensive income for the Company relates to foreign currency translation adjustments. Comprehensive income for the years ended December 31, 1997, 1998, 1999 and the six-month period ended June 30, 2000 is disclosed in the "Consolidated Statement of Stockholders' Equity." Basic and Diluted Net Income (Loss) Per Share The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standard No. 128, or SFAS 128, "Earnings per Share." Under the provisions of SFAS 128, basic income (loss) per share is computed by dividing the income (loss) available to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted income (loss) per share excludes potential common stock if the effect of such stock is antidilutive. Potential common stock consists of common shares issuable upon the exercise of stock options. Segment Reporting In 1998, the Company adopted Statement of Financial Accounting Standard No. 131, or SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 requires that companies report separately, in the financial statements, certain financial and descriptive information about operating segment 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. Reclassifications Certain reclassifications have been made to the prior years consolidated financial statements to conform to current period presentation. F-10 64 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 established accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. In June 2000, SFAS 133 was amended by SFAS 138. The Company will be required to implement SFAS 133 as amended by SFAS 137, beginning in 2001. Adopting the provisions of SFAS 133 is not expected to have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 would have no material effect on the financial position or results of operations of the Company. In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not and is not expected to have a material impact on the Company's financial position or results of operations. NOTE 2. ACQUISITION Merger of the Company with Lyte Optronics, Inc. On May 28, 1999, the Company completed a merger with Lyte Optronics, Inc., or Lyte, a Nevada corporation and all of its subsidiaries, including Alpha Photonics, Inc., Lyte Optronics Ltd. (a United Kingdom company) and Advanced Semiconductor (a Xiamen, China company). Lyte and its subsidiaries manufacture and distribute semiconductor laser diode chips, high-brightness LEDs and laser pointers. Under the terms of the merger agreement, the Company issued approximately 2,247,000 shares of its common stock in exchange for all the outstanding shares of Lyte's common stock as well as the outstanding shares of Lyte's Series A preferred stock. The Company also issued approximately 981,000 shares of Series A preferred stock in exchange for all the outstanding shares of Lyte's Series B preferred stock. In addition, the Company assumed and converted Lyte's options and warrants representing approximately 115,000 shares of the Company's common stock. The merger has been accounted for as a pooling of interests; accordingly, all prior period consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of Lyte. The Company incurred costs of approximately $2.8 million associated with the merger, which were charged to operations during the quarter ended June 30, 1999, the period in which the merger was consummated. F-11 65 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Acquisition of Alpha Photonics, Inc. by Lyte Optronics, Inc. On September 29, 1998, Lyte acquired Alpha Photonics, Inc., or Alpha. The transaction was accounted for as a purchase. Lyte issued its common and preferred stock with a value of $11.5 million in exchange for all the outstanding shares of capital stock of Alpha. Lyte recorded goodwill of $3.0 million, representing the excess of the value of the shares issued by Lyte over the net book value of Alpha. The results of operations of Alpha are included in the operations of the Company beginning on September 29, 1998. NOTE 3. BALANCE SHEET DETAIL The components of selected balance sheet accounts are summarized below (in thousands):
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 ------- -------- -------- Prepaid expenses: Income tax receivable............................. $ 312 $ 4,013 $ 2,374 Other............................................. 2,959 4,932 3,697 ------- -------- -------- $ 3,271 $ 8,945 $ 6,071 ======= ======== ======== Inventories: Raw materials..................................... $ 9,928 $ 13,503 $ 16,693 Work-in-process................................... 13,171 16,151 20,987 Finished goods.................................... 2,201 5,816 5,950 ------- -------- -------- $25,300 $ 35,470 $ 43,630 ======= ======== ======== Property, plant and equipment: Land.............................................. $ 2,446 $ 2,447 $ 2,447 Building.......................................... 17,429 18,507 18,544 Machinery and equipment........................... 23,544 31,058 35,437 Leasehold improvements............................ 476 2,704 4,617 Construction in progress.......................... 3,144 1,008 9,207 ------- -------- -------- 47,039 55,724 70,252 Less: accumulated depreciation and amortization... (9,415) (14,859) (17,776) ------- -------- -------- $37,624 $ 40,865 $ 52,476 ======= ======== ======== Accrued liabilities: Accrued compensation and other.................... $ 934 $ 2,090 $ 3,180 Allowance for sales returns....................... 1,036 344 380 Income tax payable................................ 0 615 4,043 Other............................................. 3,272 4,415 3,198 ------- -------- -------- $ 5,242 $ 7,464 $ 10,801 ======= ======== ========
NOTE 4. DEBT Short-Term Bank Borrowing The Company has a $15.0 million bank line of credit that expires on September 30, 2000. On August 28, 2000, the Company entered into a new credit facility of $20.0 million with its bank (see Note 13). The line of credit is secured by the Company's operating assets, excluding equipment. Borrowings under the prior line of credit bear interest at 0.5% above the bank's variable prime rate, which was 9.5% at June 30, 2000 and the new facilities bear interest at 1.75% above LIBOR or 0.5% above the bank's F-12 66 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) variable prime rate. The line of credit is subject to certain financial covenants regarding current financial ratios and cash flow requirements that have all been met as of June 30, 2000. The amounts outstanding under the prior line of credit were $1.9 million at December 31, 1998, $11.3 million at December 31, 1999, and $13.0 million at June 30, 2000. Notes Payable On June 15, 2000, the Company entered into a short-term note with its bank in the amount of $4.0 million. The note bears interest at 1.0% above the bank's variable prime rate, which was 9.5% at June 30, 2000. The principal and unpaid interest of the note is due September 30, 2000. The proceeds of the note were primarily used to fund current operating and capital expenditure needs of the Company. The note is to be repaid using the proceeds of a new loan of $6.0 million (see Note 13). Long-Term Debt The components of long-term debt are summarized below (in thousands):
DECEMBER 31, ------------------ JUNE 30, 1998 1999 2000 ------- ------- -------- Various notes payable to banks, secured by certain equipment, bearing interest at fixed rates between 7.13% and 9.01%, maturing between February 2001 and May 2003............................................ $ 3,782 $ 2,948 $ 2,494 Debenture loan payable to Bay Area Employment Development Company, guaranteed by the U.S. Small Business Administration, bearing interest at a fixed rate of 7.27%, maturing October 2016................ 944 917 903 Taxable revenue bonds, secured by a letter of credit from a bank, bearing interest at 2.0% below prime rate, which was 9.5% on June 30, 2000, maturing December 2023....................................... 11,615 11,135 10,723 Various mortgage notes payable to a bank, secured by property, bearing interest at a fixed rate of 9.00% and 8.25%, maturing October 2003.................... 1,890 1,822 1,776 Notes payable to a bank and a financing institution, acquired with Lyte Optronics, paid in full in 1999................................................ 2,918 -- -- ------- ------- ------- 21,149 16,822 15,896 Less current portion.................................. (2,733) (1,568) (1,862) ------- ------- ------- $18,416 $15,254 $14,034 ======= ======= =======
Maturities of long-term debt at June 30, 2000 were as follows: 2001....................................................... $ 1,862 2002....................................................... 1,895 2003....................................................... 1,056 2004....................................................... 686 2005....................................................... 514 Thereafter................................................. 9,883 ------- $15,896 =======
On August 28, 2000, the Company entered into a new credit facility including $6.0 million in term loans for real estate in Southern California. Borrowings under the term loans bear interest at 2.75% above F-13 67 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LIBOR, 2.5% above short-term treasury notes or 1.5% above the bank's variable prime rate. The term loans mature on March 31, 2003. Following the merger with Lyte Optronics in 1999, the Company repaid Lyte Optronics debt that had been obtained at an unfavorable interest rate. The repayment resulted in an extraordinary loss in the amount of $508,000, net of tax benefits. NOTE 5. INCOME TAXES The components of the provision for income taxes are summarized below (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- SIX MONTHS ENDED 1997 1998 1999 JUNE 30, 2000 ------ ------- ------ ---------------- Current: Federal.............................. $1,571 $ 3,774 $2,274 $ 3,069 State................................ 79 442 376 503 Foreign.............................. 84 51 247 190 ------ ------- ------ ------- Total current..................... 1,734 4,267 2,897 3,762 Deferred: Federal.............................. (808) (1,097) (663) (997) State................................ (143) (194) (95) (97) ------ ------- ------ ------- Total deferred.................... (951) (1,291) (758) (1,094) ------ ------- ------ ------- Total provision................... $ 783 $ 2,976 $2,139 $ 2,668 ====== ======= ====== =======
A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below:
YEARS ENDED DECEMBER 31, -------------------- SIX MONTHS ENDED 1997 1998 1999 JUNE 30, 2000 ---- ---- ---- ---------------- Statutory federal income tax rate............. 34.0% 34.0% 34.0% 34.0% State income taxes, net of federal tax benefits.................................... 5.4% 2.6% 5.4% 3.4% Foreign sales corporation benefit............. -- (3.2%) (4.8%) (2.6%) Foreign income taxed at higher rate........... 4.2% 0.8% 0.0% 0.0% Acquisition costs............................. 0.0% 0.0% 33.9% 0.0% Other......................................... 5.2% 6.9% 7.3% 3.3% ---- ---- ---- ---- Effective tax rate............................ 48.8% 41.1% 75.8% 38.1% ==== ==== ==== ====
F-14 68 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets and liabilities are summarized below (in thousands):
YEARS ENDED DECEMBER 31, ----------------- SIX MONTHS ENDED 1998 1999 JUNE 30, 2000 ------- ------- ---------------- Deferred tax assets: Accruals and reserves not yet deductible.......... $ 1,635 $ 2,935 $ 3,254 State taxes....................................... 137 98 132 Other............................................. 772 724 1,376 Net operating loss................................ 925 925 925 Credits........................................... -- 128 366 ------- ------- ------- $ 3,469 $ 4,810 $ 6,053 Deferred tax liabilities: Depreciation...................................... (1,017) (1,600) (1,468) ------- ------- ------- Net deferred tax asset......................... $ 2,452 $ 3,210 $ 4,585 ======= ======= =======
NOTE 6. NET INCOME PER SHARE A reconciliation of the numerators and denominators of the basic and diluted net income per share calculations is as follows (in thousands, except per share data):
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- ------- ------- ----------- ------- (UNAUDITED) Numerator: Net income (loss) $ 820 $ 4,284 $ 172 $(3,028) $ 4,325 ======= ======= ======= ======= ======= Denominator: Denominator for basic earnings per share -- weighted average common shares... 3,697 16,076 18,655 18,451 18,687 Effect of dilutive securities: Common stock options.... 72 249 1,116 -- 1,491 Convertible preferred stock................ 9,829 -- -- -- -- ------- ------- ------- ------- ------- Denominator for dilutive income (loss) per share............. 13,598 16,325 19,771 18,451 20,178 ======= ======= ======= ======= ======= Basic income (loss) per share........................ $ 0.22 $ 0.27 $ 0.01 $ (0.16) $ 0.23 Diluted income (loss) per share........................ $ 0.06 $ 0.26 $ 0.01 $ (0.16) $ 0.21 Options excluded from diluted net income (loss) per share........................ 9 7 415 1,123 45 ======= ======= ======= ======= =======
Certain common stock issuable upon exercise of stock options were excluded from the calculation of diluted net income (loss) per share as the impact of the options would have been anti-dilutive. NOTE 7. STOCKHOLDERS' EQUITY In May 1998, the Company completed its initial public offering, or IPO, and issued 2,875,000 shares of its common stock at $10.00 per share, including the shares from an over-allotment option. The Company received cash of approximately $25.8 million net of underwriting discounts, commissions and F-15 69 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IPO expenses. Upon the closing of the IPO, all outstanding shares of the Company's then convertible preferred stock were automatically converted into shares of common stock. On May 28, 1999, the Company completed its acquisition of Lyte. Under the terms of the acquisition, the Company issued approximately 2,247,000 shares of common stock and 981,000 shares of non-voting and non-convertible preferred stock with a 5.0% annual dividend rate payable when declared by the board of directors of the Company and $4.0 million liquidation preference over common stock, in exchange for all of the issued and outstanding shares of capital stock of Lyte. Ten percent of the shares issued to the Lyte's stockholders are held in escrow to satisfy any claims that the Company may bring under the acquisition agreement. The Company has filed certain claims under the agreement and expects that all of the shares held in escrow will be returned to the Company in satisfaction of these claims. Subsequent to June 30, 2000, the Company completed a private securities offering (see Note 13). NOTE 8. EMPLOYEE BENEFIT PLANS 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, 1998. 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, 5,901,501 shares of common stock have been reserved for issuance as of June 30, 2000. 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. F-16 70 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information about stock option activities is summarized below:
OPTIONS OUTSTANDING ------------------------------------------------ OPTIONS WEIGHTED AVERAGE AVAILABLE NUMBER EXERCISE PRICE EXERCISE PRICE FOR GRANT OF SHARES PER SHARE PER SHARE ---------- --------- --------------- ---------------- Balance at December 31, 1996....... 322,594 209,202 $ 1.59 Additional shares authorized..... 1,367,000 -- -- Granted.......................... (1,246,950) 1,246,950 $ 5.00 - $ 6.09 5.06 Exercised........................ -- (84,825) 0.06 - 1.90 1.59 Cancelled........................ 25,175 (25,175) 1.50 - 5.00 3.43 ---------- --------- Balance at December 31, 1997....... 467,819 1,346,152 4.77 Additional shares authorized..... 1,500,000 -- -- Granted.......................... (320,599) 320,599 5.00 - 11.87 7.46 Exercised........................ -- (71,407) 1.20 - 5.00 1.94 Cancelled........................ 64,268 (64,268) 5.00 - 7.50 5.39 ---------- --------- Balance at December 31, 1998....... 1,711,488 1,531,076 5.44 Additional shares authorized..... 1,000,000 -- -- Granted.......................... (1,500,350) 1,500,350 9.12 - 24.96 18.21 Exercised........................ -- (200,679) 1.20 - 8.25 4.64 Cancelled........................ 154,645 (154,645) 1.90 - 22.69 13.82 ---------- --------- Balance at December 31, 1999....... 1,365,783 2,676,102 12.18 Additional shares authorized..... 2,101,501 -- -- Granted.......................... (433,800) 433,800 15.06 - 47.00 25.39 Exercised........................ -- (261,799) 0.20 - 21.18 7.51 Cancelled........................ 206,347 (206,347) 5.00 - 32.50 14.22 ---------- --------- Balance at June 30, 2000........... 3,239,831 2,641,756 14.65 ========== =========
Information about stock options outstanding at June 30, 2000 is summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------ ------------------------------ WEIGHTED AVERAGE RANGE OF NUMBER REMAINING NUMBER WEIGHTED AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OUTSTANDING EXERCISE PRICE - --------------- ----------- ---------------- ----------- ---------------- $ 1.90 - $1.90 5,850 0.34 5,850 $1.90 5.00 - 5.00 629,082 7.15 399,928 5.00 5.50 - 7.91 315,581 7.73 161,486 6.56 8.25 - 13.56 400,726 8.76 7,519 9.04 14.56 - 17.75 266,500 9.45 5,520 15.53 18.06 - 20.69 67,600 6.85 15,000 20.68 21.19 - 21.19 433,117 8.98 97,876 21.19 21.25 - 22.69 280,100 9.25 -- -- 24.00 - 44.38 242,000 9.69 -- -- 47.00 - 47.00 1,200 9.97 -- -- --------- ---- ------- ----- 2,641,756 8.43 693,179 $8.09 ========= ==== ======= =====
F-17 71 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-Based Compensation Under APB No. 25 In connection with certain stock option grants the Company recorded deferred compensation costs totaling $322,000 for the year ended December 31, 1997 and $203,000 for the year ended December 31, 1998. Compensation cost is the difference between the exercise price and the deemed fair value at the date of grant. Compensation cost is being amortized over the vesting period relating to these options, of which approximately $102,000 was amortized for the year ended December 31, 1997, $96,000 for 1998, $110,000 for 1999 and $55,000 for the six months ended June 30, 2000. Certain Pro Forma Disclosures Pro forma information regarding net income and net income per share is required by SFAS No. 123, which also requires that information be determined as if the Company had accounted for its employee stock options granted under the fair value method. The fair value for these options was estimated using the Black-Scholes option pricing model. The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, -------------------- -------------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----------- ----- (UNAUDITED) Risk free interest rate...................... 6.1% 5.2% 5.6% 4.8% 6.2% Expected life (in years)..................... 4.5 5.0 5.0 5.0 5.0 Dividend yield............................... 0.0% 0.0% 0.0% 0.0% 0.0% Volatility................................... 0.0% 75.0% 96.0% 90.0% 140.0%
The weighted average grant-date fair value of options granted during the year ended December 31, 1997 was $0.49, $4.57 in 1998, $13.09 in 1999, $12.63 for the six months ended June 30, 1999 and $22.83 for the six months ended June 30, 2000. Had compensation cost for the Company's options been determined based on the fair value at the grant dates, as prescribed in SFAS 123, the Company's pro forma net income and net income per share would have been as summarized below (in thousands except per share data):
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- --------------------- 1997 1998 1999 1999 2000 ----- ------ ------- ----------- ------ (UNAUDITED) Net income: As reported........................ $ 820 $4,284 $ 172 $(3,028) $4,325 Pro forma net income............... $ 760 $3,936 $(2,747) $(3,685) $1,970 Net income per share: As reported: Basic........................... $0.22 $ 0.27 $ 0.01 $ (0.16) $ 0.23 Diluted......................... $0.06 $ 0.26 $ 0.01 $ (0.16) $ 0.21 Pro forma net income: Basic........................... $0.21 $ 0.24 $ (0.15) $ (0.20) $ 0.11 Diluted......................... $0.06 $ 0.24 $ (0.15) $ (0.20) $ 0.10
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. F-18 72 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 were allowed to purchase a certain number of shares of common stock by December 31, 1997. A total of 67,000 shares were purchased as of December 31, 1997. In February 1998, the Company's board of directors approved the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"). The Company's stockholders approved the 1998 Purchase Plan in March 1998. At June 30, 2000 a total of 900,000 shares of the Company's common stock were reserved for issuance under the 1998 Purchase Plan. A total of 121,000 shares were purchased as of June 30, 2000. The 1998 Purchase Plan permits eligible employees to acquire shares of the Company's common stock through payroll deductions. The common stock purchase price is determined as 85.0% of the lower of the market price of the common stock at the purchase date or the date of offer to the employee. 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 90 days from the date of hire. Participants may contribute up to 10.0% of their earnings to the Savings Plan with a discretionary matching amount provided by the Company. The Company's contributions to the Savings Plan were $87,000 for the year ended December 31, 1997, $101,000 for 1998, $146,000 for 1999 and $75,000 for the six months ended June 30, 2000. NOTE 9. SEGMENT AND FOREIGN OPERATIONS INFORMATION The Company has three reportable segments: substrates, visible emitters and consumer products. The segments in which the Company operates are subject to rapid technological change and significant competition. Also, the number of suppliers of certain materials used by the Company and the number of customers are limited. F-19 73 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Selected financial information by business segment is summarized below (in thousands):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- ----------------------- 1997 1998 1999 1999 2000 ------- -------- -------- ----------- -------- (UNAUDITED) Substrates: Net revenues from external customers........................ $25,335 $ 43,177 $ 56,732 $26,136 $ 45,337 Gross profit (loss)................. 10,108 17,936 23,286 10,381 21,148 Operating income (loss)............. 5,860 10,416 12,275 4,022 14,418 Identifiable assets................. 31,395 76,505 88,579 82,850 105,151 Visible Emitters: Net revenues from external customers........................ $ -- $ 5,897 $ 18,640 $ 9,391 $ 4,868 Gross profit (loss)................. 2,135 2,061 (110) (1,120) Operating income (loss)............. -- 1,132 (2,775) (2,884) (5,592) Identifiable assets................. -- 18,917 23,423 20,676 26,920 Consumer Products: Net revenues from external customers........................ $17,978 $ 12,240 $ 6,149 $ 4,153 $ 2,673 Gross profit (loss)................. 3,555 2,294 (1,195) (802) 652 Operating income (loss)............. (3,407) (3,405) (5,260) (2,842) (414) Identifiable assets................. 6,401 7,561 3,760 5,094 5,101 Total: Net revenues from external customers........................ $43,313 $ 61,314 $ 81,521 $39,680 $ 52,878 Gross profit (loss)................. 13,663 22,365 24,152 9,469 20,680 Operating income (loss)............. 2,453 8,143 4,240 (1,704) 8,412 Identifiable assets................. 37,796 102,983 115,762 108,620 137,172
The Company sells its substrates in the United States and in other parts of the world. Also, the Company has operations in Japan and China. Revenues by geographic location based on the country of the customer were as follows (in thousands):
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- ---------------------- 1997 1998 1999 1999 2000 ------- ------- ------- ----------- ------- (UNAUDITED) Net revenues: United States.................. $30,676 $41,902 $42,531 $19,991 $27,869 Europe......................... 5,452 4,469 8,290 3,693 5,956 Canada......................... 1,034 1,356 3,221 125 1,211 Japan, Asia Pacific and other....................... 6,151 13,587 27,479 15,871 17,842 ------- ------- ------- ------- ------- Consolidated................... $43,313 $61,314 $81,521 $39,680 $52,878 ======= ======= ======= ======= =======
F-20 74 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property, plant and equipment by geographic location is summarized below (in thousands):
DECEMBER 31, ------------------ JUNE 30, 1998 1999 2000 ------- ------- -------- Property, plant and equipment, net: United States....................................... $36,558 $37,362 $47,975 China............................................... 881 3,491 4,499 Other............................................... 185 12 2 ------- ------- ------- $37,624 $40,865 $52,476 ======= ======= =======
NOTE 10. RELATED PARTY TRANSACTIONS The Company purchased raw materials and manufactured quartz from a supplier that is owned by a family member of an officer. Purchases from this supplier were $1.5 million for the year ended December 31, 1997, $3.7 million in 1998, $3.6 million in 1999 and $3.5 million for the six months ended June 30, 2000. NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES From time to time the Company is involved in litigation in the normal course of business. Management believes that the outcome of matters to date will not have a material adverse effect on the Company's financial position or results of operations. The Company leases certain office space, manufacturing facilities and property and equipment under long-term operating leases expiring at various dates through December 2006. Total rent expense under these operating leases was approximately $183,000 for the six months ended June 30, 2000. Included in property and equipment is approximately $11.5 million of equipment that is leased under non-cancelable leases accounted for as capital leases. These leases expire at various dates through 2005. Total minimum lease payments under the above leases as of June 30, 2000, are summarized below (in thousands):
CAPITAL OPERATING LEASES LEASES TOTAL ------- --------- ------- 2001.................................................. $ 4,336 $ 617 $ 4,953 2002.................................................. 3,253 632 3,885 2003.................................................. 3,170 540 3,710 2004.................................................. 2,177 480 2,657 2005.................................................. 620 443 1,063 Thereafter............................................ -- 83 83 ------- ------ ------- 13,556 $2,795 $16,351 ====== ======= Less amounts representing interest at 8.25% to 22.8%............................................... (1,982) ------- 11,574 Less short-term portion............................... (3,437) ------- Long-term portion..................................... $ 8,137 =======
F-21 75 AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. FOREIGN EXCHANGE CONTRACTS AND TRANSACTION LOSSES The Company uses short-term forward exchange contracts for hedging purposes to reduce the effects of adverse foreign exchange rate movements. The Company has purchased foreign exchange contracts to hedge against certain trade accounts receivable denominated in Japanese yen. These contracts are accounted for using hedge accounting, under which the change in the fair value of the forward contracts is recognized as part of the related foreign currency transactions as they occur. As of June 30, 2000, the Company's outstanding commitments with respect to the foreign exchange contracts, which were commitments to sell Japanese yen, had a total contract value of approximately $1.7 million. The Company incurred a foreign transaction exchange loss of $186,000 for the year ended December 31, 1997, a loss of $24,000 in 1998, a gain of $652,000 in 1999 and a gain of $3,000 for the six months ended June 30, 2000. NOTE 13. SUBSEQUENT EVENTS Private Securities Offering On July 25, 2000 the Company completed a private securities offering, raising approximately $8.5 million in exchange for 234,115 shares of common stock. The shares issued have not been registered under the Securities Act of 1933 and are "restricted securities" as defined by Rule 144 promulgated under the Act. The securities may not be sold or offered for sale or otherwise distributed except in conjunction with an effective registration statement for the shares under the Act, in compliance with Rule 144, or pursuant to an opinion of counsel satisfactory to the Company, that such registration or compliance is not required as to said sale, offer or distribution. The Company is obligated to register the shares no later than ten days after the completion of its next public securities offering. New Debt Financing On August 28, 2000, the Company entered into a new 21-month $20.0 million line of credit and additional long-term loans of $6.0 million with its bank. F-22 76 - -------------------------------------------------------------------------------- [AXT LOGO] PRUDENTIAL VOLPE TECHNOLOGY A UNIT OF PRUDENTIAL SECURITIES CIBC WORLD MARKETS WIT SOUNDVIEW ABN AMRO ROTHSCHILD A DIVISION OF ABN AMRO INCORPORATED PACIFIC CREST SECURITIES - -------------------------------------------------------------------------------- 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses payable by us in connection with the sale and distribution of the securities being registered. All of the amounts shown are estimates except for the Securities and Exchange Commission registration fee and the Nasdaq listing application fee.
TO BE PAID BY THE REGISTRANT -------------- Securities and Exchange Commission registration fee......... $ 28,074 NASD filing fee............................................. 11,063 Nasdaq National Market additional shares listing application fee....................................................... 17,500 Blue sky fees and expenses.................................. 10,000 Accounting fees and expenses................................ 380,000 Printing expenses........................................... 100,000 Transfer agent and registrar fees and expenses.............. 10,000 Legal fees and expenses..................................... 200,000 Miscellaneous expenses...................................... 243,363 ---------- Total............................................. $1,000,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 102 of the Delaware General Law, or DGCL, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Section 145 of the DGCL provides, among other things, that we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of AXT) by reason of the fact that the person is or was a director, officer, agent, or employee of AXT, or is or was serving at our request as a director, officer, agent or employee of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding. The power to indemnify applies (a) if such person is successful on the merits or otherwise in defense of any action, suit or proceeding, or (b) if such person acting in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of AXT, and with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of AXT as well but only to the extent of defense expenses (including attorneys' fees but excluding amounts paid in settlement) actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of liability to AXT, unless the court believes that in light of all the circumstances indemnification should apply. Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the II-1 78 books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts. Our Certificate of Incorporation and Bylaws provide that we shall indemnify our directors, officers, employees and agents to the maximum extent permitted by Delaware Law, including in circumstances in which indemnification is otherwise discretionary under Delaware Law. In addition, we have entered into separate indemnification agreements with our directors and officers which would require us, 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). We also intend to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). The Underwriting Agreement hereto provides for indemnification by the Underwriters of us and our officers and directors for certain liabilities, including matters arising under the Securities Act. We have a policy of directors' and officers' liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or other agents in which indemnification is being sought. We are not aware of any threatened litigation that may result in a claim for indemnification by any of our directors, officers, employees or other agents. ITEM 16. EXHIBITS. The following exhibits are filed with this Registration Statement:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.1 Form of Underwriting Agreement. 5.1* Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel to the Registrant. 10.1 Credit Agreement dated August 28, 2000 by and between the Registrant and U.S. Bank National Association. 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants. 23.2 Consent of Arthur Andersen LLP, independent public accountants. 23.3* Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1 to this Registration Statement). 24.1* Power of Attorney (included as page II-4). 27.1* Financial Data Schedule (EDGAR filed version only)
- ------------------ * Previously filed. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: We hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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, II-2 79 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, 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. We hereby undertake that: (a) 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. (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 80 SIGNATURES Pursuant to 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 for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 1st day of September, 2000. AXT, INC. By: /s/ MORRIS S. YOUNG ------------------------------------ Morris S. Young Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed on September 1, 2000 by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MORRIS S. YOUNG Chief Executive Officer and September 1, 2000 - ----------------------------------------------------- Director Morris S. Young /s/ DONALD L. TATZIN Chief Financial Officer and September 1, 2000 - ----------------------------------------------------- Director Donald L. Tatzin * Director September 1, 2000 - ----------------------------------------------------- Jesse Chen * Director September 1, 2000 - ----------------------------------------------------- B. J. Moore *By: /s/ DONALD L. TATZIN ------------------------------------------------ Donald L. Tatzin Attorney-in-Fact
II-4 81 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.1 Form of Underwriting Agreement. 5.1* Legal opinion of Gray Cary Ware & Freidenrich LLP, counsel to the Registrant. 10.1 Credit Agreement dated August 28, 2000 by and between the Registrant and U.S. Bank National Association. 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants. 23.2 Consent of Arthur Andersen LLP, independent public accountants. 23.3* Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1 to this Registration Statement). 24.1* Power of Attorney (included as page II-4). 27.1* Financial Data Schedule (EDGAR filed version only).
- ------------------ * Previously filed. EX-1.1 2 f65146a1ex1-1.txt EXHIBIT 1.1 1 AXT, Inc. 2,200,000 Shares(1) Common Stock UNDERWRITING AGREEMENT [_____], 2000 PRUDENTIAL SECURITIES INCORPORATED CIBC WORLD MARKETS CORP. WIT SOUNDVIEW CORPORATION ABN AMRO INCORPORATED PACIFIC CREST INC. As Representatives of the several Underwriters c/o Prudential Securities Incorporated One New York Plaza New York, New York 10292 Ladies and Gentlemen: AXT, Inc., a Delaware corporation (the "Company") and certain stockholders of the Company named in Schedule 2 hereto (the "Selling Securityholders"), hereby confirm their agreement with the several underwriters named in Schedule I 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 2,100,000 shares, and the Selling Securityholders propose to sell to the several Underwriters an aggregate of 100,000 shares (in the specific amounts set forth opposite each Selling Securityholder's name in Schedule 2), of the Company's Common Stock, par value $.001 per share ("Common Stock"). The shares set forth in the preceding sentence to be sold by the Company and the Selling Securityholders are collectively referred to herein as the "Firm Securities." The Company also proposes to issue and sell to the several Underwriters not more than 330,000 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 - ---------- (1) Plus an option to purchase from AXT, Inc. up to 330,000 additional shares to cover over-allotments. 2 Securities," and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities." 2. Representations and Warranties of the Company and the Selling Securityholders. (a) The Company represents and warrants to, and agrees with, each of the several Underwriters that: (i) The Company meets the requirements for use of Form S-3 under the Securities Act of 1933, as amended (the "Act"). A registration statement on such Form (File No. 333-44704) 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 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 hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements, and, if required to be filed pursuant to Rules 434(c)(2) and 424(b), an Integrated Prospectus (as hereinafter defined), in either case, containing such information as is required or permitted by Rule 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 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 (A) all financial schedules and exhibits thereto, (B) all documents incorporated by reference therein filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (C) any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined) or, if required to be filed pursuant to Rule 434(c)(2) and 424(b), in the Integrated Prospectus; 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 -2- 3 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), including all documents incorporated by reference therein filed under the Exchange Act; 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, including, in the case of clauses (A), (B) or (C) of this sentence, all documents incorporated by reference therein filed under the Exchange Act; the term "Integrated Prospectus" means a prospectus first filed with the Commission pursuant to Rules 434(c)(2) and 424(b) under the Act; and the term "Term Sheet" means any abbreviated term sheet that satisfies the requirements of Rule 434 under the Act. Any reference in this Agreement to an "amendment or supplement" to any Preliminary Prospectus, the Prospectus or any Integrated Prospectus or an "amendment" to any registration statement (including the Registration Statement) shall be deemed to include any document incorporated by reference therein that is filed with the Commission under the Exchange Act after the date of such Preliminary Prospectus, Prospectus, Integrated Prospectus or registration statement, as the case may be; any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. For purposes of the preceding sentence, any reference to the "effective date" of an amendment to a registration statement shall, if such amendment is effected by means of the filing with the Commission under the Exchange Act of a document incorporated by reference in such registration statement, be deemed to refer to the date on which such document was so filed with the Commission. (ii) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. When any Preliminary Prospectus and any amendment or supplement thereto 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, the Exchange Act and the respective 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, the Exchange Act and the respective rules and regulations of the Commission thereunder and -3- 4 (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 Integrated Prospectus 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), on the date when the Prospectus is otherwise amended or supplemented and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), each of the Prospectus, and, if required to be filed pursuant to Rules 434(c)(2) and 424(b) under the Act, the Integrated 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, the Exchange Act and the respective 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 (ii) do not apply to statements or omissions made in any Preliminary Prospectus or any amendment or supplement thereto, the Registration Statement or any amendment thereto, the Prospectus or, if required to be filed pursuant to Rules 434(c)(2) and 424(b) and the Act, the Integrated 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. (iii) 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. (iv) 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. (v) 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 each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus); and the Company has full power (corporate and -4- 5 other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (vi) 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. (vii) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are 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 to be sold by the Company 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 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. (viii) The capital stock of the Company conforms to the description thereof contained in the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus). (ix) Except as disclosed in the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus), there are not 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. (x) The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Registration Statement and the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are 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 -5- 6 involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Financial Information" in the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus) and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, fairly present, on the basis stated in the each of Prospectus and any Integrated Prospectus (or such Preliminary Prospectus) and such Annual Report, the information included therein. (xi) To the best of our knowledge, PricewaterhouseCoopers LLP, who has certified certain financial statements of the Company and its consolidated subsidiaries and delivered its report with respect to the audited consolidated financial statements and schedules included in the Registration Statement or each the Prospectus and Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act, the Exchange Act and the related published rules and regulations thereunder. (xii) 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. (xiii) 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 or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are 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 any Integrated Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus) or filed as required. (xiv) 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 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 -6- 7 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. (xv) Subsequent to the respective dates as of which information is given in the Registration Statement, the Prospectus or any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are 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 operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus or, each of the Prospectus and any Integrated Prospectus (or, if the Prospectus and any required Integrated Prospectus are not in existence, the most recent Preliminary Prospectus). (xvi) 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 (except for the sale of Securities by the Selling Securityholders under this Agreement). (xvii) 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. (xviii) 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), (1) 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; (2) the Company has not purchased any of its outstanding capital stock, other than pursuant to the terms of its stock option plans, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) 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). -7- 8 (xix) 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, other than as security under credit and loan agreements, 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). (xx) 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). (xxi) 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). (xxii) 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). (xxiii) 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 -8- 9 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). (xxiv) 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). (xxv) 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. (xxvi) 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). (xxvii) 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). -9- 10 (xxviii) 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. (xxix) 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 set forth in Schedule 3 hereto. (xxx) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxxi) 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. (b) Each Selling Securityholder severally and not jointly represents and warrants to, and agrees with, each of the several Underwriters that: (i) Such Selling Securityholder has full power (corporate and other) to enter into this Agreement and to sell, assign, transfer and deliver to the Underwriters the Securities to be sold by such Selling Securityholder hereunder in accordance with the terms of this Agreement; the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of such Selling Securityholder; and this Agreement has been duly executed and delivered by such Selling Securityholder. (ii) Such Selling Securityholder has duly executed and delivered a power of attorney and custody agreement (with respect to such Selling Securityholder, the "Power of Attorney" and the "Custody Agreement," respectively), each in the form heretofore delivered to the Representatives, appointing [________] as such Selling Securityholder's Attorney-in-Fact (the "Attorney-in-Fact") with authority to execute, deliver and perform this Agreement on behalf of such Selling Securityholder and appointing [________], as custodian thereunder (the "Custodian"). Certificates in negotiable form, endorsed in blank or accompanied by blank stock powers duly executed, with signatures appropriately guaranteed, representing the Securities to be sold by such Selling Securityholder hereunder have been -10- 11 deposited with the Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant to this Agreement. Such Selling Securityholder has full power (corporate and other) to enter into the Custody Agreement and the Power of Attorney and to perform its obligations under the Custody Agreement. The execution and delivery of the Custody Agreement and the Power of Attorney have been duly authorized by all necessary corporate action of such Selling Securityholder; the Custody Agreement and the Power of Attorney have been duly executed and delivered by such Selling Securityholder and, assuming due authorization, execution and delivery by the Custodian, are the legal, valid, binding and enforceable instruments of such Selling Securityholder. Such Selling Securityholder agrees that each of the Securities represented by the certificates on deposit with the Custodian is subject to the interests of the Underwriters hereunder, that the arrangements made for such custody, the appointment of the Attorney-in-Fact and the right, power and authority of the Attorney-in-Fact to execute and deliver this Agreement, to agree on the price at which the Securities (including such Selling Securityholder's Securities) are to be sold to the Underwriters, and to carry out the terms of this Agreement, are to that extent irrevocable and that the obligations of such Selling Securityholder hereunder shall not be terminated, except as provided in this Agreement or the Custody Agreement, by any act of such Selling Securityholder, by operation of law or otherwise, whether in the case of any individual Selling Securityholder by the death or incapacity of such Selling Securityholder, in the case of a trust or estate by the death of the trustee or trustees or the executor or executors or the termination of such trust or estate, or in the case of a corporate or partnership Selling Securityholder by its liquidation or dissolution or by the occurrence of any other event. If any individual Selling Securityholder, trustee or executor should die or become incapacitated or any such trust should be terminated, or if any corporate or partnership Selling Securityholder shall liquidate or dissolve, or if any other event should occur, before the delivery of such Securities hereunder, the certificates for such Securities deposited with the Custodian shall be delivered by the Custodian in accordance with the respective terms and conditions of this Agreement as if such death, incapacity, termination, liquidation or dissolution or other event had not occurred, regardless of whether or not the Custodian or the Attorney-in-Fact shall have received notice thereof. (iii) Such Selling Securityholder is the lawful owner of the Securities to be sold by such Selling Securityholder hereunder and upon sale and delivery of, and payment for, such Securities, as provided herein, such Selling Securityholder will convey good and marketable title to such Securities, free and clear of any security interests, liens, encumbrances, equities, claims or other defects. (iv) Such Selling Securityholder has not, directly or indirectly, (i) taken any action designed to cause or 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 (except for the sale of Securities by the Selling Securityholders under this Agreement). -11- 12 (v) To the extent that any statements or omissions are made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by such Selling Securityholder specifically for use therein, such Preliminary Prospectus did, and the Registration Statement and the Prospectus and any amendments or supplements thereto, when they become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act, the Exchange Act and the respective rules and regulations of the Commission thereunder and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. Such Selling Securityholder has reviewed the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the Registration Statement, and the information regarding such Selling Securityholder set forth therein under the caption "Principal and Selling Securityholders" is complete and accurate. (vi) The sale by such Selling Securityholder of Securities pursuant hereto is not prompted by any adverse information concerning the Company that is not set forth in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (vii) The sale of the Securities to the Underwriters by such Selling Securityholder pursuant to this Agreement, the compliance by such Selling Securityholder with the other provisions of this Agreement, the Custody 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 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 and the Exchange 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 such Selling Securityholder or any of its subsidiaries is a party or by which such Selling Securityholder or any of its subsidiaries or any of their respective properties are bound, or the charter documents or by laws of such Selling Securityholder 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 such Selling Securityholder or any of its subsidiaries. (viii) The Selling Securityholders have 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. -12- 13 (ix) When any Preliminary Prospectus and any amendment or supplement thereto 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, the Exchange Act and the respective 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, the Exchange Act and the respective 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 Integrated Prospectus 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), on the date when the Prospectus is otherwise amended or supplemented and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), each of the Prospectus, and, if required to be filed pursuant to Rules 434(c)(2) and 424(b) under the Act, the Integrated 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, the Exchange Act and the respective 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 do not apply to statements or omissions made in any Preliminary Prospectus or any amendment or supplement thereto, the Registration Statement or any amendment thereto or the Prospectus or, if required to be filed pursuant to Rules 434(c)(2) and 424(b) and the Act, the Integrated 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. 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 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 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 -13- 14 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 Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, CA 94301, at 9:30 a.m., New York time, on [_____], 2000, 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 principal amount 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 Shares. Only execution and delivery of a receipt for Shares by the Underwriters indicates -14- 15 completion of the closing of a purchase of the Shares 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 Shares, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Shares, 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) upon demand. In the event that the closing of a purchase of Shares is not completed and the Wired 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 Wired Funds are not returned by it, in same-day funds, interest on the amount of such Wired 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 and the Selling Securityholders. (a) The Company covenants and agrees with each of the Underwriters that: (i) 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 or, each of the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 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, the Exchange Act and the Trust Indenture Act and the respective 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 each of the Prospectus and any Integrated Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the prospectus or the amendment referred to in the third sentence of Section 2(a)(i) hereof, any amendment or supplement to such prospectus or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representatives shall not 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 -15- 16 or supplements to the Prospectus and any Integrated 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 and any Integrated Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (ii) 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 post-effective amendment thereto or any order directed at any document incorporated by reference in the Registration Statement or if the Prospectus and any required Integrated Prospectus are or any amendment or supplement thereto or any order preventing or suspending the use of any Preliminary Prospectus, the Prospectus and any Integrated 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 any Preliminary Prospectus, the Prospectus and any Integrated 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. (iii) 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. (iv) 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, the Exchange Act or the respective 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, an amendment or supplement to the Prospectus or any Integrated Prospectus that corrects such statement or omission or effects such compliance. -16- 17 (v) 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, the Prospectus or any Integrated 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 p.m., 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 of (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. (vi) 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. (vii) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus or any Integrated Prospectus. (viii) 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 of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date hereof, except pursuant to this Agreement and except for issuances of options pursuant to Company's stock option plan and issuances pursuant to the exercise of employee stock options outstanding on the date hereof, pursuant to the Company's employee stock purchase plan, pursuant to the Company's dividend reinvestment plan or pursuant to the terms of convertible securities of the Company outstanding on the date hereof. (ix) 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 -17- 18 to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Securityholders under this Agreement). (x) The Company will obtain the agreements described in Section 7(h) hereof prior to the Firm Closing Date. (xi) 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 and any Integrated Prospectus), the Company will, after notice from you advising the Company to the effect set forth above and in consultation with Company counsel, 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. (xii) 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. New York time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (xiii) 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. (b) Each Selling Securityholder covenants and agrees with each of the several Underwriters that: (i) Each Selling Securityholder will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, 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 Securities legally or beneficially owned by such Selling Securityholder or any securities convertible into, or exchangeable or exercisable for, Securities for a period of 90 days after the date hereof. (ii) Each Selling Securityholder will not, directly or indirectly, (i) take any action designed to cause or 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 -18- 19 of the Company (except for the sale of Securities by the Selling Securityholders under this Agreement). 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, the Prospectus and any Integrated 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, 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) the quotation of the Securities on the Nasdaq National Market, (viii) meetings with prospective investors in the Securities (other than 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 shall have been specifically 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 its 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 fees and disbursements of counsel) 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, 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 -19- 20 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 Integrated Prospectus and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rule 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto and no order directed at any document incorporated by reference in the Registration Statement, the Prospectus or any Integrated Prospectus or any amendment or supplement 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, the Prospectus or any Integrated Prospectus or otherwise). (b) The Representatives shall have received an opinion, dated the Firm Closing Date, of Gray Cary Ware & Freidenrich LLP, counsel for the Company and the Selling Securityholders, to the effect that: (i) the Company and each of its U.S. subsidiaries listed in Schedule 4 hereto (the "Subsidiaries") have been duly incorporated 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 or any Integrated Prospectus, and the Company has corporate power to enter into this Agreement and to carry out all the terms and provisions hereof and thereof 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, except for directors' qualifying shares and as otherwise set forth in each of the Prospectus and any Integrated Prospectus, 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 each of the Prospectus or any Integrated 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 to be sold by the Company -20- 21 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 each of the Prospectus and any Integrated 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) 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, the Prospectus and any Integrated 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 no contract or other document is required to be described in the Registration Statement, the Prospectus and any Integrated 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 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 any of the Subsidiaries; (ix) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, and any Integrated Prospectus 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 -21- 22 of the Registration Statement or any post-effective amendment thereto and no order directed at any document incorporated by reference in the Registration Statement, the Prospectus and any Integrated Prospectus or any amendment or supplement 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 (x) the Registration Statement originally filed with respect to the Securities and each amendment thereto and any Rule 462(b) Registration Statement, the Prospectus and any Integrated Prospectus (in each case, including the documents incorporated by reference therein but not including 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, the Exchange Act and the respective rules and regulations of the Commission thereunder. (xi) in the case of each Selling Securityholder that is a corporation, such Selling Securityholder has full corporate power to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver the Securities being sold by such Selling Securityholder hereunder in the manner provided in this Agreement and to perform its obligations under the Custody Agreement; the execution and delivery of this Agreement, the Custody Agreement and the Power of Attorney have been duly authorized by all necessary corporate action of each Selling Securityholder; this Agreement, the Custody Agreement and the Power of Attorney have been duly executed and delivered by each Selling Securityholder; assuming due authorization, execution and delivery by the Custodian, the Custody Agreement and the Power of Attorney are the legal, valid, binding and enforceable instruments of such Selling Securityholder, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xii) upon delivery of and payment for the Securities to be sold by each Selling Securityholder as contemplated by this Agreement, the Underwriters will be "protected purchasers" within the meaning of Division 8 of the Uniform Commercial Code, and will acquire their interests therein free of any "adverse claim" within the meaning of Division 8 of the Uniform Commercial Code, provided that the Underwriters are purchasing such Securities in good faith and without notice of any such adverse claim; (xiii) the sale of the Securities to the Underwriters by such Selling Securityholder pursuant to this Agreement, the compliance by such Selling Securityholder with the other provisions of this Agreement, the Custody 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 such as have been obtained and such as may be required under state securities or blue sky laws, 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 such Selling Securityholder or any of its subsidiaries is a party or by which such Selling Securityholder or any of its subsidiaries or any of such Selling -22- 23 Securityholder's their respective properties are bound, or the charter documents or by laws of such Selling Securityholder 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 such Selling Securityholder or any of its subsidiaries. Such counsel shall also state that they have no reason to believe that the Registration Statement, other than the financial statements, including supporting schedules and other financial and statistical information contained therein as to which they make no comment, 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 and any Integrated 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, the Selling Securityholders and public officials, and copies of such opinion shall be delivered to the Representatives and counsel for the Underwriters.. References to the Registration Statement and the Prospectus and any Integrated 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 [_________], counsel for the Company in China, to the effect that: (i) Beijing Tongmeixtal Technology Co., Ltd (AXT-TM) (the "Chinese Subsidiary") has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business 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; (ii) The Chinese Subsidiary has corporate power to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus or any Integrated Prospectus; (iii) the issued shares of capital stock of the Chinese Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and, except for directors' qualifying shares and as otherwise set forth in each of the Prospectus and any Integrated Prospectus, 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; -23- 24 (iv) no legal or governmental proceedings are pending to which the Chinese Subsidiary is a party or to which the property of the Chinese Subsidiary is subject that are required to be described in the Registration Statement, the Prospectus or any Integrated Prospectus and are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Chinese Subsidiary or with respect to its properties; and (v) 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 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 Chinese Subsidiary is a party or by which the Hong Kong Subsidiary or any of its properties are bound, or the charter documents or by-laws of the Chinese Subsidiary, 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 Chinese Subsidiary. 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. References to the Registration Statement and the Prospectus and any Integrated Prospectus in this paragraph (c) shall include any amendment or supplement thereto at the date of such opinion. (d) The Representatives shall have received an opinion, dated the Firm Closing Date, of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Rd., Palo Alto, CA 94304, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement, the Prospectus or any Integrated 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 referred to in paragraphs (b) and (c) above. (e) The Representatives shall have received from PricewaterhouseCoopers 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, the Exchange Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited consolidated financial statements and schedules examined by them and included in the Registration Statement, the Prospectus and any Integrated Prospectus comply in form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder; -24- 25 (iii) on the basis of their limited review in accordance with standards established by the American Institute of Certified Public Accountants of any interim unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries as indicated in their reports incorporated in the Registration Statement, the Prospectus and any Integrated Prospectus, and of the unaudited consolidated financial statements of the Company and its consolidated subsidiaries for the periods from which such amounts are derived, 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: (A) the unaudited consolidated condensed financial statements of the Company and its consolidated subsidiaries included in the Registration Statement, the Prospectus and any Integrated Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act, the Exchange 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 any Integrated Prospectus; (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 net current assets or stockholders' equity of the Company and its consolidated subsidiaries, in each case compared with amounts shown on the June 30, 2000 audited consolidated balance sheet included in the Registration Statement, the Prospectus and any Integrated Prospectus, or for the period from July 1, 2000 to such specified date there were any decreases, as compared with the six months ended June 30, 2000, in revenue, gross profit, income before income taxes or total or per share amounts of net income 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, the Prospectus and any Integrated Prospectus under the captions "Summary Consolidated Financial Data," "Capitalization," "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Exhibit II 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. -25- 26 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, the Prospectus and any Integrated Prospectus in this paragraph (e) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (f) The Representatives shall have received a certificate, dated the Firm Closing Date, of Morris S. Young and Donald L. Tatzin of the Company to the effect that: (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, the Prospectus and any Integrated 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 post-effective amendment thereto and no order directed at any document incorporated by reference in the Registration Statement or the Prospectus or any amendment or supplement 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, the Prospectus and any Integrated 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 and any Integrated Prospectus. (g) The Representatives shall have received a certificate from Selling Securityholder, dated the Closing Date, to the effect that: -26- 27 (i) the representations and warranties of such Selling Securityholder in this Agreement are true and correct as if made on and as of the Closing Date; (ii) to the extent that any statements or omissions are made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by such Selling Securityholder specifically for use therein, the Registration Statement, as amended as of the 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 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 (iii) such Selling Securityholder has performed all covenants and agreements on its part to be performed or satisfied at or prior to the Closing Date. (h) The Representatives shall have received from each person who is a director or officer of the Company, and from the Selling Securityholders, 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 90 days after the date of this Agreement. (i) The Company shall have sent a letter (a copy of which shall have been provided to the Representatives) to each person who purchased Company Common Stock pursuant to the [private placement offering], requesting that each 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 until the resale Registration Statement filed in connection with [private placement offering] becomes effective. (j) 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. (k) 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 -27- 28 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. 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 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, the Exchange 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 or such Selling Securityholder 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 or 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 such Selling Securityholder or based upon written information furnished by or on behalf of the Company or such Selling Securityholder 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 prepared by the Company or based upon information furnished by or on behalf of the Company used in connection with the marketing of the Securities, including without limitation, slides, videos, films, tape recordings and statements communicated to securities analysts employed by the Underwriters, 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 and such Selling Securityholder 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 -28- 29 omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus or 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 any Underwriter through the Representatives specifically for use therein; and provided, further, that the Company and such Selling Securityholder 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), other than the documents incorporated by reference therein 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, 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 and such Selling Securityholder may otherwise have. Neither the Company nor any Selling Securityholder will, 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 Selling Securityholder jointly and severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each Underwriter and each person who controls the Company or any Underwriter within the meaning of the Act or the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director, officer, such Underwriter or any such controlling person may become subject under the Act, the Exchange 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 in Section 2(b) of this Agreement; (ii) 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 (iii) 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 Selling Securityholder for use therein; -29- 30 provided, however, that such Selling Securityholder 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, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5(a)(iv) and 5(a)(v) of this Agreement; 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, officer, such Underwriter or any such controlling person 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 any Selling Securityholder may otherwise have. Each Selling Securityholder 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 comprise 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. (c) Each Underwriter will, severally and not jointly, indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, each Selling Securityholder and each person, if any, who controls the Company or such Selling Securityholder 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, such Selling Securityholder or any such controlling person of the Company or such Selling Securityholder may become subject under the Act, the Exchange 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 any 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, officer or controlling person or such Selling Securityholder in connection with investigating or defending -30- 31 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. (d) 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 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 effected by such indemnified party without the consent of the indemnifying party. (e) 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 -31- 32 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 and the Selling Securityholders 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 and the Selling Securityholders 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, the Selling Securityholders 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, the Selling Securityholders 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 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 or any Selling Securityholder 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 or such Selling Securityholder, as the case may be. (f) The liability of each Selling Securityholder under this Section 8 shall not exceed an amount equal to the purchase price per share set forth in Section 3 hereof multiplied by the number of the Securities sold by such Selling Securityholder. 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 -32- 33 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, (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); -33- 34 (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 the Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on either any such exchange or (market) system, (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 under the heading "Underwriting" in any Preliminary Prospectus, the Prospectus or any Integrated 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; and if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at AXT, Inc., 4821 Technology Drive, Fremont, CA 94538, (510) 683-5901 (facsimile). 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 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 -34- 35 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 Selling Shareholder 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 Selling Shareholder designates and appoints [_____], and such other persons as may hereafter be selected by the Selling Shareholder irrevocable 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 Selling Shareholder 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 Selling Securityholder 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 Selling Shareholder refuses to accept service, the Selling Shareholder hereby agrees that service of process sufficient for personal jurisdiction in any action against the Selling Shareholder in the State of New York may be made by registered or certified mail, return receipt requested, to the Selling Shareholder at its address provided in Section 13 hereof, and the Selling Shareholder 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 Selling Shareholder 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. -35- 36 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, AXT, INC. By -------------------------------------- Morris S. Young President and Chief Executive Officer SELLING STOCKHOLDERS By -------------------------------------- [name] Attorney-in-Fact The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED CIBC WORLD MARKETS CORP. WIT SOUNDVIEW CORPORATION ABN AMRO INCORPORATED PACIFIC CREST INC. By PRUDENTIAL SECURITIES INCORPORATED By -------------------------------------------- Jean-Claude Canfin Managing Director For itself and on behalf of the Representatives. -36- 37 SCHEDULE 1 UNDERWRITERS
Number of Firm Securities to Underwriter be Purchased - ----------- ------------ Prudential Securities Incorporated CIBC World Markets Corp. Wit SoundView Corporation ABN AMRO Incorporated Pacific Crest Inc. Total
-37- 38 SCHEDULE 2 SELLING SECURITYHOLDERS
Number of Firm Securities to Selling Securityholder be Sold - ---------------------- ------- Morris S. Young 80,000 Davis Zhang 20,000 Total 100,000
-38- 39 SCHEDULE 3 EQUITY INTEREST IN OTHER ENTITIES -39- 40 SCHEDULE 4 UNITED STATES SUBSIDIARIES -40- EX-10.1 3 f65146a1ex10-1.txt EXHIBIT 10.1 1 CREDIT AGREEMENT AMONG AXT, INC. AND THE LENDERS NAMED HEREIN AND U.S. BANK NATIONAL ASSOCIATION AS AGENT AUGUST 28, 2000 2 TABLE OF CONTENTS
Page ---- Article I Definitions............................................................2 SECTION 1.1 Defined Terms.......................................2 SECTION 1.2 Interpretation.....................................16 SECTION 1.3 Headings...........................................16 Article II The Credits...........................................................16 SECTION 2.1 Line Of Credit.....................................16 SECTION 2.2 Term Loans.........................................19 SECTION 2.3 The Letter Of Credit Facility......................21 SECTION 2.4 Notice Of Borrowing................................22 SECTION 2.5 Interest/Fees......................................23 SECTION 2.6 Conversion Of Interest Options.....................25 SECTION 2.7 Other Payment Terms................................26 SECTION 2.8 Prepayment.........................................27 SECTION 2.9 Funding............................................28 SECTION 2.10 Pro Rata Treatment.................................29 SECTION 2.11 Change Of Circumstances............................29 SECTION 2.12 Taxes On Payments..................................31 SECTION 2.13 Funding Loss Indemnification.......................32 SECTION 2.14 Authorized Representatives.........................33 SECTION 2.15 Collateral.........................................33 SECTION 2.16 Guaranties.........................................34 Article III Payments With Respect To The Bonds And The Letter Of Credit..........34 SECTION 3.1 Annual Redemption Of Bonds.........................34 SECTION 3.2 Reimbursement Deposit Account......................35 SECTION 3.3 Other Optional Redemptions Of Bonds................35 Article IV Representations And Warranties........................................35 SECTION 4.1 Legal Status.......................................36 SECTION 4.2 Authorization And Validity.........................36
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Page ---- SECTION 4.3 No Violation.......................................36 SECTION 4.4 No Additional Approvals............................36 SECTION 4.5 Litigation.........................................36 SECTION 4.6 Correctness Of Financial Statement.................37 SECTION 4.7 Income Tax Returns.................................37 SECTION 4.8 No Subordination...................................37 SECTION 4.9 Permits, Franchises................................37 SECTION 4.10 ERISA..............................................37 SECTION 4.11 Other Obligations..................................38 SECTION 4.12 Government Regulations.............................38 SECTION 4.13 Securities Activities..............................38 SECTION 4.14 Environmental Matters..............................38 SECTION 4.15 Real Property Collateral...........................38 SECTION 4.16 Subsidiaries.......................................39 SECTION 4.17 Truth, Accuracy Of Information.....................39 Article V Conditions............................................................39 SECTION 5.1 Conditions Of Initial Extension Of Credit..........39 SECTION 5.2 Conditions Of Each Extension Of Credit.............43 Article VI Affirmative Covenants.................................................44 SECTION 6.1 Punctual Payments..................................44 SECTION 6.2 Accounting Records.................................44 SECTION 6.3 Financial Statements...............................44 SECTION 6.4 Compliance.........................................45 SECTION 6.5 Insurance..........................................45 SECTION 6.6 Facilities.........................................45 SECTION 6.7 Taxes And Other Liabilities........................46 SECTION 6.8 Litigation.........................................46 SECTION 6.9 Financial Condition................................46 SECTION 6.10 Notice To Agent....................................47 SECTION 6.11 Site Visits; Right To Stop Work....................47 SECTION 6.12 Security...........................................47 SECTION 6.13 Related Documents..................................47
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Page ---- SECTION 6.14 Investigations And Inquiries.......................48 SECTION 6.15 Contract Collateral................................48 SECTION 6.16 Borrowing Base Deficiency..........................48 SECTION 6.17 Notice Of Certain Matters..........................48 Article VII Negative Covenants....................................................49 SECTION 7.1 Use Of Funds.......................................49 SECTION 7.2 Other Indebtedness.................................50 SECTION 7.3 Merger, Consolidation, Organizational Structure, Transfer Of Assets......................50 SECTION 7.4 Guaranties.........................................50 SECTION 7.5 Loans, Advances, Investments.......................50 SECTION 7.6 Dividends And Distributions........................50 SECTION 7.7 Pledge Of Assets...................................51 Article VIII Events Of Default.....................................................51 SECTION 8.1 Events Of Default..................................51 SECTION 8.2 Remedies...........................................53 Article IX The Agent.............................................................54 SECTION 9.1 Authorization And Action...........................54 SECTION 9.2 Reliance By Agent..................................55 SECTION 9.3 Defaults...........................................55 SECTION 9.4 Indemnification....................................55 SECTION 9.5 Non-Reliance On Agent..............................56 SECTION 9.6 Successor Agent....................................56 SECTION 9.7 Execution Of Loan Documents........................57 SECTION 9.8 Agent In Its Individual Capacity...................57 Article X Miscellaneous.........................................................57 SECTION 10.1 Notices............................................57 SECTION 10.2 Costs, Expenses Attorneys' Fees....................58 SECTION 10.3 Indemnification....................................58 SECTION 10.4 Waivers, Amendments................................59 SECTION 10.5 Successors And Assigns.............................60
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Page ---- SECTION 10.6 Setoff.............................................63 SECTION 10.7 No Waiver; Cumulative Remedies.....................63 SECTION 10.8 Entire Agreement, Amendment........................63 SECTION 10.9 No Third Party Beneficiaries.......................63 SECTION 10.10 Time...............................................64 SECTION 10.11 Severability Of Provisions.........................64 SECTION 10.12 Governing Law......................................64 SECTION 10.13 Submission To Jurisdiction.........................64 SECTION 10.14 Arbitration........................................64 SECTION 10.15 Counterparts.......................................67 SECTION 10.16 Confidentiality....................................67
-iv- 6 LIST OF SCHEDULES AND EXHIBITS Schedule 1 Lenders and Proportionate Shares Schedule 2.1(d) Borrower Letter of Credit Agreement Schedule 2.3(a) Amortization Schedule for the Letter of Credit Facility Schedule 2.13(b) Prepayment Indemnity Schedule 4 Schedule 5 Contract Collateral Description Schedule 7.4 Existing Indebtedness Schedule 7.5 Existing Guaranties Schedule 7.7 Existing Loans; Advances; Investments Schedule 7.8 Existing Liens; Pledges of Assets Exhibit A Letter of Credit Exhibit B Form of Line of Credit Note Exhibit C Form of Term Note Exhibit D Notice of Borrowing Exhibit E Notice of Conversion or Continuation Exhibit F Notice of Authorized Representatives Exhibit G Assignment and Assumption Agreement Exhibit H Borrowing Base Certificate
-v- 7 EXHIBIT 10.1 CREDIT AGREEMENT THIS CREDIT AGREEMENT is entered into as of August 28, 2000, by and among AXT, INC., a Delaware corporation ("Borrower"), each of the financial institutions from time to time listed on Schedule I attached hereto, as amended from time to time (collectively, "Lenders"), and U.S. BANK NATIONAL ASSOCIATION ("U.S. Bank"), as agent for the Lenders (in such capacity, "Agent"), and as arranger. RECITALS WHEREAS, Borrower has requested from Lenders the line of credit, term loan and other credit facilities described herein for the purposes described herein; and WHEREAS, Borrower has issued a series of bonds designated the Variable Rate Taxable Demand Revenue Bonds Series 1998, in the aggregate principal amount of $11,615,000.00 (the "Bonds"), pursuant to an Indenture dated as of December 1, 1998 (the "Indenture") between Borrower and Harris Trust Company of California, as trustee (the "Trustee"); and WHEREAS, to support certain payments with respect to the Bonds, Borrower requested U.S. Bank to issue, and U.S. Bank issued for the account of Borrower and for the benefit of the Trustee, an irrevocable direct-pay letter of credit (the "Letter of Credit"), in the original stated amount of $11,986,680.00, a copy of which is attached hereto as Exhibit A, pursuant to that certain Reimbursement Agreement dated as of December 1, 1998, between Borrower and U.S. Bank; and WHEREAS, as of the date of this Agreement, $11,092,000.00 of the principal amount of the Bonds remains outstanding; and WHEREAS, Borrower will be responsible for amounts drawn under the Letter of Credit and for certain fees and amounts due with respect to the Letter of Credit and this Credit Agreement; and WHEREAS, Lenders and Agent have agreed to provide said Letter of Credit facility to Borrower, as well as a revolving line of credit facility and certain term loans to Borrower on the terms and subject to the conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants and promises of the parties contained herein, Agent, Lenders and Borrower hereby agree as follows: -1- 8 ARTICLE I DEFINITIONS SECTION 1.1 DEFINED TERMS. As used in this Agreement, all terms defined above shall have the meanings set forth above, and the following terms shall have the meanings set forth after each: "Accounts" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Agent's Office" means (i) initially, Agent's office designated as such in Schedule I attached hereto, and (ii) subsequently, such other office designated as such in writing by Agent to Lenders and Borrower. "Agreement" means this Credit Agreement, as amended, amended and restated, modified or supplemented from time to time. "Applicable Lending Office" means, with respect to each Lender, (i) initially, its office designated as such in Schedule I attached hereto, and (ii) subsequently, such other office or offices designated as such in writing by such Lender to Agent. "Assignee" has the meaning assigned to that term in Section 10.5(c) hereof. "Assignment" has the meaning assigned to that term in Section 10.5(c) hereof. "Assignment Agreement" has the meaning assigned to that term in Section 10.5(c) hereof. "Assignor" has the meaning assigned to that term in Section 10.5(c) hereof. "Authorized Representatives" means those officers and employees designated by Borrower on the most current Notice of Authorized Representatives delivered by Borrower to Agent as being authorized to request any borrowing or to make any interest rate selection on behalf of Borrower hereunder, or to give Agent any other notice hereunder that is required by the terms hereof to be made through one of Borrower's Authorized Representatives. -2- 9 "Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Bond Interest Payment Date" has the meaning assigned to that term in the Indenture. "Bonds" means the Bonds described in the Recitals hereof. "Borrower Letter of Credit(s)" has the meaning assigned to that term in Section 2.1(d) hereof. "Borrower Letter of Credit Agreement(s)" has the meaning assigned to that term in Section 2.1(d) hereof. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Personal Property Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrowing Base" has the meaning assigned to that term in Section 2.1(b) hereof. "Borrowing Base Certificate" has the meaning assigned to that term in Section 2.1(b) hereof. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City or Seattle are authorized or required by law to close and, if the applicable Business Day relates to any LIBOR borrowing, means such a day which is also a day on which banks in the City of London are generally open for interbank or foreign exchange transactions. "Change of Law" means the adoption of any Governmental Rule, any change in any Governmental Rule or the application or requirements thereof (whether such change occurs in accordance with the terms of such Governmental Rule as enacted, as a result of amendment or otherwise), any change in the interpretation or administration of any Governmental Rule by any Governmental Authority, or compliance by any Lender (or any entity controlling such Lender) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority. -3- 10 "Closing Date" means the date on which all of the conditions set forth in Section 5.1 of this Agreement have been satisfied or waived by Agent. "Collateral" means, collectively, the Personal Property Collateral and the Real Property Collateral. "Contract Collateral" has the meaning assigned to that term in Section 5.1(b)(xiv) hereof. "Credits" means the Line of Credit, the Term Loans and the Letter of Credit Facility. "Date of Issuance" means December 1, 1998. "Deeds of Trust" means, collectively, all of the deeds of trust for the benefit of Agent that secure the obligations of Borrower to Agent and Lenders under this Agreement. "Default" means an Event of Default or an event or condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. "EBITDA" means, for the most recent trailing four-quarter period, consolidated net income from operations (after eliminating all extraordinary items of gain or loss) plus interest expense, income taxes, depreciation and amortization, in each case defined in accordance with GAAP and, if applicable, to the extent each has been deducted in the determination of net income. "El Monte Property" means that certain real property located at 9650 Telstar Avenue, in the City of El Monte, County of Los Angeles, California, owned by Borrower and improved with a commercial building used for research and development and manufacturing purposes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Event of Default" has the meaning assigned to that term in Section 8.1 hereof. "Expiration Date" means December 1, 2008. "Federal Funds Rate" means, for any day, the weighted average of the per annum rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers as published by -4- 11 the Federal Reserve Bank of New York for such day (or, if such rate is not so published for any day, the average rate quoted to Agent on such day by three (3) Federal funds brokers of recognized standing selected by Agent). "Fixed Charge Coverage Ratio" means the ratio of (A) EBITDA less the aggregate amount of (i) unfinanced capital expenditures, (ii) cash taxes, and (ii) permitted dividends, distributions and treasury stock purchases, divided by (B) the aggregate amount of the following, each measured for the most recent four historical quarters (excluding the current quarter in possession) (i) cash Interest Expense (including any letter of credit fees payable to U.S. Bank) and (ii) capital lease payments plus the average of current maturities of long-term debt (including all bond redemptions required by this Agreement) measured for the most recent four historical quarters (excluding the current quarter in possession) and (iii) the current maturity of subordinated debt measured for the most recent four historical quarters (excluding the current quarter in possession). "Fixed Rate Term" means a period of one (1), two (2), three (3), or six (6) months, as designated by Borrower, during which all or a portion of the Line of Credit or the Term Loan bears interest determined in relation to LIBOR; provided however, that (a) no Fixed Rate Term may be selected for a principal amount less than One Million Dollars ($1,000,000.00); (b) no Fixed Rate Term shall extend beyond the scheduled maturity date hereof; (c) any Fixed Rate Term 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 Fixed Rate Term into another calendar month, in which event the Fixed Rate Term shall end on the immediately preceding Business Day; (d) any Fixed Rate Term 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 Fixed Rate Term) shall end on the last Business Day of a calendar month; and (e) with respect to the Term Loans, no Fixed Rate Term shall extend beyond a date on which Borrower is required to make a scheduled payment of principal on the Term Loans unless the aggregate principal amount of Term Loans bearing interest at the Reference Rate plus the aggregate principal amount of Term Loans bearing interest at LIBOR with Fixed Rate Terms expiring on or before such date equals or exceeds the principal amount required to be paid on the Term Loans on such date. "Funded Debt" means the aggregate amount of all obligations for (1) borrowed money, including senior bank debt, subordinated debt and amounts owing under the Bonds; (2) capital leases; (3) issued but undrawn letters of credit, except the direct pay Letter of Credit supporting the Bonds, plus any -5- 12 amounts outstanding under drawn letters of credit; and (4) contingent obligations. "GAAP" means generally accepted accounting principles as in effect in the United States of America from time to time, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including the Contract Collateral and all contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts and Negotiable Collateral. "Governmental Authority" means any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Comptroller of the Currency, any central bank or any comparable authority. "Governmental Rule" means any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guideline, policy or similar form of decision of any Governmental Authority. "Guarantee" means any guarantee of Borrower's obligations to Agent and Lenders under the Loan Documents executed by a Guarantor. "Guarantor" means, subject to the release provisions set forth in Section 2.16 hereof, collectively, AXT-Japan, Beijing Tongmei Xtal Technology Co., Ltd., American Xtal Technology (Hong Kong), Lyte Optronics, Inc., Lyte Optronics Ltd. (UK), Advanced Semiconductor (Xiamen), Bestal Substrate Foreign Sales Corp., and each future wholly-owned subsidiary of Borrower. "Indemnitees" has the meaning assigned to that term in Section 10.3 hereof. "Indenture" has the meaning assigned to that term in the Recitals hereof. -6- 13 "Interest Expense" means any and all interest owing by Borrower under any debt obligations, including the Credits, during the measured period. "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investment Property" means all of Borrower's presently existing and hereafter acquired or arising investment property (as that term is defined in Section 9115 of the California Uniform Commercial Code). "Issuance Spread" means two and one-half of one percent (2.50%) per annum. "Letter of Credit" has the meaning assigned to that term in the Recitals hereof. "Letter of Credit Facility" means the credit facility available to Borrower pursuant to Section 2.3 hereof pursuant to which U.S. Bank has issued the direct pay Letter of Credit to the Trustee. "LIBOR" means, for each Fixed Rate Term, the rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed and rounded upward if necessary to the nearest whole 1/16 of 1%) and determined pursuant to the following formula: Base LIBOR LIBOR = --------------------------------------------------- 100% - LIBOR Reserve Percentage
As used herein, (i) "Base LIBOR" shall mean the rate per annum at which United States dollar deposits would be offered to U.S. Bank in the London interbank market at approximately 11:00 a.m. London time on the date which is two Business Days prior to the first day of a Fixed Rate Term for delivery of funds on the first day of such Fixed Rate Term for a period of time substantially equal to the number of days in such Fixed Rate Term and in an amount substantially equal to the principal amount to which such Fixed Rate Term applies, and (ii) "LIBOR Reserve Percentage" shall mean the reserve percentage measured as of the date which is two Business Days prior to the date of pricing, prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of -7- 14 the Federal Reserve Board, as amended), required to be maintained by U.S. Bank, adjusted by U.S. Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. "Line Maturity Date" means May 31, 2002. "Line of Credit" means a revolving credit facility in the maximum principal amount of $20,000,000.00, as defined more fully in Section 2.1 hereof. "Line of Credit Facility Fee" has the meaning assigned to that term in Section 2.5(c)(i). "Line of Credit Note" means a promissory note executed by Borrower in favor of a Lender to evidence advances under the Line of Credit, substantially in the form of Exhibit B attached hereto. "Line of Credit Pricing Grid" means the following Line of Credit Pricing Grid:
--------------------------------------------------------------------------- - APPLICABLE MARGINS (IN BASIS POINTS) & FEE - --------------------------------------------------------------------------- RATIO OF FUNDED PRICING LIBOR REFERENCE LINE OF CREDIT DEBT TO EBITDA LEVEL MARGIN RATE MARGIN FACILITY FEE --------------------------------------------------------------------------- < 1.00 I 175 50 25.0 --------------------------------------------------------------------------- =/> 1.00 < 1.50 II 200 75 25.0 --------------------------------------------------------------------------- =/> 1.50 < 2.00 III 225 100 37.5 --------------------------------------------------------------------------- =/> 2.00 < 2.50 IV 250 125 50.0 ---------------------------------------------------------------------------
Borrower shall be eligible for Level I pricing when its ratio of Funded Debt to EBITDA is less than 1.00:1.00; for Level II pricing when such ratio is equal to or greater than 1.00:1.00, but less than 1.50:1.00; for Level III pricing when such ratio is equal to or greater than 1.50:1.00, but less than 2.00:1.00; for Level IV pricing when such ratio is equal to or greater than 2.00:1.00, but less than 2.50:1.00. This ratio shall be measured quarterly for the preceding four-quarter period. The pricing will be set at Level IV until receipt of the first financial covenant compliance reflecting the Funded Debt to EBITDA ratio. "Loan Costs" means all costs incurred by Agent in connection with the Credits, including, without limitation, all taxes and assessments, recording fees, title insurance premiums and other title charges, document binding costs, -8- 15 appraisal fees, lien and judgment search costs, fees of architects, engineers, surveyors and any special consultants, construction and Collateral inspection and exam fees, brokers fees (except as otherwise specified herein), escrow fees, all travel and out-of-pocket expenses of Agent to conduct audits or inspections and wire transfer fees. "Loan Documents" means this Agreement, the Notes, the Security Documents and each other notice, document, contract or instrument required by or at any time delivered to Agent in connection with this Agreement. "Majority Lenders" means two (2) or more Lenders whose Proportionate Shares at any time equal or exceed sixty-six and two-thirds percent (66-2/3%) of the Total Commitments. "Material Adverse Effect" means a material adverse effect on (i) the business operations or financial condition of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the amounts loaned to Borrower by Lenders hereunder. "Minimum Interest Coverage Ratio" means EBITDA divided by Interest Expense (net of capitalized interest expense) for the most recent four quarter period. "Monterey Park Property" means that certain real property located at 2019 Saturn Street, in the City of Monterey Park, County of Los Angeles, California owned by Borrower and improved with a commercial building used for research and development and manufacturing purposes. "Negotiable Collateral" means all of Borrower's present and future letters of credit, notes, drafts, instruments, securities (including the shares of stock of Subsidiaries of Borrower), documents, personal property leases (wherein Borrower is the lessor), and chattel paper. "Notes" means, collectively, the Line of Credit Note and all of the Term Notes. "Notice of Authorized Representatives" has the meaning set forth in Section 2.14 hereof. "Notice of Borrowing" has the meaning set forth in Section 2.4 hereof. "Notice of Conversion or Continuation" has the meaning assigned to that term in Section 2.6(b) hereof. -9- 16 "Participant" has the meaning assigned to that term in Section 10.5(b) hereof. "Permitted Indebtedness" means, subject to Borrower's compliance with the financial covenants required under this Agreement, the following: (a) Indebtedness of Borrower in favor of Lenders arising hereunder or any other Loan Document: (b) Capital leases incurred solely to purchase equipment which is secured by a purchase money security interest and is not in excess of the lesser of the purchase price for such equipment or the fair market value of such equipment on the date of acquisition. (c) Indebtedness to trade creditors incurred in the ordinary course of business; (d) Indebtedness set forth on Schedule 7.7 hereto; (e) Indebtedness incurred to refinance any Indebtedness permitted under the foregoing clause (b) or clause (d); (f) Accrued dividends on the capital stock of Borrower; (g) Interest rate and currency hedging agreements; (h) Guaranties of any Subsidiary's suppliers in connection with the purchase of supplies in the ordinary course of business; (i) Guaranties of lease obligations incurred in the ordinary course of business and to the extent otherwise permitted hereunder; "Permitted Investments" means, subject to Borrower's compliance with the financial covenants required under this Agreement, the following: (a) Investments existing on the Closing Date and disclosed in Schedule 7.7 attached hereto; (b) Marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having a rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates of -10- 17 deposit maturing no more than one year from the date of investment therein; and (iv) money market accounts; (c) Investments consisting of travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business; (d) Joint ventures or strategic alliances in the ordinary course of Borrower's business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any such investments by Borrower do not exceed $3,000,000.00 in the aggregate in any fiscal year; and (e) Investments or capital infusions in Borrower's Subsidiaries. "Permitted Liens" means, subject to Borrower's compliance with the financial covenants required under this Agreement, the following: (a) Liens in favor of Agent; (b) liens and security interests existing on the Closing Date and disclosed in Schedule 4.15 attached hereto; (c) liens for taxes, fees, assessment or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings; (d) liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons or entities imposed without action of such parties, provided that the payment thereof is not yet required; (e) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default hereunder; (f) liens incurred or deposits made in the ordinary course of Borrower's business in connection with workers' compensation, unemployment insurance, Social Security and other like laws; (g) liens and security interests (a) upon or in any equipment acquired or held by the Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (b) existing on such equipment at the time of its acquisition, provided that the -11- 18 lien and security interest is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (h) liens consisting of leases and subleases and licenses and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and any interest or title of a lessor or licensor under any lease or license, as applicable; (i) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and (j) liens that are not prior to Agent's security interest which constitute rights of set-off of a customary nature. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a Governmental Authority. "Personal Property Collateral" means each of the following: (k) the Accounts, (l) Borrower's Books, (m) the General Intangibles, (n) the Inventory, (o) the Investment Property, (p) the Negotiable Collateral, (q) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of U.S. Bank or the Lenders, and (r) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Personal Property Collateral, and any and all Accounts, Borrower's Books, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from -12- 19 the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Plan" means any defined employee pension benefit plan as defined in ERISA. "Proportionate Share" means, for each Lender, the dollar amount determined at any time by multiplying the percentage set forth opposite such Lender's name in Schedule 1 attached hereto by the amount of the Total Commitments at such time, and shall include, where the context so requires, the amount of all outstanding credit from such Lender to Borrower pursuant to this Agreement and the obligation of such Lender to make advances or otherwise extend credit up to such amount on the terms and subject to the conditions set forth herein. "Real Property" means collectively, the Monterey Park Property, the El Monte Property, the Technology Drive Property and the Solar Way Property. "Real Property Collateral" means, collectively, the Monterey Park Property, the El Monte Property, the Technology Drive Property and the Solar Way Property. "Reference Rate" means at any time the rate of interest which U.S. Bank establishes as its reference rate and is not necessarily the lowest rate of interest which it collects from any borrower or class of borrowers. If U.S. Bank ceases to publicly announce or publish its Reference Rate, U.S. Bank will choose a new index by using a comparable index or reference rate as its Reference Rate. "Register" has the meaning assigned to that term in Section 10.5(d) hereof. "Reimbursement Default Rate" has the meaning assigned to that term in Section 2.3(b). "Reimbursement Deposit Account" means the demand deposit account established by Borrower with U.S. Bank as defined in Section 3.2 hereof. "Reimbursement Obligations" mean the obligations of Borrower to Lenders described in Section 2.3(b) hereof. "Related Documents" means the Bonds, the Indenture, the Bond Loan Agreement, the Deeds of Trust, the UCC-1 Financing Statements, the Security Agreements, the Guarantees and any other agreement or instrument related to the issuance of the Bonds and pertaining to Borrower. -13- 20 "Security Agreements" means, collectively, all of the security agreements for the benefit of Agent that secure the obligations of Borrower to Agent and Lenders under this Agreement. "Security Documents" means, collectively, the Deeds of Trust and the Security Agreements. "Solar Way Property" means that certain real property located at 4211 Solar Way in the City of Fremont, County of Alameda, California owned by Borrower and improved with a manufacturing and research and development facility. "Stated Amount" means $11,986,680.00, as such amount may be reduced from time to time as a result of unreinstated Drawings on the Letter of Credit in accordance with the terms thereof. "Subsidiary" means any corporation, association, limited liability company, partnership, joint venture or other business entity of which more than fifty percent (50%) of the voting stock or other equity interest is owned directly or indirectly by Borrower. "Tangible Net Worth" means, at any time, total stockholders' equity at such time less the amount of any treasury stock less the value of any in tangible assets at such time. "Taxes" has the meaning assigned to that term in Section 2.12(a) hereof. "Technology Drive Property" means that certain real property located at 4281 Technology Drive in the City of Fremont, County of Alameda, California owned by Borrower and improved with a manufacturing facility. "Term Loan A" means a credit facility available to Borrower in the maximum principal amount of $1,190,000.00, as defined more fully in Section 2.2 hereof. "Term Loan A Maturity Date" means May 31, 2003. "Term Loan B" means a credit facility available to Borrower in the maximum principal amount of $1,610,000.00, as defined more fully in Section 2.2 hereof. "Term Loan B Maturity Date" means May 31, 2003. -14- 21 "Term Loan C" means a credit facility available to Borrower in the maximum principal amount of $3,200,000.00, as more fully defined in Section 2.2 hereof. "Term Loan C Maturity Date" means May 31, 2003. "Term Loan Pricing Grid" means the following Term Loan Pricing Grid:
----------------------------------------------------------------------------- - APPLICABLE MARGINS (IN BASIS POINTS) - ----------------------------------------------------------------------------- RATIO OF FUNDED PRICING LIBOR MARGIN REFERENCE DEBT TO EBITDA LEVEL RATE MARGIN ----------------------------------------------------------------------------- < 1.00 I 200 75 ----------------------------------------------------------------------------- =/> 1.00 < 1.50 II 225 100 ----------------------------------------------------------------------------- =/> 1.50 < 2.00 III 250 125 ----------------------------------------------------------------------------- =/> 2.00 < 2.50 IV 275 150 -----------------------------------------------------------------------------
Borrower shall be eligible for Level I pricing when its ratio of Funded Debt to EBITDA is less than 1.00:1.00; for Level II pricing when such ratio is equal to or greater than 1.00:1.00, but less than 1.50:1.00; for Level III pricing when such ratio is equal to or greater than 1.50:1.00, but less than 2.00:1.00; for Level IV pricing when such ratio is equal to or greater than 2.00:1.00, but less than 2.50:1.00. This ratio shall be measured quarterly for the preceding four-quarter period. The pricing will be set at Level IV until receipt of the first financial covenant compliance reflecting the Funded Debt to EBITDA ratio. "Term Loans" means, collectively, Term Loan A, Term Loan B and Term Loan C. "Term Notes" means, collectively, each of the promissory notes executed by Borrower in favor of a Lender to evidence advances under each of the Term Loans, substantially in the form of Exhibit C attached hereto. "Termination Date" has the meaning assigned to that term in Section 3.2 hereof. "Total Commitments" means, for all Lenders and at any time, the then aggregate amount of (i) the outstanding principal balance of each of the Credits, and (ii) the maximum undisbursed principal amount of each of the Credits. -15- 22 "Treasury Rate" means the Issuance Spread plus the yield to maturity of the most recently issued one, two or three year U.S. Treasury Security, as elected by Borrower, as quoted in the Wall Street Journal on the date of election of a Treasury Rate. If such date is not a Business Day, then the quote shall be obtained on the Business Day immediately preceding such date. If the Wall Street Journal (i) quotes more than one such one, two or three year U.S. Treasury Security, the highest of such quotes shall apply, or (ii) ceases to publish such quotes, the one, two or three year U.S. Treasury Security, as elected by Borrower, shall be determined from such substitute financial reporting service or source as U.S. Bank in its reasonable discretion shall determine. "Trustee" has the meaning assigned to that term in the Recitals hereof. SECTION 1.2 INTERPRETATION. The meaning of each defined term is equally applicable to both the singular and plural forms of the terms defined. As used in this Agreement and each of the other Loan Documents, the term "including" is not limiting, and means "including without limitation." SECTION 1.3 HEADINGS. Headings in this Agreement and each of the other Loan Documents are for convenience of reference only and are not part of the substance hereof or thereof. ARTICLE II THE CREDITS SECTION 2.1 LINE OF CREDIT. (a) Line of Credit. On the terms and subject to the conditions set forth in this Agreement, each Lender hereby severally agrees, on a pro rata basis in accordance with Schedule 1 attached hereto, to make advances to Borrower under the Line of Credit from time to time up to and including the Line Maturity Date, not to exceed at any time the aggregate principal amount of Twenty Million Dollars ($20,000,000.00), the proceeds of which shall be used for general corporate purposes, including working capital financing, and for the issuance of standby and commercial letters of credit, subject to a sublimit of $250,000.00 for such letters of credit as described in subparagraph (d), below. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by the Line of Credit Note, all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. Outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any -16- 23 time exceed an aggregate of (i) eighty percent (80%) of eligible receivables generated by U.S. based obligors, (ii) eighty percent (80%) of eligible receivables generated by obligors with principal offices outside of the United States provided that such foreign eligible receivables are insured in a manner acceptable to Lender, and (iii) the lesser of $7,500,000 or fifty percent (50%) of eligible inventory (the "Borrowing Base"), as evidenced by a borrowing base certificate in the form attached hereto as Exhibit H (the "Borrowing Base Certificate"). All of the foregoing shall be determined by Agent upon receipt and review of the collateral reports required hereunder and such other documents and collateral information as Agent may from time to time require. As used herein, "eligible receivables" shall consist solely of trade accounts which have been created in the ordinary course of Borrower's or any Guarantor's business, upon which Borrower's or any Guarantor's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Agent has a perfected security interest of first priority, and shall not include: (i) any Account which is past due more than ninety (90) days after the invoice date; (ii) that portion of any Account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (iii) any Account which represents an obligation of any state or municipal government or of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which Assignment of Claims Act forms reasonably satisfactory to Agent have been duly executed and acknowledged); (iv) any Account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (v) that portion of any Account which represents interim or progress billings or retention rights on the part of the account debtor; (vi) any Account which represents an obligation of any account debtor when twenty percent (25%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (i) above; -17- 24 (vii) that portion of any Account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five percent (25%) of Borrower's total accounts; (viii) any Account deemed ineligible by Agent when Agent, in its sole discretion, deems the creditworthiness or financial condition of the account debtor to be unsatisfactory; or (ix) uninsured foreign receivables. As used herein, "eligible inventory" shall mean, at any time, all of Borrower's Inventory constituting raw materials (valued at the lower of cost or market), except: (i) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances and claims of third parties; and (ii) Inventory which Agent, in its sole discretion, deems to be obsolete, unsalable, damaged, defective or unfit for further processing. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all the limitations, terms and conditions contained herein; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount set forth above in this Section 2.1. (d) Borrower Letter of Credit Subfeature. As a subfeature under the Line of Credit, Agent agrees from time to time during the term thereof to issue standby or commercial letters of credit for the account of Borrower (each, a "Borrower Letter of Credit" and collectively, "Borrower Letters of Credit"); provided however, that the form and substance of each Borrower Letter of Credit shall be subject to reasonable approval by Agent and the aggregate amount of Borrower Letters of Credit issued at any one time shall not exceed $250,000.00. Except with the prior approval of Agent, which may be granted or withheld in its sole discretion, no Borrower Letter of Credit shall have an expiration date subsequent to the Line Maturity Date. The undrawn amount of all Borrower Letters of Credit issued and outstanding under this letter of credit subfeature shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Borrower Letter of Credit shall be subject to the additional terms and conditions of the Borrower Letter of Credit Agreement and related documents, if any, required by Agent in connection with the issuance thereof (each, a "Borrower Letter of Credit Agreement" and collectively, the "Borrower Letter -18- 25 of Credit Agreements"), each of which shall be substantially in the form attached hereto as Schedule 2.1. Each draft paid by Agent under a Borrower Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower on or before the Line Maturity Date in accordance with the terms and conditions of this Agreement. Borrower agrees that Agent, in its sole discretion, may debit any demand deposit account maintained by Borrower with Agent, other than a demand deposit account maintained by Borrower on behalf of a joint venture of which Borrower is a member, for the amount of any such draft. SECTION 2.2 TERM LOANS. (a) Term Loan A. On the terms and subject to the conditions set forth in this Agreement, each Lender hereby severally agrees, on a pro rata basis in accordance with Schedule 1 attached hereto, to grant Term Loan A to Borrower on the Closing Date in the principal amount of One Million One Hundred Ninety Thousand Dollars ($1,190,000.00), the proceeds of which shall be used to repay existing indebtedness encumbering the Monterey Park Property in the approximate amount of $684,260.00 and to finance improvements and additions to the El Monte Property. Borrower's obligation to repay Term Loan A shall be evidenced by the Term Note for Term Loan A, all terms of which are incorporated herein by this reference. (b) Repayment of Term Loan A. Interest on Term Loan A shall be paid monthly or as otherwise set forth in this Agreement. Commencing September 30, 2000, and on the last day of each calendar quarter thereafter, Borrower shall make quarterly installments of principal in the amount required in order to amortize fully the principal amount of Term Loan A, together with interest thereon at the rates of interest applicable under the Term Loan A Notes, over twenty (20) years and continuing until the Term Loan A Maturity Date, as follows:
---------------------------------------------------------------------- YEAR QUARTERLY PAYMENT AMOUNT ---------------------------------------------------------------------- 2000 $14,875 2001 $14,875 2002 $14,875 2003 $14,875 BALANCE DUE $1,011,500 ======================================================================
There will be one payment due on March 31, 2003 in the amount of $14,875 with the entire balance of principal and interest then unpaid due and payable on the Term Loan A Maturity Date. Such quarterly payment shall be credited to principal, and interest shall be paid separately as set forth herein. -19- 26 (c) Term Loan B. On the terms and subject to the conditions set forth in this Agreement, each Lender hereby severally agrees, on a pro rata basis in accordance with Schedule 1 attached hereto, to grant Term Loan B to Borrower on the Closing Date in the principal amount of One Million Six Hundred Ten Thousand Dollars ($1,610,000.00), the proceeds of which shall be used to repay existing indebtedness encumbering the El Monte Property in the approximate amount of $1,106,559.00 and to finance improvements and additions to the El Monte Property. Borrower's obligation to repay Term Loan B shall be evidenced by the Term Notes for Term Loan B, all terms of which are incorporated herein by this reference. (d) Repayment of Term Loan B. Interest on Term Loan B shall be paid monthly or as otherwise set forth in this Agreement. Commencing on September 30, 2000, and on the last day of each calendar quarter thereafter, Borrower shall make quarterly installments of principal in the amount required in order to amortize fully the principal amount of Term Loan B, together with interest thereon at the rates of interest applicable under the Term Loan B Notes, over twenty (20) years and continuing until the Term Loan B Maturity Date, as follows:
--------------------------------------------------------------------- YEAR QUARTERLY PAYMENT AMOUNT --------------------------------------------------------------------- 2000 $20,125 2001 $20,125 2002 $20,125 2003 $20,125 BALANCE DUE $1,368,500 =====================================================================
There will be one payment due on March 31, 2003 in the amount of $20,125 with the entire balance of principal and interest then unpaid due and payable on the Term Loan B Maturity Date. Such quarterly payment shall be credited to principal, and interest shall be paid separately as set forth herein. (e) Term Loan C. On the terms and subject to the conditions set forth in this Agreement, each Lender hereby severally agrees, on a pro rata basis in accordance with Schedule 1 attached hereto, to grant Term Loan C to Borrower on the Closing Date in the principal amount of Three Million Two Hundred Thousand Dollars ($3,200,000.00), the proceeds of which shall be used to finance the construction of improvements and additions to the El Monte Property. Borrower's obligation to repay Term Loan C shall be evidenced by the Term Notes for Term Loan C, all terms of which are incorporated herein by this reference. -20- 27 (f) Repayment of Term Loan C. Borrower shall make installments of interest only through December 31, 2000 monthly or as otherwise set forth in this Agreement. Commencing on March 31, 2001, and on the last day of each calendar quarter thereafter, Borrower shall make quarterly installments of principal in the amount required in order to amortize fully the principal amount of Term Loan C, together with interest thereon at the rates of interest applicable under the Term Loan C Notes, over five (5) years and continuing until the Term Loan C Maturity Date, as follows:
---------------------------------------------------------------------- YEAR QUARTERLY PAYMENT AMOUNT ---------------------------------------------------------------------- 2001 $160,000 2002 $160,000 2003 $160,000 ---------------------------------------------------------------------- BALANCE DUE $1,760,000 ======================================================================
There will be one payment due on March 31, 2003 in the amount of $160,000 with the entire balance of principal and interest then unpaid due and payable on the Term Loan C Maturity Date. Such quarterly payment shall be credited to principal, and interest shall be paid separately as set forth herein. (g) Prepayment. Borrower may prepay principal on each of the Term Loans solely in accordance with the provisions of Sections 2.8 and 2.13 of this Agreement. SECTION 2.3 THE LETTER OF CREDIT FACILITY. (a) Terms and Amount of Letter of Credit. U.S. Bank has issued its irrevocable direct-pay Letter of Credit for the account of Borrower in favor of the Trustee in an initial amount equal to the initial Stated Amount, which amount shall be amortized as follows: $10,340,000.00 of the initial Stated Amount shall be amortized based on a twenty-five (25) year amortization schedule and $1,275,000.00 of the initial Stated Amount shall be amortized based on a five (5) year amortization schedule. The amount of principal and interest which Borrower must pay monthly in order to amortize fully the initial Stated Amount according to the above amortization schedule is set forth on Schedule 2.3(a) attached hereto. Notwithstanding any contrary provision of this Agreement, this Agreement shall not expire or be otherwise terminated until such time as all payment obligations due or to become due to Agent or any Lender with respect to the Letter of Credit have been paid. -21- 28 (b) Reimbursement Obligations. Borrower agrees to pay to Agent (i) on the day that any drawing is made by the Trustee under the Letter of Credit, all amounts to be advanced by Agent pursuant to the Letter of Credit on behalf of Borrower in respect of such drawing, and (ii) interest on any and all amounts that Borrower fails to pay when due under this Agreement from the date such amounts become payable until payment in full (collectively, the "Reimbursement Obligations"). For each day that any Reimbursement Obligation remains unpaid, interest shall accrue on such amounts at an aggregate rate per annum equal to five percent (5%) above the Reference Rate (the "Reimbursement Default Rate"), based on the actual number of days elapsed in a year of 360 days. SECTION 2.4 NOTICE OF BORROWING. Borrower, through one of its Authorized Representatives, shall request advances under each of the Term Loans and each advance under the Line of Credit by giving Agent irrevocable written notice or telephonic notice (confirmed promptly in writing), in the form of Exhibit D attached hereto (each, a "Notice of Borrowing"), which specifies, among other things: (i) the principal amount to be disbursed, if under the Term Loans, or the principal amount of the requested advance, if under the Line of Credit; (ii) the proposed date of borrowing, which shall be a Business Day; (iii) the interest rate option applicable to such borrowing (which, for a LIBOR interest selection, shall be subject to the minimum dollar requirements set forth in Section 2.5(a) hereof); and (iv) if the amounts disbursed or advanced will bear interest determined in relation to LIBOR, the length of the Fixed Rate Term applicable thereto. Each such Notice of Borrowing must be received by Agent not later than 10:00 a.m. Pacific Standard time at least one (1) Business Day prior to the date of borrowing if interest will be determined in relation to the Reference Rate, and (ii) at least three (3) Business Days prior to the date of borrowing if interest will be determined in relation to LIBOR; provided however, that Agent, at its sole discretion, may permit borrowing requests to be made by telephone (confirmed promptly in writing) and on the same day only if interest will be determined in relation to the Reference Rate. Agent shall promptly notify each Lender of the contents of each Notice of Borrowing and of the amount of the disbursement or advance to be made by such Lender. Each advance for which interest will be determined in relation to the Reference Rate shall be in the minimum amount of $100,000.00. -22- 29 SECTION 2.5 INTEREST/FEES. (a) Interest on the Line of Credit. The outstanding principal balance of the Line of Credit shall bear interest in accordance with the following interest rate options, as designated periodically by Borrower: (i) at the applicable margin over the Reference Rate set forth in the Line of Credit Pricing Grid; or (ii) at the applicable margin over LIBOR set forth in the Line of Credit Pricing Grid; provided, however, that each LIBOR interest selection must be for a minimum amount of $1,000,000 and in integral multiples of $100,000. (b) Interest on the Term Loans. The outstanding principal balances of each of the Term Loans shall bear interest in accordance with the following interest rate options, as designated periodically by Borrower: (i) at the applicable margin over the Reference Rate set forth in the Term Loan Pricing Grid; (ii) at the applicable margin over LIBOR set forth in the Term Loan Pricing Grid; provided, however, that each LIBOR interest selection must be for a minimum amount of $1,000,000 and in integral multiples of $100,000; or (iii) at a fixed rate per annum equal to the Treasury Rate (for a term of one, two or three years, at Borrower's option). The margins above the Reference Rate or LIBOR, as applicable (the "Interest Rate Margins"), at which the outstanding principal balances of the Line of Credit and each of the Term Loans bear interest from time to time shall be adjusted in accordance with the Line of Credit Pricing Grid and the Term Loan Pricing Grid, respectively. Until such time as Agent receives Borrower's financial statements (as required under this Agreement) evidencing Borrower's compliance with any of the Funded Debt to EBITDA ratios set forth in the applicable Pricing Grid, the Level IV Interest Rate Margin above the Reference Rate or LIBOR shall apply. Thereafter, Agent shall adjust the Interest Rate Margins in accordance with the applicable Pricing Grid on the first day of the month following each month in which Agent receives updated financial statements from Borrower pursuant to this Agreement. Such Interest Rate Margins shall be determined (i) using the most recent quarterly financial statement of Borrower available to Agent on the applicable adjustment date to determine the amount of Funded Debt and (ii) using the most recent financial statements of Borrower available -23- 30 to Agent on the applicable adjustment date for a four (4) consecutive quarter period to determine EBITDA. (c) Fees for the Line of Credit. (i) Line of Credit Facility Fee. Commencing on the Closing Date and continuing through the Line Maturity Date, Borrower shall pay to Agent, for the ratable benefit of Lenders, a per annum facility fee (the "Line of Credit Facility Fee") calculated based on the average undisbursed portion of the Line of Credit at the applicable Line of Credit Facility Fee described in the Line of Credit Pricing Grid. Such Line of Credit Facility Fee shall be payable quarterly in arrears commencing September 30, 2000, and on the last day of each calendar quarter thereafter, and on the Line Maturity Date. The rate set forth above shall be adjusted in accordance with the Line of Credit Pricing Grid as of the first day of the month following receipt of Borrower's financial statements as required under this Agreement. (ii) Borrower Letter of Credit Fees. In the event any Borrower Letters of Credit are issued for the account of Borrower, Borrower shall pay to the Agent , for the ratable benefit of the Lenders, (1) with respect to each Borrower Letter of Credit which is a commercial letter of credit, a fee at issuance equal to one quarter of one percent (.25%) of the Borrower Letter of Credit amount plus a flat fee of $125.00 for each commercial letter of credit without negotiation and a fee upon negotiation equal to one quarter of one percent (.25%) of the drawn amount plus a flat fee of $100.00 for each commercial letter of credit with negotiation, and (2) with respect to each Borrower Letter of Credit which is a standby letter of credit, a per annum fee equal to the Interest Rate Margin above LIBOR set forth in the Line of Credit Pricing Grid then applicable and multiplied by the face amount of such standby letter of credit. (d) Term Loan Commitment Fees. Borrower shall pay to Agent a non-refundable commitment fee for each of the Term Loans as set forth below, which fee shall be due and payable in full on the date on which the applicable Term Loan is made: -- Term Loan A: $11,900.00 -- Term Loan B: $16,100.00 -- Term Loan C: $32,000.00 -24- 31 (e) Letter of Credit Facility Fee. Borrower shall pay to Agent a Letter of Credit Facility fee (for itself) in an amount equal to one and one-quarter of one percent (1.25%) per annum of the Stated Amount of the Letter of Credit, payable annually on each anniversary of the Date of Issuance, until the earlier of the termination or expiration of the Letter of Credit Facility, which fee shall be non-refundable even if the Letter of Credit is terminated or canceled before its stated expiration date. (f) Computation and Payment. All interest and fees shall be computed on the basis of a 360-day year, actual days elapsed. Interest determined in relation to the Reference Rate or the Treasury Rate shall be payable on the first (1st) day of each month. Interest determined in relation to LIBOR shall be payable on the last day of the Fixed Rate Term to which such interest rate applies; provided that if such Fixed Rate Term is for six (6) months, on the first (1st) day of the fourth (4th) month of such Fixed Rate Term and on the last day of such Fixed Rate Term. SECTION 2.6 CONVERSION OF INTEREST OPTIONS. (a) Election. Subject to the minimum dollar requirements set forth in Section 2.5(a) hereof, (i) at any time any portion of the Line of Credit or any of the Term Loans bear interest determined in relation to the Reference Rate, Borrower may convert all or any portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower, and (ii) at any time any portion of the Line of Credit or the Term Loan bears interest determined in relation to LIBOR, Borrower may convert all or a portion thereof at the end of the Fixed Rate Term applicable thereto so that it bears interest determined in relation to the Reference Rate or in relation to LIBOR for a new Fixed Rate Term designated by Borrower. In addition, Borrower may elect to convert any Term Loan to a fixed rate equal to the Treasury Rate as set forth in Section 2.5(b). If Borrower has not made the required interest rate conversion or continuation election prior to the last day of any Fixed Rate Term, Borrower shall be deemed to have made a Reference Rate interest selection for the amounts that were subject thereto. (b) Notice to Agent. Borrower, through one of its Authorized Representatives, shall request each interest rate conversion or continuation by giving Agent irrevocable written notice or telephonic notice (confirmed promptly in writing), in the form of Exhibit E attached hereto (a "Notice of Conversion or Continuation"), which specifies, among other things: (i) the Credit to which such Notice applies; (ii) the principal amount which is the subject of such conversion or continuation; -25- 32 (iii) the proposed date of such conversion or continuation, which shall be a Business Day; (iv) and if such Notice pertains to a LIBOR interest selection, the length of the applicable Fixed Rate Term. Any such Notice of Conversion or Continuation must be received by Agent not later than 10:00 a.m. at least one (1) Business Day prior to the effective date of any Reference Rate interest selection, and (ii) at least three (3) Business Days prior to the effective date of any LIBOR interest selection; provided however, that Agent, at its sole discretion, may permit interest rate conversion or continuation requests to be made by telephone (confirmed promptly in writing) and on the same day for a Reference Rate interest selection. Agent shall promptly notify each Lender of the contents of each such Notice of Conversion or Continuation, or if timely notice is not received from Borrower prior to the last day of any Fixed Rate Term of the automatic conversion of the amounts subject thereto to the Reference Rate interest option. SECTION 2.7 OTHER PAYMENT TERMS. (a) Automatic Debit. Agent shall, and Borrower hereby authorizes Agent to, debit any deposit account of Borrower with Agent (including the Reimbursement Deposit Account described in Section 3.2 hereof) for all payments of principal, interest and fees as they become due on any of the Credits. At least one Business Day prior to any such debit of a deposit account of Borrower, Agent shall provide a written statement of all amounts to be debited. Should, for any reason whatsoever, the funds in any such deposit account be insufficient to pay all principal, interest and/or fees when due, Borrower shall, immediately upon demand, remit to Agent the full amount of any such deficiency. (b) Place and Manner. Borrower shall make all payments due to each Lender under the Loan Documents by payment to Agent at Agent's Office, for the account of such Lender, in lawful money of the United States and in same day or immediately available funds not later than 12:00 noon Pacific Standard time on the date due. Agent shall promptly disburse to each Lender at such Lender's Applicable Lending Office each such payment received by Agent for such Lender. (c) Date. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (d) Default Interest Rate. Notwithstanding any contrary provision of this Agreement or any Note, upon the occurrence and during the continuance of any Event of Default, interest shall accrue on the outstanding principal balance of the Line -26- 33 of Credit and each of the Term Loans at an increased rate per annum (computed on the basis of a year of 360 days for the actual number of days elapsed) equal to two percent (2%) above the rate of interest from time to time applicable to such Credit, and on the outstanding principal balance of the Letter of Credit Facility at an increased rate per annum (computed on the basis of a year of 360 days for the actual number of days elapsed) equal to five percent (5%) above the Reference Rate in effect from time to time. Borrower agrees that an Event of Default will cause the Agent to incur additional expense in servicing the Credits, that the Agent is entitled to damages for the detriment caused thereby, that such damages are extremely difficult and impractical to ascertain, and that application of the above default interest rates to the amounts owing by Borrower under the Loan Documents is a reasonable estimate of such damages to Agent. (e) Application of Payments. All payments under the Loan Documents (including prepayments) shall be applied first to unpaid fees, costs and expenses then due and payable under this Agreement and the other Loan Documents, second to accrued interest then due and payable under the Loan Documents, and finally to reduce the outstanding principal amount of such Credits. Subject to the provisions of Section 3.2, if no Event of Default has occurred and is continuing, Agent shall, subject to the preceding sentence, apply all payments to be applied to Borrower's obligations as directed by Borrower. If an Event of Default has occurred and is continuing or if Borrower fails to direct application, Agent shall apply such payments as determined by it in its discretion. (f) Failure to Pay Agent. Unless Agent shall have received notice from Borrower at least one (1) Business Day prior to the date on which any payment is due to the Lenders hereunder that Borrower will not make such payment in full, Agent may assume that Borrower has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower shall not have made such payment in full to Agent, such Lender shall repay to Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to Agent, at the Federal Funds Rate. A certificate of Agent submitted to any Lender with respect to any amounts owing by such Lender under this Section 2.7(f) shall be presumptive evidence of such amounts. SECTION 2.8 PREPAYMENT. (a) Optional Prepayments. Borrower may, through one of its Authorized Representatives and upon at least (i) one (1) Business Day's prior written notice to Agent if interest is determined in relation to the Reference Rate, or (ii) three (3) Business Days' prior written notice to Agent if interest is determined in relation to -27- 34 LIBOR, prepay the outstanding amount of the Line of Credit or any Term Loan in whole or in part, without premium or penalty, except as required by Section 2.13 hereof. Partial prepayments of any portion of the Line of Credit or any Term Loan shall be in the minimum amount of $1,000,000 and in integral multiples of $100,000. (b) Application of Term Loan Prepayments. All optional prepayments on any of the Term Loans pursuant to Section 2.8(a) shall be applied pro rata to reduce principal then outstanding. SECTION 2.9 FUNDING. (a) Lender Funding and Disbursement. Each Lender shall, before 11:00 a.m. (San Francisco time) on the date of each borrowing under the Line of Credit or under any of the Term Loans, make available to Agent at Agent's Office, in same day or immediately available funds, such Lender's Proportionate Share thereof. After Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article V hereof, Agent will promptly disburse such funds in same day or immediately available funds to Borrower. Unless otherwise directed by Borrower in writing, Agent shall disburse the proceeds of each borrowing to Borrower by deposit to any demand deposit account maintained by Borrower with Agent. (b) Lender's Failure to Fund. Unless Agent shall have received notice from a Lender on or prior to the date of any borrowing under the Line of Credit or any of the Term Loans that such Lender will not make available to Agent such Lender's Proportionate Share thereof, Agent may assume that such Lender has made such portion available to Agent on the date of such borrowing in accordance with Section 2.9(a) hereof, and Agent may, in reliance upon such assumption, make available to Borrower (or otherwise disburse) on such date a corresponding amount. If any Lender does not make the amount of its Proportionate Share of any borrowing available to Agent on the date of such borrowing, such Lender shall pay to Agent, on demand, interest which shall accrue on such amount until made available to Agent at rates equal to (i) the daily Federal Funds Rate during the period from the date of such borrowing through the third Business Day thereafter, and (ii) thereafter, the Reference Rate in effect from time to time. A certificate of Agent submitted to any Lender with respect to any amounts owing under this Section 2.9(b) shall be presumptive evidence of such amounts. If any Lender's Proportionate Share of any borrowing is not in fact made available to Agent by such Lender within three (3) Business Days after the date of such borrowing, Borrower shall pay to Agent, on demand, an amount equal to such Proportionate Share together with interest thereon, for each day from the date such amount was made available to Borrower until the date such amount is repaid to Agent, at the rate of interest then applicable thereto. (c) Lenders' Obligations Several. The obligation of each Lender hereunder is several. The failure of any Lender to make available its Proportionate -28- 35 Share of any borrowing shall not relieve any other Lender of its obligation hereunder to do so on the date requested, but no Lender shall be responsible for the failure of any other Lender to make available the Proportionate Share to be funded by such other Lender. SECTION 2.10 PRO RATA TREATMENT. (a) Borrowings. Except as otherwise provided herein, (i) each extension of credit under any Credit shall be made or shared among the Lenders pro rata according to their respective Proportionate Shares in such Credit, and (ii) each payment of principal of and interest or fees on a Credit shall be made or shared among the Lenders pro rata according to the respective unpaid principal amounts of such Credit held by such Lenders. (b) Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary or otherwise) on account of a Credit in excess of its ratable share of payments on account of such Credit obtained by all Lenders entitled to such payments, such Lender shall forthwith purchase from the other Lenders sufficient participations in such Credit as shall be necessary to cause the purchasing Lender's interest in the Credit to be equivalent to the excess payment received; provided however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase shall be rescinded and each other Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such other Lender's ratable share (according to the proportion of (i) the amount of such other Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.10(b) may, to the fullest extent permitted by law, exercise all its rights of payment (but not including any right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such participation. SECTION 2.11 CHANGE OF CIRCUMSTANCES. (a) Inability to Determine Rate. If Agent at any time shall determine that adequate and reasonable means do not exist for ascertaining LIBOR, or the Majority Lenders shall determine at any time that LIBOR does not accurately reflect the cost to Lenders of making or maintaining LIBOR interest rates hereunder, then Agent shall give telephonic notice (promptly confirmed in writing) to Borrower and each Lender of such determination. If such notice is given, and until such notice has been withdrawn in writing by Agent, then no LIBOR interest option may be selected by Borrower and any portion of any Credit which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear -29- 36 interest determined in relation to the Reference Rate pursuant to the terms and conditions of this Agreement. (b) Illegality: Termination of Commitment. Notwithstanding any other provisions herein, if any Change of Law shall make it unlawful for any Lender (i) to make a LIBOR interest rate available, or (ii) to maintain LIBOR interest rates hereunder, then, in the former event, any obligation of Lenders hereunder to make available such unlawful LIBOR interest rate shall forthwith be canceled, and in the latter event, any such unlawful LIBOR interest rate then outstanding shall at the option of Agent be converted so that interest is determined in relation to the Reference Rate pursuant to the terms of this Agreement; provided however, if any such Change in Law, shall permit a LIBOR interest rate until the expiration of the Fixed Rate Term relating thereto, then such permitted LIBOR interest rate shall continue as such until the end of such Fixed Rate Term. With respect to any outstanding principal amount as to which such LIBOR interest rate is converted to a lower rate in accordance with the foregoing terms and provisions, Borrower agrees to pay to Agent, for the benefit of each Lender, as appropriate, the amount of any increase in cost or expense to the Lenders. (c) Charges: Illegality. Upon the occurrence of any event described in Section 2.11(b) hereof, Borrower shall pay to Agent, for the benefit of each Lender, as appropriate, such amount or amounts as may be necessary to compensate such Lender for any fines, fees, changes, penalties or other amounts payable by such Lender as a result thereof and which are attributable to LIBOR interest rates made available to Borrower hereunder. In determining which amounts payable by any Lender and/or losses incurred by any Lender are attributable to LIBOR interest rates made available to Borrower hereunder, any reasonable allocation made by any Lender among its operations shall be conclusive and binding upon Borrower provided Lender provides Borrower with a statement setting forth in reasonable detail such amount and the reasonable calculation thereof. (d) Charges: Change of Law. If, after the date of this Agreement, any Change of Law: (i) shall subject any Lender to any tax, duty or other charge with respect to any LIBOR interest rate, or shall change the basis of taxation of payments by Borrower to any Lender of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of taxation on the overall net income of any Lender imposed by the jurisdiction of such Lender's incorporation or by any jurisdiction in which its Applicable Lending Office is located); or (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets -30- 37 held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any Lender; or (iii) shall impose on any Lender any other condition with respect to its performance hereunder; and the effect of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining any LIBOR interest rate hereunder or to reduce any amount receivable by such Lender in connection therewith, then Borrower shall, pay to Agent, on behalf of each Lender, as appropriate, such amount or amounts as may be necessary to reimburse such Lender for such increased costs or to compensate such Lender for such reduced amounts. A certificate as to the amount of such increased costs or reduced amounts, delivered by such Lender to Borrower (which delivery shall be through Agent) shall, in the absence of manifest error, be conclusive and binding on Borrower for all purposes provided Lender provides Borrower with a statement setting forth in reasonable detail such amount and the reasonable calculation thereof. (e) Capital Requirements. If any Lender shall have determined that any Change of Law regarding capital adequacy which occurs after the Closing Date hereof has or shall have the effect of reducing the rate of return on the capital of such Lender (or any entity controlling such Lender) as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such entity would have achieved but for such Change of Law (taking into consideration such Lender's or such entity's policies with respect to capital adequacy), by an amount deemed by such Lender to be material, then from time to time, within fifteen (15) days after presenting a statement setting forth in reasonable detail such amount and the reasonable calculation thereof. Borrower shall pay to Agent, for the benefit of such Lender such amounts set forth therein which shall compensate such Lender for such reduction. SECTION 2.12 TAXES ON PAYMENTS. (a) Payments Free of Taxes. All payments made by Borrower under the Loan Documents shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority (except net income taxes imposed on Agent or any Lender) (with all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings relating to the payments made hereunder being hereinafter referred to herein as "Taxes"). If any Taxes are required to be withheld from any amounts payable to Agent or any Lender under the Loan Documents, the amounts so payable to Agent or such Lender shall be increased to the extent necessary to yield to Agent or such Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in the Loan Documents. Whenever any such -31- 38 Taxes are payable by Borrower, as promptly as possible thereafter, Borrower shall send to Agent, for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by Borrower showing payment thereof. If Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Agent the required receipts or other required documentary evidence, Borrower shall indemnify Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by Agent or any Lender as a result of any such failure. The agreements in this Section 2.12(a) shall survive the termination of this Agreement for a period not to exceed the lesser of the applicable statute of limitations or twenty-four months. (b) Withholding Exemption Certificates. Each Lender agrees that it will deliver to Borrower and Agent, upon the reasonable request of Borrower or Agent, either (i) a statement that it is incorporated under the laws of the United States of America or a state thereof, or (ii) if it is not so incorporated, two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. SECTION 2.13 FUNDING LOSS INDEMNIFICATION. (a) LIBOR. If Borrower shall (a) repay or prepay any portion of a Credit which bears interest determined in relation to LIBOR on any day other than the last day of the Fixed Rate Term therefor (whether an optional prepayment, a mandatory prepayment, a payment upon acceleration or otherwise), (b) fail to borrow any such portion of a Credit for which a Notice of Borrowing has been delivered to Agent (whether as a result of the failure to satisfy any applicable conditions or otherwise), or (c) fail to convert or continue at the LIBOR interest option any portion of a Credit in accordance with a Notice of Conversion or Continuation delivered to Agent (whether as a result of the failure to satisfy any applicable conditions or otherwise), Borrower shall, concurrent with Borrower's repayment pursuant to the foregoing, reimburse Agent on behalf of each Lender, as appropriate, and hold such Lender harmless for all costs and losses incurred by such Lender as a result of such repayment, prepayment or failure. Borrower understands that such costs and losses may include, without limitation, losses incurred by a Lender as a result of funding and other contracts entered into by such Lender to fund any LIBOR portion of any Credit. Each Lender demanding payment under this Section 2.13 shall, in accordance with the foregoing, deliver to Agent for delivery to Borrower a certificate setting forth the amount of costs and losses for which demand is made. Borrower shall have the right to review and confirm any amount alleged to be owing and any calculation relating thereto. The agreements in this Section 2.13 shall survive the termination of this Agreement. -32- 39 (b) Treasury Rate. If Borrower shall repay or prepay any portion of a Credit which bears interest at the Treasury Rate on any day other than the last day of its term (whether an optional prepayment, a mandatory prepayment, a payment upon acceleration or otherwise), Borrower shall pay to such Lender the "prepayment indemnity" more particularly described on Schedule 2.13(b). SECTION 2.14 AUTHORIZED REPRESENTATIVES. On the Closing Date, and from time to time subsequent thereto at Borrower's option, Borrower shall deliver to Agent a written notice in the form of Exhibit F attached hereto (each, a "Notice of Authorized Representatives"), which designates by name each of Borrower's Authorized Representatives and includes each of their respective specimen signatures. Agent shall be entitled to rely conclusively on the authority of each officer or employee designated as an Authorized Representative in the most current Notice of Authorized Representatives delivered by Borrower to Agent, to request borrowings and select interest rate options hereunder, and to give to Agent such other notices are as specified herein as being made through one of Borrower's Authorized Representatives, until such time as Borrower has delivered to Agent, and Agent has actual receipt of, a new written Notice of Authorized Representatives. Agent shall have no duty or obligation to Borrower to verify the authenticity of any signature appearing on any Notice of Borrowing, Notice of Conversion or Continuation or any other written notice from an Authorized Representative or to verify the authenticity of any person purporting to be an Authorized Representative giving any telephonic notice permitted hereby. SECTION 2.15 COLLATERAL. (a) Personal Property Collateral and Contract Collateral. As security for all indebtedness of Borrower to Lenders pursuant to this Agreement, as of the Closing Date Borrower grants to Agent, for the benefit of Lenders, a security interest of first priority in the Personal Property Collateral. (b) Real Property Collateral. As additional security for all indebtedness of Borrower to Lenders pursuant to this Agreement, as of the Closing Date Borrower grants to Agent, for the benefit of Lenders (but only to the extent that a Lender has a Proportional Share in any of the Term Loans), (i) a lien of first priority in the Monterey Park Property and all improvements thereon with respect to Term Loan A, (ii) a lien of first priority in the El Monte Property and all improvements thereon with respect to Term Loan B, (iii) a lien of second priority in the Monterey Park Property and all improvements thereon with respect to Term Loan C, and (iv) a lien of second priority in the El Monte Property and all improvements thereon with respect to Term Loan C, subject solely to such exceptions to title as Agent shall deem acceptable. -33- 40 (c) Cross-Collateralization and Cross-Default. Borrower acknowledges that the Lenders have made the Credits to Borrower upon the security of Borrower's collective interests in the Collateral and in reliance upon the Collateral taken together being of greater value as collateral security than the sum of the Collateral taken separately. Borrower agrees that the Security Agreements are and will be cross-collateralized and cross-defaulted with each other so that (i) an Event of Default under any Security Agreement shall constitute an Event of Default under each of the other Security Agreements; (ii) an Event of Default under any Note or this Agreement shall constitute an Event of Default under each Security Agreement; and (iii) each Deed of Trust shall secure the obligations evidenced by all of the Notes as if a single blanket lien were placed on all of the Collateral as security for such obligations provided that to the extent that a Lender does not have a Proportional Share in a particular Credit hereunder, such Lender's security interest in the Collateral for such Credit shall be subordinate and second in priority to the pro rata security interests of the Lenders having Proportional Shares in such Credit(s). (d) Documentation; Fees. All of the foregoing shall be evidenced by and subject to the terms of the documents described in Section 5.1 hereof. Borrower shall fully cooperate with Agent and perform all additional acts reasonably requested by Agent or any Lender to effect the purposes of this Section 2.15. Borrower shall reimburse Agent, immediately upon demand, for all reasonable costs and expenses incurred by Agent in connection with any of the foregoing security, including filing and recording fees and costs of inspections, expert opinions, appraisals, and audits. SECTION 2.16 GUARANTIES. One hundred percent (100%) of the principal amount of the Credits plus one hundred percent (100%) of all accrued interest, late charges, attorney's fees and other charges arising under the Credits, shall be unconditionally guaranteed by each of the Guarantors. Notwithstanding the foregoing, Lender agrees that American Xtal Technology (Hong Kong) and Lyte Optronics Ltd. (UK) shall be released at such time as Borrower has provided Agent with satisfactory evidence that such Guarantors have ceased all operations and have no assets. ARTICLE III PAYMENTS WITH RESPECT TO THE BONDS AND THE LETTER OF CREDIT SECTION 3.1 ANNUAL REDEMPTION OF BONDS. Borrower covenants to take all necessary action to prepay the loan and cause optional redemptions of the Bonds pursuant to Article IV of the Indenture and this Section 3.1 at a price equal to the principal amount of the Bonds to be redeemed, together with accrued interest to the redemption date, on the Bond Interest Payment -34- 41 Date for December of each year, commencing with the Bond Interest Payment Date for the month of December 2000. The principal amount of Bonds to be redeemed on each such December Bond Interest Payment Date is set forth on Schedule 2.3(a) attached hereto. SECTION 3.2 REIMBURSEMENT DEPOSIT ACCOUNT. Borrower agrees to maintain an interest-bearing deposit account in Borrower's name with U.S. Bank (the "Reimbursement Deposit Account"), which shall be pledged to Agent as security for Borrower's performance of its obligations under this Agreement. Borrower agrees to deposit into the Reimbursement Deposit Account on a monthly basis, three (3) Business Days before the Bond Interest Payment Date for such month, until the earlier to occur of (x) the earliest date on which both no further demands may be made for a drawing under the Letter of Credit and all amounts due to Agent or any Lender under this Agreement in respect of the Letter of Credit have been paid in full, or (y) the Expiration Date (such earlier date, the "Termination Date"), an amount equal to the sum of (i) the next monthly interest payment that Borrower is obligated to make under the Indenture and (ii) the smallest monthly amount that, if deposited by Borrower into the Reimbursement Deposit Account each month during the year commencing on the date of the last annual principal redemption of the Bonds, would be sufficient to meet when due the next annual principal redemption of the Bonds as required under Section 3.1 hereof. SECTION 3.3 OTHER OPTIONAL REDEMPTIONS OF BONDS. Notwithstanding any contrary provision of this Agreement, any optional redemption of the Bonds under the Indenture other than the optional redemptions required by Section 3.1, above, shall require the advance written consent of Agent (which consent shall not be unreasonably withheld), and Agent's receipt of satisfactory evidence of Borrower's ability to reimburse Agent and Lenders for any drawing under the Letter of Credit for such redemption. ARTICLE IV REPRESENTATIONS AND WARRANTIES Except as set forth in Schedules 4.5-4.16 hereto (the "Disclosure Schedule"), the parts of which are numbered according to the relevant Sections of this Agreement, Borrower makes the following representations and warranties to Agent and Lenders, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Lenders and Agent under this Agreement. -35- 42 SECTION 4.1 LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, each of Borrower and each Guarantor is qualified or licensed to do business in California and is in good standing as a foreign corporation in California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all other jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a Material Adverse Effect. SECTION 4.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by each of Borrower and each Guarantor of the Loan Documents to which it is a party have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof such Loan Documents will constitute legal, valid and binding agreements and obligations of Borrower and such Guarantor, enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles relating to or limiting creditors' rights generally or the availability of equitable remedies. SECTION 4.3 NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents to which it is a party do not (a) to Borrower's knowledge, violate any provision of any applicable law or regulation, (b) contravene any provision of the Certificate of Incorporation or By-Laws of Borrower, (c) result in a breach of, or constitute a default under, any contract, obligation, indenture or other instrument, or, any judgment, injunction, order or decree, to which Borrower is a party or by which Borrower or any of its respective property may be bound, or (d) result in or require the creation or imposition of any lien, security interest or other charge or encumbrance upon or with respect to any property of Borrower except in favor of Agent or Lenders. SECTION 4.4 NO ADDITIONAL APPROVALS. No further approval, authorization, consent, order, notice to or filing or registration with any governmental authority or any public board or body is legally required with respect to the execution, delivery or performance by Borrower of the Loan Documents to which it is a party where the failure to obtain such approval could reasonably have a Material Adverse Effect. SECTION 4.5 LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could reasonably be expected to have a Material Adverse Effect. -36- 43 SECTION 4.6 CORRECTNESS OF FINANCIAL STATEMENT. The audited consolidated financial statements of Borrower dated as of December 31, 1999, and the unaudited interim consolidated financial statements of Borrower dated as of March 31, 2000, heretofore delivered by Borrower to Agent, (a) are complete and correct and present fairly the financial condition of Borrower as of the date thereof; (b) disclose all liabilities of Borrower that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent; and (c) have been prepared in accordance with GAAP. Since the date of such financial statements there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged or granted a security interest in or otherwise encumbered any of its assets or properties except as permitted by this Agreement or as disclosed by Borrower to Agent in the Disclosure Schedule. SECTION 4.7 INCOME TAX RETURNS. Except to the extent covered by legally permitted and validly filed extensions, Borrower has filed all United States federal income tax returns, state tax returns and all other material tax returns which it is required to file, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by them, except for those being actively contested in good faith. The charges, accruals and reserves on the books of Borrower in respect of taxes or other governmental charges are, in the opinion of Borrower or its independent certified public accountants, adequate. Borrower has no knowledge of any pending assessments or adjustments of the income tax paid or payable by Borrower with respect to any year. SECTION 4.8 NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower or any Guarantor is a party or by which Borrower or any Guarantor may be bound that requires the subordination in right of payment of any of Borrower's or such Guarantor's or such other Person's obligations subject to this Agreement to any other obligation of Borrower or such Guarantor or such other Person. SECTION 4.9 PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, franchises and licenses required and rights to all trademarks, trade names, patents and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 4.10 ERISA. Borrower and each Guarantor is in compliance in all material respects with all applicable provisions of ERISA; neither Borrower nor any Guarantor has violated any provision of any Plan maintained or contributed to by Borrower or such Guarantor or such other Person; no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower or any Guarantor; each of Borrower and each Guarantor has met its minimum funding requirements under ERISA with respect to each Plan; and each -37- 44 Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under GAAP. SECTION 4.11 OTHER OBLIGATIONS. To the best of Borrower's knowledge, neither Borrower nor any Guarantor is in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 4.12 GOVERNMENT REGULATIONS. Neither Borrower nor any Guarantor is subject to regulation under the Investment Company Act of 1940, the Federal Power Act, the Interstate Commerce Act, the Public Utility Holding Company Act of 1935 or any federal or state statute or regulation limiting its ability to incur indebtedness for money borrowed. SECTION 4.13 SECURITIES ACTIVITIES. Neither Borrower nor any Guarantor is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (as defined within Regulations G, T and U of the Board of Governors of the Federal Reserve System), and not more than twenty-five percent (25%) of the value of Borrower's or any Guarantor's assets consists of such margin stock. SECTION 4.14 ENVIRONMENTAL MATTERS. Except as set forth on the Disclosure Schedule hereto, each of Borrower and each Guarantor is in compliance in all material respects with all applicable Federal and state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's or any Guarantor's operations and/or properties, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act and the California Health and Safety Code, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower or any Guarantor is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. To Borrower's knowledge, neither Borrower nor any Guarantor has any material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. SECTION 4.15 REAL PROPERTY COLLATERAL. Except as set forth in Schedule 4.15 hereto, with respect to the Real Property Collateral: (a) All taxes, governmental assessments, insurance premiums, and water, sewer and municipal charges, and rents (if any) which previously became (or -38- 45 without payment before the date hereof would have become) delinquent in respect thereof have been paid as of the date hereof; (b) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to any such lien) which affect all or any interest in any such real property and which are or may be prior to or equal to the lien thereon in favor of Agent; (c) To Borrower's knowledge, none of the improvements which were included for purpose of determining the appraised value of any such real property lie outside of the boundaries and/or building restriction lines thereof, and no improvements on adjoining properties materially encroach upon any such real property; and (d) There is no pending, or to the best of Borrower's knowledge threatened, proceeding for the total or partial condemnation of all or any portion of any such real property, and all such real property is in good repair and free and clear of any damage that would materially and adversely affect the value thereof as security and/or the intended use thereof. SECTION 4.16 SUBSIDIARIES. Borrower does not own any stock or equity interest in any corporation or other entity, other than those listed on the Disclosure Schedule hereto. SECTION 4.17 TRUTH, ACCURACY OF INFORMATION. All financial and other information furnished to Agent or any Lender in connection with this Agreement is true and correct as of the date hereof and does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the information furnished, in light of the circumstances under which furnished, not misleading. ARTICLE V CONDITIONS SECTION 5.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Lenders to extend any credit contemplated by this Agreement is subject to the fulfillment to Agent's satisfaction of all of the following conditions: (a) Approval of Agent's Counsel. All legal matters incidental to the extension of credit hereunder shall be satisfactory to counsel for Agent. -39- 46 (b) Documentation. Agent shall have received, in form and substance satisfactory to Agent, each of the following duly executed: (i) This Agreement and the Notes. (ii) Guaranty from each Guarantor as required by Section 2.16 hereof. (iii) All Security Agreements, UCC-1 Financing Statements and other documentation from Borrower and each other person or entity required by Agent for the creation, perfection and preservation of the personal property security interests described in Section 2.15(a) hereof. (iv) All Deeds of Trust and other documentation from Borrower and each other person or entity required by Agent for the creation, perfection and preservation of the real property security interests described in Section 2.15(b) hereof (including, as deemed necessary by Agent, a modification to the Deeds of Trust encumbering the Solar Way Property and the Technology Drive Property), together with such policies of title insurance covering said parcels of real property, issued by companies, in amounts and in form and substance as Agent shall deem acceptable. (v) Corporate Borrowing Resolution from Borrower. (vi) Resolution from each corporate or limited liability company Guarantor authorizing the execution and delivery of its respective Guaranty and its pledge of collateral required hereunder. (vii) Certified copies of the filed Articles of Incorporation for Borrower and each corporate Guarantor and the certificate of formation for each limited liability company Guarantor. (viii) Certificate of Incumbency from Borrower and each corporate or limited liability company Guarantor. (ix) Notice of Authorized Representatives. (x) Evidence satisfactory to Agent certifying that all improvements at each of the Real Properties comply with all applicable zoning and building laws, and all approvals, consents, licenses, and permits necessary to conduct Borrower's business have been obtained. (xi) An opinion of Gray Cary Ware & Freidenrich LLP, counsel to Borrower, in form satisfactory to Agent, confirming that the -40- 47 Loan Documents are valid, binding and enforceable in accordance with their terms, that they do not violate any usury or other applicable laws and that the Borrower, the Guarantors and each of the Real Properties are in compliance with all applicable laws. (xii) Copies of all of Borrower's franchise agreements and service agreements. (xiii) Evidence of a tax service contract with a third party vendor which shall provide tax information on the Properties. (xiv) Copies of all material contracts, agreements and leases set forth on Schedule 5 hereto (the "Contract Collateral") to which Borrower or any Guarantor is a party and assignments thereof to Agent as additional collateral for the Credits and any consents to such assignment or landlord waivers as Agent may require. (xv) Copies of the most current tax bills for each of the Real Properties evidencing no delinquency in payment and that such Real Property has been segregated from all other property on the applicable municipal tax rolls. (xvi) A written certification executed by Borrower and each Guarantor certifying as to the truth and accuracy of all material facts pertinent to the Credits and to the legal opinion described in (xi) above. (xvii) Such other documents as Agent may require under any other Section of this Agreement. (c) Financial Statements. Agent shall have received, in form and substance satisfactory to Agent and Lenders, audited financial statements for Borrower for and as of the fiscal year ending December 31, 1999, which financial statements shall reflect no material adverse change in the financial condition of Borrower from the financial information previously delivered to Agent. (d) Fees and Expenses. Borrower shall have paid all fees and invoiced costs and expenses then due pursuant to the terms of this Agreement and all Loan Costs incurred by Agent as of the Closing Date. (e) Insurance. Borrower shall have delivered to Agent evidence of insurance coverage on all Borrower's and Guarantor's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Agent, and where required by Agent, with loss payable endorsements in favor of Agent, including policies of fire and extended coverage insurance covering the Real Property Collateral, with replacement cost and mortgagee loss payable endorsements, commercial general -41- 48 liability insurance for Borrower and each Guarantor with respect to each of Borrower's and such Guarantor's properties providing for limits of not less than $5,000,000 for both injury to or death of a person and for property damage per occurrence, and such policies of insurance against specific hazards affecting any such real property as may be required by governmental regulation or Agent. (f) Appraisals; Collateral Audit; and Credit Checks. Agent shall have obtained, at Borrower's cost (A) an appraisal of all Real Property Collateral, all improvements thereon, and all Personal Property Collateral issued by an appraiser acceptable to Agent and in form, substance and reflecting values satisfactory to Agent, in its discretion, (B) a collateral audit of all Personal Property Collateral performed by a person satisfactory to Agent and in form, substance and reflecting values satisfactory to Agent, and (C) satisfactory credit checks on Borrower and each Guarantor. (g) Title Insurance. As to the El Monte Property and the Monterey Park Property, Agent shall have received an ALTA Policy of Title Insurance, with such endorsements as Agent may require, including CLTA endorsements 100, 100.29, 103.1A, 103.7, 104.7, 111.5, 116, 116.4, 116.7 and 123.2, issued by a company and in form and substance satisfactory to Agent, in such amount as Agent shall require, insuring Agent's lien on the El Monte Property and the Monterey Park Property to be of first priority, subject only to such exceptions as Agent shall approve in its discretion, with all costs thereof to be paid by Borrower. As to the Solar Way Property and the Technology Drive Property, Agent shall have received a CLTA 110.5 modification endorsement to each of the existing Title Policies for such properties. (h) Environmental Reports. Agent shall have obtained, at Borrower's cost, a Phase I (and to the extent deemed necessary by Agent, a Phase II) Environmental Site Assessment for each parcel of Real Property Collateral, and such other documentation as Agent may reasonably determine is necessary in order to adequately review and make a determination as to the condition of each such parcel of Real Property Collateral. (i) Material Adverse Change. There shall have been no material adverse change, as determined by Agent, in the business, operations, properties, or financial condition of Borrower since the dates of the financial statements delivered to Agent pursuant to Section 5.1(c). (j) Engineering Survey. Agent shall have made a physical inspection of each parcel of Real Property Collateral and if required by Agent, an independently prepared structural and mechanical engineering report satisfactory to Agent. (k) UCC Filings. There shall exist no UCC filings against Borrower or any Guarantor which have not been approved by Agent, and each of Borrower and each Guarantor, as applicable, shall have delivered to Agent such first priority UCC-1 -42- 49 Financing Statements covering all Personal Property Collateral and Contract Collateral as Agent may require. (l) Subordination Agreement. Agent shall have received, in form and substance satisfactory to Agent, a subordination agreement from the Small Business Administration subordinating its lien in the Solar Way Property to Agent's first priority lien in the Solar Way Property or a re-affirmation thereof consenting to the cross-collateralization as set forth in the Loan Documents. SECTION 5.2 CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Lenders to make each extension of credit requested by Borrower hereunder (including the initial extension of credit) shall be subject to the fulfillment to Agent's satisfaction of all of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Lenders pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Default or Event of Default shall have occurred and be continuing or shall exist, and Agent shall have received a certificate confirming the matters set forth in this Section 5.2(a) signed by a senior financial officer of Borrower. (b) Borrowing Base. With respect to the Line of Credit, Agent has determined that there is availability under the Borrowing Base to make the extension of credit. (c) Minimum Extension of Credit. The extension of credit is in the amount of at least $100,000; however, Agent in its sole discretion may make an extension of credit in an amount less than $100,000. (d) Documentation. Agent shall have received all additional documents which may be required in connection with such extension of credit. Borrower shall pay the costs of any additional documentation, legal fees or title insurance required by Agent to evidence such extension of credit and preserve the priority of the lien of the Security Documents. -43- 50 ARTICLE VI AFFIRMATIVE COVENANTS Borrower covenants that so long as Lenders remain committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Lenders under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Agent otherwise consents in writing: SECTION 6.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 6.2 ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Agent, upon reasonable notice and during regular business hours, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. Borrower shall not be responsible for the costs of more than one (1) inspection and audit of Borrower's books and records in any six (6) month period if an Event of Default is not continuing during the inspection and audit. SECTION 6.3 FINANCIAL STATEMENTS. Provide to Agent all of the following, in form and detail satisfactory to Agent: (a) not later than ninety (90) days after and as of the end of each fiscal year, an audited financial statement of Borrower and each entity whose financial results are consolidated with those of Borrower for reporting purposes, prepared by a nationally recognized certified public accountant, to include a balance sheet, income statement, statement of cash flows, reconciliation of net worth and notes to financial statements; (b) not later than thirty (30) days prior to the end of each fiscal year, an annual budget for Borrower, prepared by Borrower, which shall include three-year projections of Borrower's operations and planned capital expenditures and financial projections for Borrower and each entity whose financial results are consolidated with those of Borrower for reporting purposes for the next fiscal year; (c) not later than forty-five (45) days after and as of the end of each fiscal quarter, a financial statement of Borrower and each entity whose financial results are consolidated with those of Borrower for reporting purposes, prepared by Borrower, to include a balance sheet and income statement; -44- 51 (d) not later than thirty (30) days after and as of the end of each calendar month, (i) a calculation of the Borrowing Base certified as correct by a senior financial officer of Borrower; and (ii) an accounts receivable aging and an accounts payable aging; (e) not later than ninety (90) days after and as of the end of each fiscal year, a financial statement of each Guarantor hereunder, prepared by such Guarantor to include a balance sheet and, for any non-individual Guarantor, an income statement, and within thirty (30) days after filing, copies of each such Guarantor's filed United States federal income tax returns, if any, for such year; (f) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the chief financial officer or other executive officer of Borrower that said financial statements are accurate, that Borrower is in compliance with the financial covenants set forth in Section 6.9 below and that there is no Borrowing Base Deficiency as defined in Section 6.16 below, and that there exists no Event of Default nor any condition, act or event which, with the giving of notice or the passage of time or both, would constitute an Event of Default; (g) from time to time such other information as Agent may reasonably request. SECTION 6.4 COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. SECTION 6.5 INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts reasonably satisfactory to Agent, and deliver to Agent from time to time at Agent's request schedules setting forth all insurance then in effect. SECTION 6.6 FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, ordinary wear and tear excepted, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained, ordinary wear and tear excepted. -45- 52 SECTION 6.7 TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made appropriate reserves in accordance with GAAP. SECTION 6.8 LITIGATION. Promptly give notice in writing to Agent of any litigation pending or threatened against Borrower with a claim in excess of $500,000.00. SECTION 6.9 FINANCIAL CONDITION. Maintain Borrower's financial condition as follows, based on the consolidated financial statements of Borrower and each entity whose financial results are consolidated with those of Borrower for reporting purposes, using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Maintain at all times a ratio of current assets to current liabilities greater than or equal to 1.75 to 1.00. (b) Without Agent's prior written consent, Borrower shall not incur expenses for capital expenditures in excess of (i) $50,000,000 for the Borrower's fiscal year 2000, and (ii) $40,000,000 for the Borrower's fiscal year 2001, and (iii) thereafter, such limit to be mutually approved by Borrower and Majority Lenders. (c) Maintain at all times a Minimum Interest Coverage Ratio of 3.00 to 1:00, measured quarterly, based upon the four-quarter period then ended. (d) Maintain, as of the end of each fiscal quarter commencing with the quarter ended September 30, 2000, a Tangible Net Worth not less than $63,000,000.00 plus seventy-five percent (75%) of net income for each fiscal quarter after June 30, 2000 without deduction for losses, plus 100% of net equity proceeds. (e) Maintain at all times a Fixed Charge Coverage Ratio of not less than (i) 1.15 to 1.00 for the period from January 1, 2000 to December 31, 2000, measured as of December 31, 2000, and (ii) 1.25 to 1.00 measured for the most recent four historical quarters (excluding the current quarter in possession), for the fiscal quarter ending on March 31, 2001 and for each fiscal quarter thereafter. (f) Maintain a ratio of Funded Debt to EBITDA not to exceed the following amounts for the four (4) consecutive fiscal quarter period ending on the last day of each fiscal quarter during the following periods: -46- 53 ----------------------------------------------------------------- the period from June 30, 2000, through and 2.50 to 1.00 including December 31, 2000 ----------------------------------------------------------------- the period from January 1, 2001, through and including December 31, 2001, and each fiscal 2.00 to 1.00 quarter thereafter -----------------------------------------------------------------
SECTION 6.10 NOTICE TO AGENT. Promptly (but in no event more than five (5) Business Days after Borrower becomes aware of the occurrence of each such event or matter) give written notice to Agent in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which, with the giving of notice or the passage of time or both, would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $500,000. SECTION 6.11 SITE VISITS; RIGHT TO STOP WORK. Agent and its agents and representatives shall have the right to enter and visit the Real Property and the facilities thereon during regular business hours. In each instance, Agent shall give Borrower reasonable notice before entering any of the Real Property facilities thereon. Agent shall use its best efforts to reasonably avoid interfering with Borrower's use of any Real Property facilities thereon or with Borrower's business operations when exercising any of the rights granted in this Section 6.11. Notwithstanding this Section 6.11 or any other provisions of the Loan Documents, Borrower shall not be responsible for the cost of more than one (1) such visit to the Real Properties and facilities thereon in any six (6) month period if an Event of Default is not continuing at the time of the proposed visit. SECTION 6.12 SECURITY. At all times maintain in favor of Agent perfected security interests of such priority as is designated herein in all assets in which, under the provisions of this Agreement, Agent has or is to obtain a security interest; take such actions (including the execution of financing statements and fixture filings) as Agent reasonably requests to protect Agent's security interests; and provide to Agent such assurances as Agent may require as to Borrower's compliance herewith. SECTION 6.13 RELATED DOCUMENTS. Comply with the terms and covenants of the Related Documents to which it is a party, and Borrower -47- 54 will not amend, modify or terminate, or agree to amend, modify or terminate, any Related Document. SECTION 6.14 INVESTIGATIONS AND INQUIRIES. Agent and its agents and representatives shall have the right once per six (6) month period (or more frequently if an Event of Default is outstanding) to conduct such investigations and inquiries as to the credit and operations of Borrower, each of the Guarantors and the Collateral as shall be necessary in connection with the Credits and monitoring of the Credits, and Borrower shall cooperate with Agent and provide Agent with such information reasonably requested by Agent in the exercise of such right and pay for the cost of such inquiry. SECTION 6.15 CONTRACT COLLATERAL. Agent shall have the right to review any Contract Collateral. SECTION 6.16 BORROWING BASE DEFICIENCY. If at any time and for any reason, Borrower delivers to Agent a quarterly compliance certificate that shows that the outstanding unpaid principal balance of the Line of Credit exceeds the aggregate amount of the Borrowing Base ("Borrowing Base Deficiency"), or if at any time and for any reason Agent gives notice to Borrower of a Borrowing Base Deficiency, then Borrower shall immediately prepay the principal balance of the Line of Credit in an amount equal to the difference between the aggregate outstanding principal balance of the Line of Credit and the amount of the Borrowing Base. SECTION 6.17 NOTICE OF CERTAIN MATTERS. Borrower shall give notice to Agent, within ten (10) days of Borrower's learning thereof, of any of the following: (a) any disputes, litigation, investigation, proceeding or suspension that may exist at any time between Borrower or any Guarantor and any Governmental Agency; (b) any threat or commencement of proceedings in condemnation or eminent domain relating to any of the Real Property Collateral; (c) the commencement of, or any material development in, any litigation or proceeding relating to any Collateral between the Borrower and (i) any Governmental Authority, (ii) any Person having rights under or in connection with any covenants, conditions, restrictions, easements or rights-of-way affecting such Collateral, or (iii) any tenant under its lease of such Collateral, in each case under this subsection (c) the adverse determination of which would reasonably be expected to materially and adversely affect such Collateral; -48- 55 (d) upon, but in no event later than ten (10) days after, Borrower's becoming aware of (i) any and all enforcement, cleanup, removal or other governmental or regulatory actions, instituted or threatened in writing against (A) Borrower that involve potential liability in excess of $5,000,000 for any single action or $15,000,000 in the aggregate of all such actions, or (B) any of the Real Properties, pursuant to any applicable environmental laws, (ii) all other environmental claims against (A) Borrower that involve potential liability in excess of $5,000,000 for any single environmental claim or $15,000,000 in the aggregate for all such environmental claims, or (B) any Real Property, and (iii) any environmental or similar condition on any real property adjoining or in the vicinity of any Real Property that causes such Real Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such Real Property under any applicable environmental laws; and (e) any trade name hereafter used by Borrower and any change in Borrower's principal place of business. Each notice under this Section 6.17 shall be accompanied by a written statement by Borrower setting forth details of the occurrence referred to therein, and stating what action, if any, Borrower or any affected Guarantor proposes to take with respect thereto and at what time. Each notice under this Section 6.17 shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Documents that have been breached or violated. ARTICLE VII NEGATIVE COVENANTS Borrower further covenants that so long as Lenders remain committed to extend credit to Borrower pursuant to the terms hereof or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Lenders or Agent under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not, and will not permit any Subsidiary to, without the prior written consent of Majority Lenders: SECTION 7.1 USE OF FUNDS. Use any of the proceeds of any Credit extended hereunder except for the following purposes: (a) The purposes stated in Article II hereof; (b) Payment of outstanding debt owed to U.S. Bank as of the Closing Date, including U.S. Bank's existing line of credit in the amount of $15,000,000.00 and U.S. Bank's existing bridge loan to Borrower; and -49- 56 (c) Payment of the Loan Costs. SECTION 7.2 OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, which in the aggregate exceed $500,000, except (a) the liabilities of Borrower to Lenders, or (b) Permitted Indebtedness. SECTION 7.3 MERGER, CONSOLIDATION, ORGANIZATIONAL STRUCTURE, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business; nor change the day to day control and management of Borrower (which shall include the resignation or termination of Morris S. Young from his current position but shall not include the changing of officers or employees in the ordinary course of Borrower's business), Borrower's name, identity or organizational structure; provided, however, that the consent of Majority Lenders will not be required for any of the foregoing that does not result in an expenditure or gain to Borrower of $1,000,000 or less; provided further, however, that Majority Lenders shall not unreasonably withhold their consent in the case of a corporate restructure of Borrower in which Borrower is the surviving entity and ownership and control of Borrower remain substantially unchanged. SECTION 7.4 GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Lenders and except as any such liability constitutes Permitted Indebtedness. SECTION 7.5 LOANS, ADVANCES, INVESTMENTS. Except for Permitted Investments, make any loans or advances to or investments in any person or entity in excess of $1,000,000 in the aggregate in any fiscal year. SECTION 7.6 DIVIDENDS AND DISTRIBUTIONS. Pay any dividend or distribution in any fiscal year, either in cash, stock or any other property, on Borrower's stock now or hereafter outstanding in an aggregate amount that exceeds ten (10%) of Borrower's after-tax net income for such fiscal year, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding in an aggregate amount that exceeds $1,000,000 in any fiscal year. -50- 57 SECTION 7.7 PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing (a) in favor of Agent, or (b) Permitted Liens. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Loan Document Payments. Borrower fails to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Other Required Payments. Borrower fails to pay when due any required payment under the Indenture. (c) Misrepresentation. Any financial statement or certificate furnished to Agent in connection with, or any representation or warranty made by Borrower, or any Guarantor shall prove to be incorrect, false or misleading in any material respect when furnished or made or when deemed made. (d) Other Covenants. Borrower or any Guarantor fails to perform, observe or comply with any obligation, agreement or other provision on its part to be performed under this Agreement or any other Loan Document (other than those referred to in subsections (a), (b) and (c) above), and with respect to any such failure which by its nature can be cured, such failure shall continue for a period of thirty (30) days from its occurrence. (e) Other Defaults. Any event of default by Borrower or any Guarantor in the payment or performance of any obligation under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any such Guarantor has incurred any debt or other liability in excess of $500,000 to any person or entity (including any Lender or Agent), which default is not cured within any cure period applicable thereto. The Event of Default under this Section 8.1(e) caused by the occurrence of an event of default under another agreement described in this Section 8.1(e) shall be automatically cured for purposes of this Agreement upon the cure or waiver of the event of default under the other agreement. (f) Judgment Liens or Levies. The filing of a notice of judgment lien against Borrower or any Guarantor; or the recording of any abstract of judgment -51- 58 against Borrower or any Guarantor in any county in which Borrower or such Guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution or other like process, against the assets of Borrower or any Guarantor; or the entry of a judgment against Borrower or any Guarantor, and any of the foregoing shall relate to a claim or judgment of $500,000 or more and shall continue unstayed for a period of forty-five (45) days from its occurrence. (g) Insolvency. Borrower or any Guarantor shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; or Borrower or any Guarantor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Code, or under any state or Federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or Federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Guarantor, and such case or proceeding shall continue undismissed for a period of forty-five (45) days from commencement of such proceeding or case; or Borrower or any Guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or Federal law relating to bankruptcy, reorganization or other relief for debtors. (h) ERISA Event. A Reportable Event (as defined in ERISA), or any violation of any provision of any Plan maintained or contributed to by Borrower or any Subsidiary, involving an amount in excess of $500,000 occurs and is not cured within forty-five (45) days. (i) Invalidity. Any material provision of this Agreement, any other Loan Document or any Related Document shall at any time for any reason cease to be in full force and effect or valid and binding on Borrower or any Guarantor, or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower or any Guarantor, or Borrower or any Guarantor shall deny that it has any further liability or obligation under this Agreement, any other Loan Document or any Related Document, and such event shall have or be likely to have, in the reasonable judgment of Agent and Majority Lenders, a Material Adverse Effect. (j) Material Adverse Change. A material adverse change, as reasonably determined by Agent and Majority Lenders in the good faith exercise of their discretion, shall occur in the financial condition of Borrower taken as a whole. -52- 59 (k) Death or Incapacity. The death or incapacity of Morris S. Young, provided that Agent and Majority Banks reasonably determine, in the good faith exercise of their discretion, that such death or incapacity shall have or be likely to have, in their reasonable judgment, a Material Adverse Effect. (l) Dissolution or Liquidation. The dissolution or liquidation of Borrower or any corporate or limited liability company Guarantor; or Borrower or any such entity Guarantor or their respective directors, stockholders or members shall take action seeking to effect the dissolution or liquidation of Borrower or such entity Guarantor. (m) Change in Ownership. Any change in ownership during the term of this Agreement which would lead to a change in the management of Borrower; provided, however, that no Event of Default shall be deemed to have occurred under this Section 8.1(m) as a result of a change in the Borrower's management or employees in the ordinary course of business. (n) Real Property Transfers. The sale, transfer, hypothecation, assignment or other encumbrance, other than Permitted Liens, whether voluntary, involuntary or by operation of law, without Agent's prior written consent, of all or any part of or interest in any of the Real Property Collateral. (o) Cross-Default. A defined event of default under any of the Security Documents, subject to the applicable cure period, if any, provided in such Security Document. The Event of Default under this Section 8.1(o) shall be automatically cured for purposes of this Agreement upon the cure or waiver of the event of default under the Security Documents. SECTION 8.2 REMEDIES. During the continuation of any Event of Default (other than an Event of Default referred to in Section 8.1(g) hereof), Agent may, with the consent of the Majority Lenders, or shall, upon written instructions from the Majority Lenders, by written notice to Borrower, (a) terminate the obligations of the Lenders to extend any further credit under any of the Loan Documents, and/or (b) declare all indebtedness of Borrower under the Loan Documents to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence or existence of any Event of Default described in Section 8.1(g) hereof, immediately and without notice, (i) the obligations, if any, of Lenders to extend any further credit under any of the Loan Documents shall automatically cease and terminate, and (ii) all indebtedness of Borrower under the Loan Documents shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Borrower. In addition to the foregoing remedies, during the continuance of any Event of Default, Agent may (i) exercise all of its rights and remedies under any Related Document (to which Agent -53- 60 is a party or is a third party beneficiary) or applicable law; (ii) require the Trustee to declare a default under the Indenture and accelerate the maturity of the Bonds; (iii) require Borrower to deliver and pledge to Agent, as security for Borrower's obligations to Agent and Lenders under this Agreement, cash collateral in the amount of any outstanding but undrawn amounts under the Letter or Credit; (iv) exercise any other right, power or remedy granted to it or the Lenders under any Loan Document or permitted to it or the Lenders by law, either by suit in equity or by action at law, or both; or (v) exercise all or any combination of the remedies provided for in this Section 8.2. Immediately after taking any action under this Section 8.2, Agent shall notify each Lender of such action. ARTICLE IX THE AGENT SECTION 9.1 AUTHORIZATION AND ACTION. Each Lender hereby irrevocably appoints U.S. Bank as Agent, and authorizes Agent to act as its agent under the Loan Documents and to take such actions on such Lender's behalf and to exercise such powers and perform such duties under the Loan Documents as are expressly delegated to Agent by the terms thereof, together with such other powers as are reasonably incidental thereto. Agent shall have no duties or responsibilities except those expressly set forth in the Loan Documents, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into any Loan Document or otherwise exist against Agent. Notwithstanding anything to the contrary contained herein, Agent shall not be required to take any action which is contrary to any Loan Document or applicable law. Neither Agent nor any Lender shall be responsible to any other Lender for any recitals, statements, representations or warranties made by Borrower contained in any Loan Document, for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Loan Document or the Collateral or for any failure by Borrower to perform its respective obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be responsible to any Lender for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither Agent nor any of its directors, officers, employees or agents shall be responsible to any Lender for any action taken or omitted to be taken by it or them under any Loan Document or in connection therewith, except for its or their own gross negligence or willful misconduct. Except as otherwise provided under this Agreement, Agent shall take such action with respect to the Loan Documents as shall be directed by the Majority Lenders. Notwithstanding the foregoing, Agent shall have the right, after consultation with Borrower, which consultation shall not be unreasonably withheld or delayed, to change the terms, structure, pricing and/or any amount of any of the Credits, including the right to reallocate the relative principal -54- 61 loan amounts among any of the Term Loans and the Line of Credit, and/or to establish additional Term Loan tranches in the event a syndication of the Credits has not been successfully completed; provided however, that agent shall not have the right to change the aggregate amount of the Credits unless Agent determines in its sole discretion that such change is necessary to ensure a successful syndicate of the Credits. SECTION 9.2 RELIANCE BY AGENT. Agent shall be entitled to rely upon any certificate, notice or other document (including any cable, telegram, telecopy, or telex) or conversation believed by it in good faith to be genuine and correct and to have been signed, sent or made by or on behalf of the proper person or persons, and upon advice and statements of legal counsel (including counsel to Borrower), independent accountants and other experts selected by Agent with reasonable care. As to any matters not expressly provided for by this Agreement, Agent shall not be required to take any action or exercise any discretion, but shall be required to act or to refrain from acting upon instructions of the Majority Lenders and shall in all cases be fully protected by the Lenders in acting, or in refraining from acting, hereunder or under any other Loan Document in accordance with the instructions of the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. SECTION 9.3 DEFAULTS. Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless Agent has received a notice from a Lender or Borrower referring to this Agreement, describing such Default and expressly stating that such notice is a "notice of default". If Agent receives such notice of the occurrence of a Default, Agent shall promptly give notice thereof to the Lenders. Agent thereupon shall take such action with respect to such Default as shall be reasonably directed by the Majority Lenders; provided however, that unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders. SECTION 9.4 INDEMNIFICATION. Without limiting the obligations of Borrower hereunder, each Lender agrees to indemnify Agent, ratably in accordance with its Proportionate Shares, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time (including at any time following payment of such obligations) be imposed on, incurred by or asserted against Agent in any way relating to or arising out of this Agreement or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or thereof or of any such other documents or any action taken or omitted by Agent under or in connection herewith or -55- 62 therewith; provided however, that no Lender shall be liable for any of the foregoing to the extent they arise from Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Lender agrees to reimburse Agent promptly on demand for its ratable share of any amounts payable but not paid by Borrower under Section 10.2 hereof. Agent shall be fully justified in refusing to take or to continue to take any action hereunder unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by Agent by reason of taking or continuing to take any such action. The agreements in this Section 9.4 shall survive the payment of Borrower's obligations hereunder. SECTION 9.5 NON-RELIANCE ON AGENT. Each Lender represents that it has, independently and without reliance on Agent or any other Lender, and based on such documents and information as such Lender has deemed appropriate, made its own appraisal of and investigation into the financial condition and affairs of Borrower and decision to enter into this Agreement. Each Lender agrees that such Lender will, independently and without reliance upon Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement. Each Lender acknowledges that Agent has not made any representation or warranty to it with respect to the financial condition or affairs of Borrower, any Loan Document or any Collateral, and that no act by Agent hereafter, including any review of any of such matters, shall be deemed to constitute any such representation or warranty by Agent to any Lender. Neither Agent nor any Lender shall be required to keep informed as to the performance or observance by Borrower of the obligations under this Agreement or any other document referred to or provided for herein or to make inquiry of, or to inspect the properties or books of Borrower. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by Agent hereunder, neither Agent nor any Lender shall have any duty or responsibility to provide any Lender with any credit or other information concerning Borrower, which may come into the possession of Agent or such Lender, or any of its or their affiliates. SECTION 9.6 SUCCESSOR AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving thirty (30) days' written notice thereof to the Lenders, and Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been appointed by the Majority Lenders and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a bank having a combined capital, surplus and retained earnings of not less than U.S. $500,000,000. Upon the acceptance of any -56- 63 appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article IX shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. SECTION 9.7 EXECUTION OF LOAN DOCUMENTS. Agent is hereby authorized by the Lenders to execute, deliver and perform each of the Loan Documents to which Agent is or is intended to be a party and each Lender agrees to be bound by all of the agreements of Agent contained in the Loan Documents. SECTION 9.8 AGENT IN ITS INDIVIDUAL CAPACITY. Agent and its affiliates may make loans to, accept deposits from, own securities of and generally engage in any kind of business with Borrower, as though Agent were not Agent hereunder, without any duty to give notice thereof or account therefor to any Lender. U.S. Bank as a Lender shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not Agent, and the terms "Lender" or "Lenders" shall include U.S. Bank in each such capacity. ARTICLE X MISCELLANEOUS SECTION 10.1 NOTICES. Except as specified otherwise herein, all notices, requests and demands which any party is required or may desire to give to any other party under this Agreement must be in writing, addressed to Agent and each Lender at its address or telecopy number set forth as the "Address for Notices" for Agent or such Lender in Schedule I hereto, and addressed to Borrower at the following address or telecopy number: Borrower: AXT, Inc. 4281 Technology Drive Fremont, CA 94538 Attn: Donald Tatzin Chief Financial Officer/Secretary Telecopier: (510) 438-4793
-57- 64 With a copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 9301 Attn: Sally Rau, Esq. Telecopier: (650) 327-3699
or to such other address or telecopy number as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 10.2 COSTS, EXPENSES ATTORNEYS' FEES. Except as otherwise set forth herein, Borrower shall pay immediately upon demand: (a) all reasonable costs, fees and expenses, including reasonable attorneys' fees and expenses, incurred by Agent in connection with the preparation, review, execution and delivery of, and the exercise of its duties under, this Agreement and the other Loan Documents, and the preparation of amendments and waivers hereunder and thereunder; (b) all reasonable costs, fees and expenses, including reasonable attorneys' fees and expenses, incurred by Agent and/or Lenders in connection with the enforcement, preservation or protection (or attempted enforcement, preservation or protection) of any rights or remedies of Agent and/or Lenders under this Agreement or any other Loan Document (including in connection with any "workout" or restructuring relating to this Agreement, any Credit, or any bankruptcy or insolvency case involving Borrower; and (c) all reasonable costs, fees and expenses incurred by Agent for appraisals, audits, environmental inspections and reviews, searches and filings in connection with any of the foregoing. As used herein, the term "reasonable attorneys' fees and expenses" shall include, without limitation, allocable costs and expenses of Agent's (or any Lender's, if applicable) in-house legal counsel and staff, and "reasonable costs, fees and expenses" shall include, without limitation, allocable costs, fees and expenses of Agent's (or any Lender's, if applicable) internal appraisal, audit, environmental and other similar services. SECTION 10.3 INDEMNIFICATION. To the fullest extent permitted by law, Borrower hereby agrees to protect, indemnify, defend and hold harmless each of the Lenders, Agent, their respective affiliates and each of their respective past and present officers, directors, shareholders, employees, agents, attorneys and affiliates, together with their respective heirs, beneficiaries, executors, administrators, trustees, predecessors, successors and assigns (collectively, "Indemnitees") from and against any liabilities, losses, damages or expenses of any kind or nature and from any suits, claims or demands (including in respect of or for reasonable attorneys' fees and other expenses, including the allocated costs and -58- 65 expenses of internal counsel) arising on account of or in connection with any matter or thing or action or failure to act by Indemnitees, or any of them, arising out of or relating to this Agreement or any other Loan Document, including any use by Borrower of any proceeds of any Credit, except to the extent such liability arises from the Indemnitee's own willful misconduct or gross negligence. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Agent or any Lender believes is covered by this indemnity, Agent or such Lender shall give Borrower notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel reasonably satisfactory to Agent or such Lender, as the case may be. Agent or such Lender may also require Borrower to defend the matter. Any failure or delay of Agent or any Lender to notify Borrower of any such suit, claim or demand shall not relieve Borrower of its obligations under this Section 10.3 but shall reduce such obligations to the extent of any increase in those obligations caused solely by an unreasonable failure or delay in providing such notice. If Bank does not require Borrower to defend such action, or if Borrower fails or refuses to defend such action, Bank shall have the right to employ counsel to defend such action and to participate in the defense thereof, and the fees and expenses of such counsel shall be at the expense of Borrower. In addition, Bank shall have the right to employ separate counsel and to participate in the defense of any such action if Bank has been advised by counsel of recognized standing in matters of banking or securities laws that a single lawyer cannot ethically represent both Bank or any other Indemnitee and Borrower. The obligations of Borrower under this Section 10.3 shall survive the payment in full and performance of all Borrower's obligations to Lenders and Agent. SECTION 10.4 WAIVERS, AMENDMENTS. Any term, covenant, agreement or condition of this Agreement or any other Loan Document may be amended or waived if such amendment or waiver is in writing and is signed and the Majority Lenders (or by Agent with written consent of the Majority Lenders), Borrower and any other party thereto; provided however, that any amendment, waiver or consent which affects the rights or duties of Agent must be in writing and be signed also by Agent; and provided further, that any amendment, waiver or consent which effects any of the following changes must be in writing and signed by all Lenders (or by Agent with the written consent of all Lenders): (a) increases the maximum principal amount available under any Credit or the Borrowing Base; (b) extends the maturity date of any Credit; (c) reduces the principal of, or interest (including default rate interest) on, any Credit or any fees or other amounts payable for the account of the Lenders hereunder; -59- 66 (d) postpones or conditions any date fixed for any payment of the principal of, or interest on, any Credit or any fees or other amounts payable for the account of the Lenders hereunder; (e) waives or amends this Section 10.4; (f) amends the definition of Majority Lenders or any provision of this Agreement requiring approval of the Majority Lenders or some other specified number or proportion of Lenders; (g) changes the voting percentages of the Lenders; (h) results in a release of any material part of the Collateral; or (i) increases or decreases the Proportionate Share of any Lender in the Total Commitments (other than through an assignment under Section 10.5 hereof). Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. SECTION 10.5 SUCCESSORS AND ASSIGNS. (a) Binding Effect. The Loan Documents shall be binding upon and inure to the benefit of Borrower, the Lenders, Agent, all future holders of the Notes and their respective successors and permitted assigns, except that Borrower may not assign or transfer any of its rights or obligations under any Loan Document without the prior written consent of Agent and each Lender unless in accordance with Section 7.3. All references in this Agreement to any person or entity shall be deemed to include all successors and assigns of such person or entity. (b) Participations. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions ("Participants") participating interests in any Credit owing to such Lender, any Note held by such Lender, or any other interest of such Lender under this Agreement and the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, (i) such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible for the performance thereof, (iii) such Lender shall remain the holder of any such Note for all purposes under this Agreement, and (iv) Borrower and Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Participants shall have no rights under this Agreement or any other Loan Document except as provided below. No Lender shall sell any participating interest under which the Participant shall have any rights to vote on any -60- 67 amendment or waiver of this Agreement or any other Loan Document; provided however, that a Lender may sell a participating interest under which the Participant shall have the right to vote on any amendment or waiver of this Agreement or any Loan Document requiring the unanimous consent of all Lenders pursuant to Section 10.4 hereof; provided further, however, that any agreement pursuant to which any Lender sells a participating interest to a Participant may require the selling Lender to obtain the consent of such Participant in order for such Lender to agree in writing to any amendment of a type specified in Section 10.4 hereof not requiring the unanimous consent of all Lenders. No agreement pursuant to which any Lender sells a participating interest to a Participant other than a Lender may permit the participant to transfer, pledge, assign, sell participations in or otherwise encumber its participating interest. Borrower agrees that if amounts outstanding under this Agreement and the other Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the fullest extent permitted by law, be deemed to have the rights of payment (but not including any right of setoff) in respect of its participating interest in amounts owing under this Agreement and any other Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or any other Documents; provided however, that such rights of payment shall be subject to the obligation of such Participant to share with the Lenders, and the Lenders agree to share with such Participant, as provided in Section 2.10(b) hereof. Borrower also agrees that any Lender which has transferred all or part of its interests in the Credits to one or more Participants shall, notwithstanding any such transfer, be entitled to the full benefits accorded such Lender under Sections 2.11 and 2.13 hereof, as if such Lender had not made such transfer. (c) Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time, sell and assign to any Lender, any affiliate of a Lender or any other bank or financial institution (individually, an "Assignee") all or any portion of its rights and obligations under this Agreement and the other Loan Documents (such a sale and assignment to be referred to herein as an "Assignment") pursuant to an Assignment and Assumption Agreement in the form of Exhibit G attached hereto (an "Assignment Agreement"), executed by each Assignee and such assignor Lender (an "Assignor") and delivered to Agent for its acceptance and recording in the Register; provided however, that: (i) each Assignment shall be in a minimum amount of $5,000,000; and (ii) without the written consents of Borrower and Agent, which consents shall not be unreasonably withheld, no Lender may make any Assignment to any Assignee which is not, immediately prior to such Assignment, a Lender hereunder or an affiliate thereof. -61- 68 Upon the execution, delivery, acceptance and recording of each Assignment Agreement, from and after the effective date set forth therein, (A) each Assignee thereunder shall be a Lender hereunder with a Proportionate Share as set forth in Section 1 of such Assignment Agreement and shall have the rights, duties and obligations of such a Lender under this Agreement and the other Loan Documents, and (B) the Assignor thereunder shall be a Lender with a Proportionate Share as set forth in Section 1 of such Assignment Agreement, or, if the Proportionate Share of the Assignor has been reduced to 0%, the Assignor shall cease to be a Lender; provided however, that each Assignor shall nevertheless be entitled to the indemnification rights contained in Section 10.3 hereof for any events, acts or omissions occurring before the effective date of its Assignment. Each Assignment Agreement shall be deemed to amend Schedule 1 hereto to the extent necessary to reflect the addition of each Assignee and the resulting adjustment of Proportionate Shares arising from the purchase by each Assignee of all or a portion of the rights and obligations of an Assignor under this Agreement and the other Loan Documents. (d) Register. Agent shall maintain at Agent's Office a copy of each Assignment Agreement delivered to and accepted by Agent and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Proportionate Shares of each Lender from time to time. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrower, Agent and the Lenders may treat each entity whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Registration. Upon its receipt of an Assignment Agreement executed by an Assignor and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate of a Lender, by Borrower and Agent) together with payment by such Assignee to Agent of a registration and processing fee of $3,500.00, Agent shall (i) promptly accept such Assignment Agreement, and (ii) on the effective date of such Assignment record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and Borrower. Agent may, from time to time at its election, prepare and deliver to the Lenders and Borrower a revised Schedule 1 reflecting the names, addresses and respective Proportionate Shares of all Lenders then parties hereto. (f) Confidentiality. Without limitation, Agent and the Lenders may disclose the Loan Documents, and any financial or other information relating to Borrower, to each other or to any potential Participant or Assignee; provided, however, that such potential Participant or Assignee shall have agreed in writing to be bound by Section 10.16 hereof prior to such disclosure. -62- 69 SECTION 10.6 SETOFF. In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, but only with the prior consent of Agent, which consent may be granted or withheld by Agent in its sole and absolute discretion, but without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon the occurrence and during the continuance of a Default or Event of Default, to set-off and apply against any indebtedness, whether matured or unmatured, of Borrower to such Lender, any amount owing from such Lender to Borrower, at or at any time after, the happening of any of the above mentioned events, and as security for such indebtedness, Borrower hereby grants to each Lender a continuing security interest in any and all deposits, accounts or moneys of Borrower then or thereafter maintained with such Lender, subject in each case to Section 2.10(b) hereof. The aforesaid right of set-off may be exercised by such Lender against Borrower or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of Borrower or against anyone else claiming through or against Borrower or such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Lender prior to the occurrence of a Default or Event of Default. Each Lender agrees promptly to notify Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. SECTION 10.7 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of Agent or any Lender to exercise, and no delay in exercising, any right, power, privilege or remedy under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. The rights and remedies under the Loan Documents are cumulative and not exclusive of any rights, powers, privileges or remedies that may otherwise be available to the Agent or any Lender. SECTION 10.8 ENTIRE AGREEMENT, AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement among Borrower, Agent and Lenders with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in a writing signed by each party hereto. SECTION 10.9 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity (other than an Indemnitee) shall be a third party beneficiary of, or have any -63- 70 direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 10.10 TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 10.11 SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 10.12 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California (without regard to the conflicts of law rules of such jurisdiction). SECTION 10.13 SUBMISSION TO JURISDICTION. EACH OF BORROWER, AGENT AND LENDERS HEREBY: (A) SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL COURTS OF THE UNITED STATES SITTING IN THE STATE OF CALIFORNIA FOR THE PURPOSE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS; (B) AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS; (C) IRREVOCABLY WAIVES (TO THE FULL EXTENT PERMITTED BY APPLICABLE LAW) ANY OBJECTION WHICH IT NOW OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY OF THE FOREGOING COURTS, AND ANY OBJECTION ON THE GROUND THAT ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM; AND (D) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 10.14 ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, this Agreement or any of the Related Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind -64- 71 related directly or indirectly to this Agreement or any of the Related Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to this Agreement or any of the Related Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in this Agreement or any of the Related Documents; provided, however, that notwithstanding the foregoing or anything to the contrary herein, it is specifically contemplated and agreed by Borrower, Agent and Lenders (and any Participants and Assignees) that the provisions of Section 1283.05 of the California Code of Civil Procedure, as presently in force, be incorporated into and made a part of, and be applicable to, the arbitration agreement set forth in this Section 10.14. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators -65- 72 (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000 the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (A) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (B) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (C) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (1) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (2) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance -66- 73 with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to this Agreement or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of this Agreement any of the Related Documents or any relationship between the parties. SECTION 10.15 COUNTERPARTS. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. SECTION 10.16 CONFIDENTIALITY. No Lender shall disclose to any Person any information with respect to Borrower which is furnished pursuant to this Agreement and the other Loan Documents, except that Agent and Lenders may disclose any such information (a) to their own directors, officers, employees, auditors, counsel and other professional advisors and to their respective affiliates if Agent and Lenders reasonably determine that any such party should have access to the information; (b) if such information is generally available to the public; (c) if required in any report, statement or testimony submitted to any governmental authority having jurisdiction over any Lender; (d) if required in response to any summons or subpoena or in connection with any litigation, to the extent permitted or deemed advisable by counsel (provided, however, that written notice of such disclosure be given to Borrower at least five (5) Business Days prior to such event to allow Borrower to seek a protective order); (e) to comply with any requirement or law applicable to Lenders; (f) to the extent necessary in connection with the exercise of any right or remedy under any Loan Document; (g) to any Participant or Assignee or prospective Participant or Assignee, provided that such Participant or Assignee or such prospective Participant or Assignee agrees in writing to be bound by this Section 10.16 prior to disclosure; or (h) otherwise with the prior written consent of Borrower; provided, however, that any -67- 74 disclosure made in violation of this Agreement shall not affect the obligation of Borrower under this Agreement or the other Loan Documents. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. "BORROWER" "AGENT" AXT, INC., a Delaware corporation U.S. BANK NATIONAL ASSOCIATION By: By: --------------------------------- ------------------------------------- Title: Title: ------------------------------ ---------------------------------- -68- EX-23.1 4 f65146a1ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-3 of our report dated August 28, 2000 relating to the consolidated financial statements of AXT, Inc., which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP San Jose, California August 31, 2000 EX-23.2 5 f65146a1ex23-2.txt EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated May 27, 1999 for Lyte Optronics, Inc. and Subsidiaries for years ended December 31, 1998 and 1997 included in or made part of this registration statement. /s/ ARTHUR ANDERSEN LLP - ------------------------------- Arthur Andersen LLP Los Angeles, California August 31, 2000 -----END PRIVACY-ENHANCED MESSAGE-----